Steel Defies Expectations With Summer Rally

By Michael Johnston of ETFdb

What was supposed to be a quiet summer in the steel industry has turned out to be rather eventful. With most analysts expecting prices to remain weak for the remainder of the year, steel has shown signs of rallying in recent weeks as global supplies have eased and another showdown with China appears to have been averted.

Last week, the Obama administration stepped up its pressure on China's currency policy, filing two complaints against the country with the World Trade Organization. One of those was related to anti-dumping duties imposed by China on U.S. Steel, as the administration argued that China failed to comply with WTO procedures in reaching its conclusions. But recent developments out of China also appear to be brightening the outlook for U.S. steelmakers, as the world's second-largest economy has slashed output to comply with energy savings targets imposed by Beijing.

"China has long been both a savior and a threat to the world's steel industry," Robert Guy Matthews writes. "Its economic stimulus program led to steel-intensive infrastructure building, with producers running at near-full capacity to meet the demand." Now as China pulls back on steel production, the decline in global supplies has set off a late summer rally in metals markets. Steel producers from China and a handful of other developed and emerging markets have announced material price hikes in recent weeks, defying expectations in an environment where underlying economic fundamentals remain weak.

Some suspect that the rally will be short-lived, running out of steam before the calendar turns to 2011. Though China has taken steps to curb steel production in the short term, it seems unlikely the country will impose any longer-term cuts in output. Moreover, expectations for muted economic growth in the U.S. and much of the developed world will no doubt weigh on demand for the foreseeable future.

STEEL ETFS IN FOCUS For investors looking to make a play on the global steel market, there are a couple of different options:

Market Vectors Steel Index ETF ( SLX) This ETF is linked to the NYSE Arca Steel Index, a benchmark consisting of companies involved in a variety of activities related to steel production, including the operation of manufacturing mills, fabrication of steel products or the extraction and reduction of iron ore. A breakdown of SLX's holdings shows that about 65% of assets are international, with the remainder consisting of U.S. stocks. The international component includes minimal exposure to China, as Brazil, the U.K. and Luxembourg are afforded the largest weightings.

PowerShares Global Steel Portfolio ( PSTL) This ETF is linked to the NASDAQ OMX Global Steel Index, a benchmark that measures the performance of the largest global companies involved in the manufacturing and storage of iron and steel products. Relative to SLX, PSTL maintains a heavier international tilt; only about 12% of assets are U.S. stocks. Japan gets the largest individual country weighting, accounting for about 20% of the fund's holdings.

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At the time of publication, Michael Johnston had no positions in the securities mentioned. ETF Database is not an investment advisor, and any content published by ETF Database does not constitute individual investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. From time to time, issuers of exchange-traded products mentioned may place paid advertisements with ETF Database. All content on ETF Database is produced independently of any advertising relationships.