After being decimated during the Great Recession, steel has managed to claw its way back to the top of hill. As industrial activity has finally begun to rise, demand and prices for the back-bone of modern society have steadily climbed over the last six months. Today, steel now sit highs not seen in well over a year.

Likewise, stocks within the global steel sector have surged to reflect that new reality. That’s prompted some analysts to begin questioning just whether or not the rally can continue.

However, with industrial output just really getting started and rising demand from new sectors, along with old standbys, higher steel prices could still be on the horizon. For investors, the industrial metal could be one of the best plays for 2014 and beyond.

Still Rising Demand

Steel has had an impressive run as of late. After being left for dead due to overcapacity concerns and faltering demand, prices for steel have surged. The same could said for steel producers like U.S. Steel (NYSE:X) –which has surged by 50% in a short six-months. Those impressive gains have prompted analysts from Citigroup (NYSE:C) and Nomura (NYSE:NMR) to question whether or not steel stocks still have more fuel in their tanks.

If future demand is any indication, the answer is yes.

Despite steel’s recent torrid run, higher prices could still be on the table as demand continues to pick up for the metal. According to a new report by The World Steel Association (WSA), global steel use is expected to rise by 3.3% in 2014 to reach 1.52 billion tons. That’s on the back of 2013’s 3.1% increase and 2012’s 2% rise in steel demand.

The key for the WSA’s forecasts is that the group expects to see continued recovery in developed economies. Manufacturing and industrial output continues to rise in variety of nations. From the United States to Germany, key pieces of manufacturing data seem to support higher demand for steel as the metal is used in everything from washing machines to cars.

At the same time, huge infrastructure projects continue to be developed across the world. In the U.S., the oil & gas boom is requiring miles and miles of new pipelines and gathering systems, while the recovery in residential and commercial construction is adding to steel demand. Globally, many new infrastructure projects remain on track. China, alone, is still forecasted to grow its steel demand by an annual pace of 3% to 4% through 2020. Those forecasts are based on its continued need for infrastructure improvements.

All in all, the bullish demand picture for steel this year has sent prices for the metal up to $680 a ton and prompted venerable investment Goldman Sachs (NYSE:GS) to upgrade the sector. That’s one of the first upgrades for the sector is quite a while.

Betting On I-Beams

With the fundamentals for steel moving in the right direction, stocks within the sector could be ripe for more gains. Now may be the time to add the steel sector to a portfolio. The popular and broad SPDR S&P Metals & Mining ETF (NYSE:XME) does include some steel exposure, however, a more direct play could be the smaller Market Vectors Steel ETF (NYSE:SLX).

With nearly $136 million in assets, SLX tracks 28 different steel producers- including Reliance Steel & Aluminum (NYSE:RS) and Ternium S.A. (NYSE:TX). The fund has rebounded from its lows and has rallied about 13% over the last 3 months. However, it still sits about $30 below its all-time high. Expenses for SLX run a cheap 0.55% and the fund yields a hefty 2.26%.

On an individual basis AK Steel (NYSE:AKS) could be an interesting buy. Several bullish tailwinds in the automotive and construction industries will directly benefit AKS’s bottom line. The firm expects that construction demand for its steel will finally surpass pre-recession amounts and that it will ship nearly 16 million units to auto customers during the new year. That bullishness should help the firm become profitable and move the share price forward.

Some of the deepest values could be had in the emerging market producers of steel. The Brazilian duo of Companhia Siderurgica Nacional (NYSE:SID) and Gerdau S.A. (NYSE:GGB), along with Russia's Mechel OAO (NYSE:MTL) have suffer twice as hard as investors have fled emerging markets. Yet, all trade single digit forward P/E’s.

The Bottom Line

The steel sector has rebounded quite nicely over the last few months as investors have looked for value. Given the longer term demand picture, the value is still there and more gains could still be in store. There’s still time to add a dose of steel stocks to a portfolio. The previous picks- along with industry leader Nucor (NYSE:NUE) –make ideal selections to play the trend.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

Related Articles
  1. Chart Advisor

    Strongest Steel Stocks in the Materials Sector

    Why steel? Well, it's the best performing industry in the Materials sector, and Materials was one of the hottest sectors over the last week. Here are four large steel stocks to keep an eye on.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  5. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  6. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
  7. Mutual Funds & ETFs

    ETF Analysis: ETFS Physical Platinum

    Learn about the physical platinum ETF. Platinum embarked on a bull market from 2001 to 2011, climbing to record prices along with other precious metals.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Turkey

    Learn about the iShares MSCI Turkey exchange-traded fund, which invests in a wide variety of companies' equities traded on Turkish exchanges.
  9. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  10. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!