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.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV