Imbalances in global microeconomic forces are expected to take their toll on the steel industry providing negative price support for the metal exposing the Market Vectors Steel ETF (SLX) and the PowerShares Global Steel (PSTL) to feel the wrath.
According to a recent report by Credit Suisse, scrap steel price in the last quarter of this year are expected to decline due to excess supply and weaker demand growth. On the supply forefront, the recent lifts in scrap prices, which are up nearly 40 percent over the last two months, have boosted supplies of the scrap metal in yards resulting in excess supply. Additionally, global production of steel has increased by nearly 18 percent since June 2009.
On the demand side, consumption of steel from a global perspective decreased 3.4 percent in June 2010 from a month earlier. Additionally, investment in steel-intensive infrastructure and commercial and residential construction in China has slowed, which was a huge global demand driver. China also canceled export-tax rebates on some steel products to avoid the need for imports and help stabilize prices. Lastly, fears of a sustainable economic recovery in the US continue to loom forcing the Federal Reserve to revise its GDP growth outlook downward for the remainder of the year, which will likely further hinder demand for steel.
In a nutshell, these aforementioned trends in supply and demand are resulting in excess capacity concerns in the steel industry which could increase the level of steel imports and result in a downward pressure on prices of the industrial metal having an impact on the previously mentioned ETFs.
- Market Vectors Steel ETF (SLX), which boasts metals and mining giants Vale (VALE) and Rio Tinto as its top holdings and gives exposure to Reliance Steel and Aluminum (RS) and Nucor Corp (NUE) as well.
- PowerShares Global Steel (PSTL), which holds steel giants like Posco (PKX), ArcelorMital (MT) and Companhia Siderurgica Nacional (SID).
Disclosure: No Positions