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Steel Headwinds Developing: ETFs

NEW YORK ( TheStreet) -- Despite holding firm for numerous months, uncertainty in global economic growth, resulting in spotty demand, is causing the price of steel to decline and will likely continue to provide negative price support for the commodity.

The decline in steel prices is most evident in the fall of the Baltic Dry Index (BDI). The BDI is a measure of commodity shipping costs, of which iron-ore, used to create steel, creates the single biggest source of demand for dry-bulk shipping. The BDI has declined for the longest consecutive period in nearly nine years and this decline is primarily being driven by declining Chinese steel prices and demand.

The demand for steel supported by China is so significant because as almost all other nations around the world reduced their production and consumption of the metal during the recession, China was on a massive buying spree. China's appetite for steel was driven by its building of infrastructure, increased demand of automobiles and appliances and increased manufacturing activity. All of these forces are starting to ease, which will soften China's demand for steel and could even lead to the Asian nation increasing exports of steel, pumping up global supply.

As for demand in other parts of the world, consumers and businesses are taking a wait-and-see approach in Europe as well as the U.S. To further damper demand in the U.S., the real estate markets remain weak and the capital goods markets remain wary and will continue to do so until the labor markets show significant improvements.

In a nutshell, declines in demand for steel in China and other parts of the world will likely remain intact in the near future, having a negative impact on steel prices. Some equities that are likely to be impacted by this:

  • Market Vectors Steel ETF (SLX), which closed at $57.45 on Friday.
  • SPDR S&P Metals & Mining (XME), which includes Steel Dynamics (STLD) and U.S. Steel (X), in its holdings. XME closed at $48.99 on Friday.
  • iShares S&P Global Materials (MXI), which boasts iron ore giants BHP Billiton (BHP) and Rio Tinto (RTP) as its top holdings. MXI closed at $55.69 on Friday.

If invested in the aforementioned equities, it is important to utilize an exit strategy that identifies specific price points at which further downward price pressure is likely to occur.

According to the latest data at www.SmartStops.net, such price points are at the following: SLX at $53.95; XME at $45.70; MXI at $53.52. These price points change on a daily and are reflective of market volatility.

Written by Kevin Grewal in Houston, Texas

Kevin Grewal serves as the editorial director and research analyst at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Additionally, he serves as the editorial director at SmartStops.net where he focuses on mitigating risks and implementing exit strategies to preserve equity. Prior to this, Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.

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