Ken Heebner, portfolio manager of the CGM Focus Fund (up 80% in 2007), is making a strong long term investment case for steel.
A small bit of research confirms Ken’s advocacy. Steel consumption, according to the International Iron and Steel Institute (IISI), was up 6.8% in 2007. Although we are likely to see some slowing in 2008, IISI is projecting consumption growth to remain above 6% as China, Brazil and India continue to build out infrastructure and produce steel-intensive products at a rapid pace. IISI has promised to publish an updated forecast in mid-April.
On the production side, continued heavy investment in China resulted in world production growth of 7.5% in 2007. With production outpacing demand, the outlook for steel prices is uncertain. However, the real growth of the steel industry has positive implications for the outlook for steel producers, even in a flat pricing environment.
Steel ETFs offer a low-cost way to establish a diversified exposure to the growth in the steel industry. Van Eck Global’s Market Vectors Steel ETF (Amex: SLX) tracks a modified market-cap weighted index of 21 companies that are engaged in the production of steel products or mining and processing of iron ore.
The top holding as of March 28 was steel industry giant Arcelor Mittal (NYSE: MT) which represents over 15% of the fund’s holdings. Other top investments include Korean steel maker POSCO (NYSE: PKX) and Brazilian steel maker Companhia Siderurgica Nacional (NYSE: SID). See our post The Case for a Brazil ETF for more on SID.
See the Market Vectors website for more information on SLX.
SLX is the only pure Steel ETF play at the moment. We’ll cover other Metal ETFs in a future post.