Will ITC Ruling Boost Steel ETF (SLX)?

by on December 31, 2009 | Updated January 4, 2010 | ETFs Mentioned:

Trade tensions between the U.S. and China continue to mount, with the most recent dispute focusing on the damage done to the domestic steel industry by cheap overseas imports. The U.S. International Trade Commission announced that duties of between 10% and 16% will be imposed on future imports of steel pipes. One day earlier, the ITC imposed preliminary anti-dumping duties on imports of steel-grate products, drawing harsh criticisms from China and threatening to enrage the U.S.’s largest trading partner.

The Steel ETF Has Surged This YearDomestic steelmakers had alleged that Chinese manufacturers had tripled imports to the U.S., causing a sharp drop in prices, rises in inventories, and ultimately thousands of layoffs. Not surprisingly, Chinese steel companies had a slightly different take on the situation: they argued that the U.S. is trying to unfairly quash competition and was not negatively impacted by the increase in imports, which came in order to meet increases in demand.

“The decision has far-reaching implications, giving domestic producers better pricing power and more incentive to invest in production, writes Kris Maher. “They aren’t expected to resume production or hire laid-off steelworkers until inventory levels fall.” While this week’s rulings are a blow to the Chinese steel industry, the case isn’t over yet. The Chinese government can appeal to the World Trade Organization and Chinese steelmakers can appeal the decision to a U.S. court.

Steel ETF Holds Steady

The Market Vectors Steel Index ETF (SLX) has been one of the best-performing ETFs of 2009, adding more than 110% on the year (see the Top Ten Performing Equity ETFs Of 2009). The fund gained more than 0.5% in early trading Thursday following news of the penalties set to be imposed against the Chinese steel industry, indicating that the market had not yet fully priced in the positive outcome.

SLX is based on the NYSE Arca Steel Index, a benchmark that measures the performance of companies primarily involved in a variety of activities related to steel production, including the operation of mills, fabrication of steel products, and the extraction and reduction of iron ore.

SLX maintains a global focus, with North American steelmakers (including several who filed the original suit against the Chinese) accounting for only about 40% of the fund’s total assets. The remainder of this ETF is allocated to Europe, South America, and Asia. SLX is tilted towards large cap companies, although more than 30% of the fund is invested in firms with a market capitalization of less than $5.0 billion.


Outlook For 2010

Despite a stellar performance in 2009, SLX remains about 45% below highs reached in May 2008, underscoring how dramatically the entire industry was impacted by the economic downturn. A quick recovery in the manufacturing sectors in emerging economies translated to big gains for this fund in 2009, but a continued rally will depend upon strength in demand from developed economies.

The ITC decision could give a short-term boost to domestic steel companies in the form of enhanced pricing power, but the longer-term prospects for the industry are less clear. Although there is no shortage of optimism on Wall Street, definitive signs of a real recovery in the manufacturing sector have been slow to appear.

Disclosure: No positions at time of writing.