An Inexpensively Valued Fund in a Better-Managed Industry
Even in a weaker global economy, Market Vectors Steel ETF fund should keep its strength.
The global economy generally has improved, but investor concerns persist both in Europe, where debt problems loom large, and in China, where growth clearly is slowing. In the steel subsector of the broader industrial sector, we have found that while steel companies aren't immune from any slowdown, they have shown themselves to be better managed than in the past and able to affect steel prices by adjusting supply far more strategically.
How have steel companies been able to alter their industry dynamics? In recent years, industry players have changed what drives higher steel prices. Historically, the maxim was that stronger demand drove higher steel prices. Now, given steel makers' increasing willingness to adjust production to meet demand, supply actually plays a much greater role in determining steel prices than it once did. Steel buyers and distributors manage their working capital better and operate with much smaller inventories than in the past. So, short-term supply changes can have a much greater impact on steel prices than they used to by giving the impression of shortages during periods of lean supply chains. More steel mills and steel buyers are shifting to lean inventories, given the drag on the companies' earnings during the downturn from carrying higher-cost inventories.
Robert Goldsborough does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.