Steel, Commodity Price Trends Support SLX

Steel, Commodity Price Trends Support SLX

The VanEck Steel ETF offers investors exposure to the steel sector and an above-market dividend.

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Reviewed by: Andrew Hecht
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Edited by: Andrew Hecht

Shares of steel companies rise and fall with the price of the metal, which is on the rise after a June-to-July correction. Higher steel prices should support steel company earnings over the coming months.  

This merits a look at the VanEck Steel ETF (SLX), which holds a portfolio of shares in the leading steel companies.  

Steel is primarily iron, with a small amount of carbon that strengthens the metal and improves its resistance to fracturing. The metal’s strength and relatively low cost compared with other metals make it a critical ingredient in building and infrastructure construction, as well as in the manufacturing of items like machines, cars, weapons and more.  

Australia, Brazil, China, India and Russia lead the world in production of iron ore, which is the main ingredient of steel. These countries account for around 82% of the world’s annual iron ore output. Meanwhile, iron ore prices have generally been rising since late 2015, despite a sharp fall last year. 

 

Source: Barchart 

 

The above chart highlights the pattern of higher lows and higher highs in the iron ore market that took the price to a high of $219.77 in July 2021, from $38.03 in late 2015. While the price has corrected and dropped to around $110 per ton on Aug. 15, it’s still nearly three times higher than in late 2015.  

Steel Price Correction, Consolidation  

Steel prices are a function of iron ore values. 

 

Source: Barchart 

 

The U.S. Midwest Steel CRU futures chart, which tracks the price of domestic hot-rolled coil steel, fell to $364 in late 2015 before rising to a high of $1,945 in August 2021. The price was around $883 on Monday, Aug. 15. 

 

Source: LME 

 

The above chart shows the Platts price of London Metal Exchange hot rolled coil steel contracts for North America. After reaching a high of $1,597.50 on May 4, 2022, the ferrous metal dropped to a recent low of $827.50 and was at the $865 level in mid-August. Steel prices have been consolidating at the lows in July and August.  

The recent sell-off from spike highs could be a buying opportunity for a steel ETF for several reasons, including China’s emergence from COVID-19 lockdowns, U.S. focus on infrastructure rebuilding, the impact of Russia’s Ukraine war on iron ore prices as well as inflation. 

China, which is the world’s biggest steel consumer, is expected to emerge soon from COVID-19 lockdowns, potentially sparking a construction boom and boosting steel demand.  

In the U.S., infrastructure program will increase steel consumption as the government stimulus bill funds repair and new construction of roads, bridges, tunnels, airports, schools and government buildings in coming years.  

Russia, the world’s fifth leading producer, responsible for over 4% of the world’s iron ore supplies, is a swing producer that could also impact future prices. The war in Ukraine is affecting energy and food prices, and iron ore could also be a victim of the increased geopolitical tensions.  

Finally, rising prices have lifted the costs of just about everything, and steel is no exception.  

Bull markets rarely move in straight lines, and sell-offs can be brutal in commodities. However, all the ingredients that lifted steel and iron ore prices over the past few years are still here today. 

SLX, with its impressive portfolio, has outperformed the stock market this year. And steel-producing companies are likely to benefit from rising prices. The ETF owns a diverse, international portfolio of steel producers that mitigates the idiosyncratic risks of holding individual companies.  

As of Aug. 12, the S&P 500 had dropped 10% since the end of 2021.

 

 

SLX has about $97.5 million in assets under management, trades an average of 18,005 shares daily and has an expense ratio of 0.55%. The blended dividend of $3.76 equates to an above-market 6.56% yield at $57.34 per share.  

Over the period from July 14 through Aug. 12, steel prices have been consolidating and attempting to turn higher as SLX rallied 24% from its recent low. Copper, the leading nonferrous metal, rallied 17% since mid-July to more than $3.65 per pound last week. Other metals prices have recovered over the past weeks, which may also help steel prices rise. The short-term trend in the SLX is bullish, and the long-term path of least resistance suggests that the ETF will continue to appreciate.  

SLX is a diversified product for ETF investors looking for exposure to steel for the coming years. The fund will rise and fall with the steel price, offering an above-market dividend while investors wait for capital appreciation.  

Andrew Hecht is a Nevada-based writer and analyst covering stocks, bonds, foreign exchange, cryptocurrency and raw material markets. He has over four decades of experience in markets across all asset classes, concentrating on commodity markets. Hecht was a senior trader at Salomon Brothers in the 1980s and 1990s, running sales and trading businesses. In 2013, McGraw Hill published his book, “How to Make Money in Commodities."