Steel ETF Could Be a Steal

By Michael Johnston, founder of ETF Database.

The world's largest steelmaker by volume posted better-than-expected third-quarter net income on Wednesday, even though the results were well below year-ago levels as demand for steel continues to be weak.

Luxembourg-based ArcelorMittal(MT Quote) reported a net profit of $903 million, crushing analyst estimates for a loss of about $50 million. But a significant portion of the profit was attributable to a one-time tax benefit, and EBITDA came in slightly lower than expected by analysts.

Perhaps even more promising for the steel industry is that the company also raised its profit guidance for the fourth quarter, citing higher shipments and average steel prices. Lakshmi Mittal, the company's chairman and CEO, indicated that clear signs of a recovery can now be seen.

"In response to this increased demand, a number of our facilities have now been restarted, and we expect fourth-quarter crude steel capacity utilization to be approximately 70%," he said. "We should continue to see further gradual improvement through 2010, although the operating environment remains challenging." ArcelorMittal had been operating at about 60% capacity in the third quarter.

Time For a Steel ETF?

The Market Vectors Steel ETF(SLX Quote) tracks a benchmark that measures the performance of companies engaged in a variety of activities related to steel, including production, operation of steel mills, fabrication of steel products, and extraction and reduction of iron ore. ArcelorMittal is the fund's third-largest holding, accounting for nearly 10% of total assets.

As hopes for a recovery have mounted, SLX has surged, gaining more than 80% in 2009. But the ETF is still trading at about 50% of its May 2008 high of more than $112.

If a recovery is indeed under way, SLX is an interesting play for investors looking to profit from increased global manufacturing activity.