Predicted Iron Ore Demand Could Fuel Steel ETF
Steel prices -- and thus steel companies and ETFs -- are driven in part by the price of iron. Analysts are expecting the price to fall in the near term but see reasons for a late-year rally.
Iron To Fall, Then Rally?
The price of iron ore is hanging around the $82/ton level, and some analysts are looking for a short-term drop of another 15 percent before the bottom is formed.
Morgan Stanley came out with a call this week that said it feels iron ore could hit $70/ton before a year-end rally in the price of the commodity. The research firm predicts it could rally to $90/ton by the end of the year.
Vale SA (NASDAQ: VALE), a large global metals company, stated last week that iron ore prices could reach $100/ton by the end of December.
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The two catalysts that will be moving iron ore are Chinese demand and the supply at the ports. Vale believes the supply will dwindle and push up prices, as Morgan Stanley sees an increase in Chinese demand in the fourth quarter.
The steel stocks have been struggling to put together a solid uptrend since the market collapsed in 2008. That being said, there has been some solid consolidation over the last year. The stocks now look poised to rally if the predictions for higher iron ore prices by the end of the year come to fruition.
Investors can play the iron or market via individual stocks that are based around the globe, or they can take a wide moat approach by choosing an ETF.
Market Vectors Steel ETF (NYSE: SLX)
The Market Vectors Steel ETF tracks 29 companies around the world that are involved in the production of steel products or mining and processing of iron ore. The ETF is concentrated in the biggest names in the sector, with the top three holdings making up nearly 30 percent.
Those holdings are based in different continents and have all global footprints: Rio Tinto plc makes up 11.8 percent of the total portfolio, Vale is 11.7 percent and Posco is 5.7 percent. Rio Tinto is based in London, Vale is a Brazilian company and Posco is South Korean.
The ETF is up 6 percent over the last 12 months but has been performing better of late with a gain of 11 percent over the last six months. The ETF is sitting on support at the $47.50 area and could be gearing up for another run at a 52-week high that could see the ETF trade in the low-$50’s in the coming weeks.
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