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A Fundamental Case For The Steel ETF

June 16, 2016 2:55 pm
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Thanks to some positive guidance and bullish analyst commentary, the Market Vectors Steel (ETF) (NYSE: SLX) climbed nearly 3 percent Wednesday, extending its year-to-date gain to 35.7 percent.

Steel On The Move

SLX, the lone exchange-traded fund dedicated to steel stocks, got a lift after Bank of America Merrill Lynch raised its rating on United States Steel Corporation (NYSE: X) to Neutral from Underperform. Bank of America also raised its price target on U.S. Steel to $18.

Related Link: Bank Of America Upgrades US Steel To Neutral

U.S. Steel rival AK Steel Holding Corporation (NYSE: AKS) also soared on an upgrade courtesy of Credit Suisse, which sent that stock higher by 7 percent.

What That Means For SLX

U.S. Steel and AK Steel combine for over 6 percent of SLX's weight. Rio Tinto plc (ADR) (NYSE: RIO) is the largest of the ETF's 26 holdings at a weight of nearly 13 percent. Importantly, SLX's run may still be in the early innings despite global oversupply.

“Despite the negative view for the global steel industry, we believe that the U.S. steel industry has bottomed and unique investment opportunities exist,” said VanEck in a recent note. “Thus far in 2016, the U.S. steel industry has performed well, and, we believe, there are further compelling upside opportunities. In short, we see these positive signs: (1) a continuation of a strengthening U.S steel price environment; (2) fundamentally better operating and financial conditions via improved capacity utilization; and (3) the potential for an industry-wide multiple rerating, which has not occurred in a long time.”

Good News For Entire Materials Sector

Rebounding steel stocks have also played a role in lifting the broader materials sector this year. The materials sector is the third-best group year-to-date in the S&P 500, trailing only utilities and energy.

Related Link: Bank Of America Calls Steel Prices As Good As It Gets

Of added assistance to SLX has been political action in the United States. Late last year, Congress took steps to protect U.S. steelmakers from the erosive effects of Chinese (and other) competitors flooding the market with cheap supply. Earlier this year, the U.S. Department of Commerce announced tariffs on steel imports to the U.S. so punitive that Chinese makers are essentially excluded from the market.

“Looking out post the implementation of these policies, we expect current U.S. domestic steel prices to have additional upside. We believe that the price of domestic steel could improve because: (1) the removal of 'dumped and government subsidized' steel from the domestic market will normalize the mix between domestic supply and imports; (2) inventories will be drawn down; and (3) upward pressure on raw material prices, such as coking coal and iron ore, will continue,” added VanEck.

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