Tickers in this Article: BHP, NUE, MT, PKX
While it looks as if the S&P 500 is set to finish 2011 relatively flat, getting there was an incredibly volatile ride. Fears surrounding a full blown European financial crisis has put investors on edge. Yet looking back on metal stocks in 2011, the year was a mixed bag to say the least. With no sense of direction as to where the economy was heading, metals, the basic building blocks of economic growth, remained suppressed. (For related reading, see A Beginner's Guide To Precious Metals.)

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Crumbling Steel
The most fundamental of metals, steel, was a disappointment for investors in 2011. Traditionally, the performance of steel businesses has laged economic growth and recession. When the recession hit in 2008, steel stocks performed well until in late 2009. However, in 2011, as steel prices declined and economic growth looked dismal, steel stocks sunk. South Korea steel giant Posco (NYSE:PKX), one of biggest and most efficient steel companies in the world, was not spared. Shares started the year at over $100 and now sit around $80.

If it was Posco's low cost structure that helped blunt its decline in 2011, that explains the severe price decline in shares of the world's largest steel company, Arcelor Mittal (NYSE:MT). Mountains of debt that was employed over the past couple of years to acquire steel mills, many of which produce steel at a high cost, have hurt MT in this environment. Shares are down over 50% as 2011 comes to a end. Efficiency was a relative winner in the steel industry in 2011; Nucor (NYSE:NUE), the U.S. based operated of lower cost mini-mills, declined around 12% in 2011.

Diversification No Good
Contrary to popular belief, diversification was no good in 2011 for the metal industry. Australia's $180 billion BHP Billiton (NYSE:BHP), which mines and produces oil, gas, copper, potash and precious metals, declined in value as commodities sold off in the second half of 2011. Shares have declined over 25% in 2011, but that could create an opportunity in 2012. This high quality well diversified global metals company now trades for around eight times earnings and yields a very attractive 3.2%. If the economy continues to recover, commodity prices will likely head higher. Investors seeking both income and growth will naturally be looking closer at BHP.

The Bottom Line
The poor performance of metals stocks leaves the door wide open for a broad recovery in 2012. Stock prices will move well in advance of increases in the underlying commodity price. 2011 has created seemingly attractive valuations heading in 2012, but future performance will be at the mercy of investor sentiment, at least in the short run. (To learn more, read Using Base Metals As An Economic Indicator.)

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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.

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