🏗️ Your Guide To Investing In Steel, The Metal That Helped Industrialise Humanity
Steel is arguably the metal that helped industrialise humanity during the industrial revolution. Not only was it the basis for many new inventions, it was also used in building up vital infrastructure, such as the railways, manufacturing machines, vehicles, and more. It’s actually an alloy, a mix made mostly from iron, with smaller amounts of other elements, like carbon. Steel pretty much replaced iron since it was more cost effective, stronger, and lighter.
What Can It Do For You
🧺 Portfolio Diversification. As always, adding commodities to your portfolio can help diversify and lower risk. Like copper, steel is used in a lot of major industries, so it can be a good indicator for the global economy. Adding steel to your portfolio means owning an asset that tends to act differently to other asset classes, and even to other commodities.
💰 Profit. Similar to copper, it’s possible to gain decent speculative returns from steel. Investing in steel means you’re confident about increased demand due to global economic growth in the form of mass-scale infrastructure/construction projects, emerging market growth, &/or transportation. Of course, there will be other factors at play that can lower prices, which results in cyclic & volatile price swings that can provide multiple opportunities to enter a trade.
What Affects Steel Prices
The price of steel can fluctuate wildly. There are several key factors that are involved in moving the price of steel:
- 🇨🇳 Chinese Supply & Demand. China is both the world’s largest producer & consumer of steel. Growth in the Chinese economy the past couple of years meant massive, large scale infrastructure & construction projects all around the country. But China is also the biggest exporter of steel. When demand slowed, producers dumped their steel in the markets, lowering prices. China arguably is the biggest influencer of steel prices.
- 🇧🇷🇷🇺🇮🇳🇨🇳 BRIC Demand. Economic growth of other emerging markets like Brazil, Russia & India also means increased demand for infrastructure & construction projects.
- ⚡ Production Expenses. Refining the iron ore to become steel an energy intensive process. If electricity prices go up, steel prices may also go up to reflect this.
- 🏭 Global Industrial Demand. Steel is used globally for major industries like construction, infrastructure & transportation. A strong global economy could potentially initiate construction/infrastructure projects, as well as increase consumer demand for steel products.
- 🔄 Substitution. Steel also faces competition from other materials (like carbon fibre & aluminium) if prices are too high.
- ♻️ Raw Materials (Scrap & Iron Ore). Scrap metal & iron ore are used to make steel. As such, the cost of these materials will be reflected in the price of steel.
- 💵 US Dollar Strength. Like other commodities, the benchmark for the pricing of steel is in US dollars. A weak dollar compared to other currencies (i.e. need more USD to buy other currencies) may incentivise foreign buyers to buy (since their currencies are worth more in dollars & so can buy more steel) & drive up demand, increasing prices, and vice versa.
🇺🇸 What Was Trump’s Steel Tariff About?
Basically, as part of his America First initiative, he introduced tariffs on a number of imported materials, including steel. This meant that competitively priced foreign steel now cost more (25% more to be exact), and that American steel manufacturers can raise prices, generate more revenue, create more jobs, etc. But as you can imagine, higher prices meant dampened demand. He also promised to introduce large scale infrastructure projects, but never went through with it. The result? It led to a couple of things: the tariffs didn’t quite boost the steel industry as planned; it meant that domestic goods that use steel were more expensive; & that an estimated 75,000 jobs were made redundant across multiple industries, including construction & the auto industry. Even steel industry workers were (ironically) affected, with nearly 2,000 laid off in Michigan alone.
Where Is Demand Coming From?
Like copper, steel is also another popular industrial metal, used in many different industries.
- 🏗️ Construction & Infrastructure. Making up just over half of steel’s demand, buildings & infrastructure projects need a lot of steel.
- 🚗 Automotive Industry. According to the World Steel Association, on average, about 900kg of steel is used per vehicle, with newer types of steel being used in new vehicle designs.
- 🚜 Industrial Machinery/Equipment. These include vats, vessels, tanks, piping, and other products involved in machinery such as gears and bearings.
- 🗄️ Various Metal Products. These are miscellaneous products like cans, filing cabinets, razors, knives, oil barrels, etc.
- 🚆 Other Transport. This includes ships/shipping containers, trains & rail cars, & planes (engines & landing gear).
- 📻 Domestic Appliances. These include phones, fridges, washing machines, computers, etc.
- 🔌 Electrical Equipment. Steel is needed in various machinery & parts used in the production & distribution of electricity, like generators, steel-enforced cables, transformers, etc.
The Case Against Steel
China has been blamed for the cheap price of steel. They (& to a lesser extent, a number of other countries as well) have flooded & oversupplied the market, with declining global demand due to the economic impact of the pandemic. Any negative developments during the pandemic (such as further lockdown measures) may further hamper demand.
The Case For Steel
Steel will always be present in the global economy due to its role in construction, infrastructure & manufacturing. Economic recovery post-pandemic may see a rise in steel demand as consumer spending increases on steel-containing products, as well as developments in infrastructure & construction. There are reports that China is cutting back on steel production by targeting illegal factories & ban any new steelmaking facilities, but only time will tell if they truly have or not. Furthermore, because its price is linked to major industrial demand, any movements can arguably be easier to track than other commodities.
Popular Ways To Invest In Steel — Pros/Cons of Each
Like some of the other base metals, you can’t really invest in physical steel. If you’re still confused about how any of these work, refer back to our basics newsletter for a refresher.
- Steel ETFs. There are a couple of options here. There are ETFs that invests in steel companies, or ETFs/ETNs that includes steel in their portfolio. Regardless, they’re traded on stock exchanges, so they’re very easy to buy and sell. However, there are no assurances that you actually own the physical metal. You also probably won’t be able to take delivery of your steel. Depending on which broker you go with, you may be charged with trading commissions. ETFs also charge an expense ratio, or management fee that gets taken out of their total holdings and is then reflected on your account. Whichever ETF you choose, be aware of the fine print — the risks and costs.
- Steel Stocks. These are shares of steel-producing companies. Some of these companies don’t just produce steel, and are involved in a number of other operations, while others focus on mining & processing iron ore to create steel. Because of this, depending on which company you choose, some stock prices are more aligned with steel prices than others. As always, you may want to consider looking at the company’s annual reports (especially operational costs), portfolio of what mines they have, the metals they produce, and potential expansion plans.
- Steel Futures Contracts. A binding agreement traded on futures exchanges between two parties where they agree to buy/sell steel at a specified time in the future with an agreed-upon price. These futures contracts can be settled with physical delivery or with cash after the contracts have expired. Because you are using a significant amount of borrowed money, even small price changes in steel can either lead to massive profit, or massive losses beyond what you paid for, potentially leaving you in massive debt. They are certainly high-risk and not recommended for beginners. Further, fees associated with futures trading include broker commissions, and exchange/clearing fees.
TL;DR — Is It The Right Investment For You?
As always, it depends on what your aims are. Along with copper, steel can be a good indicator of the economy since it’s used in a lot of major industries. By investing in steel, you’re essentially betting on the growth of global infrastructure/construction projects, emerging markets, and/or transportation. However, when there’s a global economic slowdown, its price may fall due to decreased demand, which may be from lowered consumer demand, cancelled/suspended infrastructure programs, or a slowdown in emerging market economies. That being said, adding steel to an existing portfolio of commodities, or bundling it up with other commodities, can be a good way to achieve diversification. Furthermore, because it can be volatile, it presents an opportunity for you to gain decent speculative returns if your analysis and timing is right.
🧺 If you are considering adding steel to your existing portfolio or bundling it with a number of others, you may want to consider doing dollar-cost averaging (regular investments over time) to build your steel position so you can take advantage of the volatility in the market.
💰 If you are considering adding steel for speculation and profit, you may want to monitor the factors that affect steel prices mentioned above, especially any developments in the emerging markets, most notably, China. In addition to monitoring the factors mentioned above, you may also want to consider performing some technical analysis on steel’s price chart to help consolidate trends and patterns to help with your decision. That being said, its prices can swing unexpectedly due to speculators investing in the market, so be prepared and have an exit plan in place.
As always, if you are unsure, check in with a professional financial advisor before making any moves.