Steel consumption is growing steadily, although it still has considerable distance to make up in order to catch up to 2008 levels. In September, U.S. flat imports grew sequentially by 18% to 551,000 tons, 27% above and 32% below 2009 and 2008 levels, respectively. Despite that production in China slumped, possibly due to a larger than expected build up of inventories, other major produces such as France, Spain and Japan have experienced steady increases
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According to data provided by the World Steel Association short range outlook, worldwide steel use is forecasted to increase by 13.1% through 2010 and another 5.3% in 2011. These October figures were positively revised compared to the previous forecasts provided in April, where the association predicted a 10.7% increase in steel usage for 2010. Despite that emerging markets and developing economies such as BRIC have the highest demand for steel, the highest forecasted growth rates for steel use are associated with the NAFTA countries.
Fourth Quarter Outlooks
Domestic steel corporations tell a much different story about the industry. The major players in the field recently released their earnings and provided cautious outlooks for subsequent periods. Nucor (NYSE:NUE) reported quarterly net earnings of seven cents per diluted share, a figure which showed strong year-over-year improvement, yet fell short of expectations. However, the corporation stated "the fourth quarter may indeed turn out to be the most challenging quarter of the year. The most challenging markets for our products continue to be those associated with residential and non-residential construction, which continue to show little, if any, strength."
Likewise, management of Steel Dynamics (NASDAQ:STLD) remains uncertain about fourth quarter steel product demand, stating "... given the uncertainty surrounding demand for flat-rolled steels, we will provide specific fourth quarter guidance in December." For the nine months ending September 30, Steel Dynamics reported earnings per diluted share of 61 cents, a 79-cent improvement from 2009 levels. However, quarterly EPS was down from last years values. The less than impressive results and gloomy predictions have caused 19% share price declines in both STLD and NUE, while AK Steel Holdings (NYSE:AKS) stock has fallen by 30%. (Check out Nucor Adds A Note Of Caution To The Season.)
Drawing a Conclusion
Risky macroeconomic conditions have caused corporations with broad market exposure, especially the housing sector, to underperform the S&P 500 index. There seems to be a discrepancy in economic forecasts. While general indicators are pointing to improved signs of activity, exposure to the housing market and other risky economic segments has caused steel manufacturers to be wary of the fourth quarter. Although the primary metal index, an eight-month gauge of industry activity, grew by 1.4% last month, the price of steel operators fails to reflect such optimism.
Exchange traded funds are currently the best investment alternative to gain safe exposure to the steel market. The Market Vector Steel Index ETF (NYSE:SLX), with a management expense ratio of only 0.56% and 26 holdings, is not as heavily exposed to the American economy, since 65% of its holdings are international assets such as Rio Tinto (NYSE:RIO), Arcelor Mittal (NYSE:MT) and Vale (NYSE:VALE). On the other hand, risk-seeking investors should consider purchasing American steel stocks, as the recent price drops could present an optimal long-term buying opportunity.
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