China Could Ignite The Steel Industry

By Aaron Levitt | June 12, 2012 AAA

With its growth slowing, China has recently begun to unveil some new stimulus measures to get its economy moving once again. This past week, Beijing cut state-set gasoline and diesel prices for the second time in a month and lowered interest rates for first time in almost four years. Overall, analysts at Credit Suisse (NYSE:CS) estimate that China will undergo nearly $315 billion worth of economic stimulus spending in order to reignite its slowing growth. One area, which is expected to see the bulk of that spending, is on infrastructure projects. Already, The National Development and Reform Commission (NDRC), has been accelerating construction approvals within the nation. For investors, now could be the time to bet on the beleaguered steel sector.

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Big Construction Projects
Since the beginning of the year, the NDRC has approved more than twice as many investment projects as it did in the same period a year earlier. Between January and April, the central planning council gave the go ahead to more than 860 different large scale projects ranging from hospitals and water treatment plants to clean energy facilities including wind, solar and hydroelectric power. Likewise, new policies to drive domestic appliance and automobile demand in the nation have also been unveiled.

SEE: Stimulus Spending: When It Fails And Why

Officials are predicted to be more conservative this time around as too much investment could worsen capacity issues in some sectors, and that its banks can't afford a second lending binge. The latest NDRC approval was $23 billion worth of new steel projects as the nation deals with slowing industrial growth. The new Baosteel and Wuhan Iron & Steel Group plants have been on hold since 2009, citing overcapacity in the industry. Baosteel's project will increase its production capacity by 2.3% to about 53 million tons, while the Wuhan mill in China's southwestern region, will add 8.5 million tons of annual capacity or 22%.
According to industry group, the China Iron & Steel Association, demand for the world's biggest consumer of steel should rise by as much 25% by 2015. However, as these projected stimulus measures take hold, the beaten down steel industry could finally get a break.

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Betting on the Steel Producers
With China ramping up the stimulus-machine once again, it could finally be time to bet on the steel producers. Overall, the sector has fallen hard as global growth continues to be anemic and represents a real value in the commodities sector. With over $130 million in assets, the Market Vectors Steel ETF (ARCA:SLX) is the biggest and most heavily traded fund in the sector. The exchange-traded fund tracks 27 different holdings, including producers like Nucor (NYSE:NUE) and POSCO (NYSE:PKX). The fund, which is currently $30 below its 52-week high, can be had for a dirt cheap P/E of just 10 and at a 2.21% yield. Tracking a wider swath of firms at 70, the PowerShares Global Steel (Nasdaq:PSTL) can also be used as a broad play.

Perhaps the biggest winners in China's resuming steel binge could be the producers of iron ore. Prices for the critical component in steel production currently sit at around $130 per metric ton. However, analysts expect the new stimulus measures to push prices upwards to average $152 in the second half of the year. That'll directly benefit both Rio Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP, BBL). China is the largest customer for both companies, representing 31 and 28% in sales, respectively. Likewise, coking coal is expected to rise 7% this year based on the stimulus measures. That should help boost shares of coal-miner Peabody (NYSE:BTU).

SEE: The Role Of Speculators In The Commodity Market

The Bottom Line
With its economy is beginning to slow, China has begun to unveil some new stimulus measures to boost sagging growth. That includes fast tracking major infrastructure and public works projects. Those new construction efforts could finally be the catalyst needed to ignite the beleaguered steel sector. For investors, adding a dose of steel related equities like producer Steel Dynamics (Nasdaq:STLD) could be great bet on China's growth.

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

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