By Kevin Grewal
As emerging markets continue to grow, the dollar continues to remain unstable and infrastructure remains a core component of rebuilding global economies, metals have a bright future ahead of them.
The growth and development of emerging markets is likely to add to industrialization and new infrastructure. As a result, the demand for steel is likely to continue to grow or at the very least remain stable.
Secondly, steel appears to be a fundamental in the global economic recovery. Infrastructure building, both here in the United States as well as abroad, seems to be the building blocks and foundation of creating jobs and rebuilding a beaten down economy. Additionally, as the U.S. economy starts to grow, which it is expected to do in 2010, the demand for steel by automakers and the manufacturing industry will likely increase putting further microeconomic pressures on the commodity.
Thirdly, steel is inversely related to the dollar. This means as the dollar depreciates, steel becomes more attractive. As for the dollar, it is expected to continue to remain at depressed levels unless the Federal Reserve decides to increase interest rates.
From a supply perspective, it appears that inventories of steel in China are starting to deplete, so the growing Asian nation will likely demand more, leading to pressure on prices. Lastly, the commodity remains attractive due to the latest agreement between BHP Billiton (BHP) and Rio Tinto (RTP) top combine iron ore operations in Australia which could lead to increased efficiency.
Another thing to keep in mind is that as the demand for steel rises, the demand for other metals will likely follow. Most goods that require steel also need other metals and alloys such as copper.
Some equities that are likely to benefit from the steel craze are:
- The Market Vectors Steel ETF (SLX), more than doubling from a March low of $22.14 to close at $57.82 on Tuesday
- SPDR Metals & Mining (XME,) up 128% from a March low of $20.81 to close at $47.42 on Tuesday
- iShares Dow Jones US Basic Materials (IYM) up 103% from a March low of $28.36 to close at $57.53 on Tuesday.
When investing in these commodity based ETFs, it is important to keep in mind the inherent risks involved. A good way to mitigate these risks is through the use of an exit strategy. According to the latest data at www.SmartStops.net, an upward trend in the previously mentioned equities could come to an end at the following price points: SLX at $54.58; XME at $45.43; IYM at $56.00. These price points change with market volatility and updated data can be found at www.SmartStops.net.