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Commodity Investing

Why I’m Bullish on Steel

After a six-month rally in steel prices, the metal pulled back a bit in recent days.

Some analysts say the run in steel is done. I say you should buy the dip, because there are some excellent opportunities to forge big profits in the steel sector.*

Here’s why…

Price matters. The price of steel recently hit its highest price in a year, touching nearly $680. Nothing goes up in a straight line. Despite the slight pullback recently, the trend is higher and stronger.

The oil & gas boom. The buildout in America’s oil fields is enormous, and it fuels the need for steel. Our path to energy independence is paved with miles of steel tubes and pipes.

Global trade is increasing. The Baltic Dry Index, which measures maritime shipping costs, has doubled since June. This indicates that the global economy is probably ramping up, and that means steel demand should go up, too.

Steel is used for everything – from new buildings to cars to dishwashers.

In fact, the International Monetary Fund expects that the global economy will grow 3.6% in 2014, up from 2.9% last year… great news for steel prices.

China. Forecasters believe demand for steel in China will grow at an annual pace of 3% to 4% through 2020. Since China represents 45% of the world’s demand for steel, that’s a big deal.

To be sure, the World Steel Association is forecasting only a modest 3.3% rise in steel demand for 2014, compared to a 3.1% increase in 2013. But forecasting anything is a tough business, and I think they’re being conservative.

How You Can Play Steel’s Next Move

The easiest way to play a potential rally in steel is through the Market Vectors Steel ETF (NYSE: SLX).

It’s a basket of the biggest and best steel stocks in the world.


And if you like global exposure, you’ll find it in the SLX.

American companies account for only 39% of the portfolio. Brazil, Luxembourg and the U.K. account for just over half of the ETF. The top two holdings are Rio Tinto Plc (NYSE: RIO) and Vale S.A. (NYSE: VALE). Together, they account for about 25% of the portfolio.

The news gets better: SLX recently sported a dividend yield of 2.26%. Dividends sweeten the pot, and pay you to wait for a stock or ETF to break out.

If you prefer individual stocks, you could look at both Rio Tinto and Vale. Rio recently traded at less than 10 times forward earnings, Vale at less than seven times its forward P/E. That’s cheap!

Now, just because something is cheap doesn’t mean it can’t get cheaper.

However, I think steel stocks are more likely to get more expensive as global economic growth picks up steam. The current pullback will pass. It’s time for steel to shine.*

Good investing,

Sean

*Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Wall Street analysts.


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