SLX - SLX: A Bullish Trend Since Early May

2023-08-09 12:37:17 ET

Summary

• Steel is a critical building block for construction projects and various products, making it an important indicator of the global economy.
• U.S. and Chinese steel prices have declined, with Chinese prices stabilizing in recent weeks.
• VanEck Steel ETF, a diversified steel fund, has seen a bullish trend and offers an attractive dividend yield, but its performance is dependent on Chinese economic strength.

Steel is an alloy of iron and carbon with more strength and fracture resistance than other forms of iron. Stainless steels are resistant to corrosion and oxidation, containing chromium and nickel. Steel is a critical building block for construction projects and is required for water pipes, furniture, appliances, automobiles and other transport vehicles, and many other products.

Iron ore, coal, and scrap steel are the primary raw materials for steelmaking.

Markets across all asset classes reflect the economic and geopolitical landscape. Since steel is a leading infrastructure building block, the price of steel is an excellent barometer of the health and well-being of the global economy.

The VanEck Steel ETF (SLX) owns shares of companies involved in the steel sector. Since late May 2023, SLX has been trending higher and is sitting at a resistance level that could be the gateway to higher highs.

U.S. and Chinese steel prices have declined from the 2022 high - Chinese steel stabilized over the past weeks

Like many industrial commodities, steel prices have experienced selling pressure.

The chart shows the decline in U.S. steel prices since the 2023 highs in March and April. While HRC North American steel prices remain higher than at the end of 2022, they are trending lower over the past months and in early August 2023.

China is the world's leading steel producer and consumer.

Steel HRC FOB China prices peaked in 2023 in March. Since then, the trend has been lower on weakness in China's economy. After reaching a low in May, Chinese steel prices have stabilized, but the recent poor Chinese trade data could put additional pressure on steel demand in the world's second-leading economy.

Steel is an economic barometer

Like copper and crude oil, steel is highly sensitive to economic growth or contraction. When steel production rises due to increasing demand, global financial conditions tend to be growing. Falling steel production is a sign of economic contraction.

In May 2023, worldwide crude steel production for 63 countries reporting to the World Steel Association was 161.6 million metric tons, a 5.1% decline compared to May 2022. While African, Middle Eastern, Russian, Ukrainian, and other CIS production increased, Asian and Oceanian, European, and North and South American output declined. The steel output data indicates global economic weakness.

China leads the world in output and consumption

China's population and growth make it a leading producer and consumer in the world of commodities, and steel is no exception.

The World Steel Association reported the following output for the top ten steel-producing countries in May and through the first five months of 2023.

The data confirms weakness in China's economy as steel output fell in May 2023 on a year-on-year basis. Over the first five months of 2023, production was only slightly higher than at the same time during the previous year.

China dominates worldwide steel production.

The chart shows in 2021; China produced 8.75 times more steel than India, the world's second-leading producer. Therefore, while steel is a global economic barometer, the price action most reflects China's economy.

SLX is a diversified steel ETF product

The fund summary for the VanEck Steel ETF states:

At $66.49 per share on August 9, SLX had $121.695 million in assets under management. SLX trades an average of 18,692 shares daily and charges a 0.55% management fee.

As of August 5, SLX's top holdings included:

The geographic breakdown was:

The chart shows SLX does not have significant exposure to Chinese steelmakers or related steel companies, with over half the assets invested in U.S., Brazilian, and U.K. companies.

SLX has a bullish trend and an attractive dividend yield in August 2023

While steel prices have been weak, gains in the U.S. stock market have created a divergence, pushing the SLX higher since late May.

The chart shows the 29.4% rise from $55.19 on May 31 to the most recent $71.42 per share high on July 25. At $66.49 on August 9, SLX was still 20.5% higher than the May 31 low.

SLX closed 2022 at $57.84 per share and was 15% high for the year as of August 9. The S&P 500, the most diversified U.S. stock market index, was 17.1% higher in 2023 on August 9, so the SLX ETF product has slightly underperformed the benchmark index so far this year.

SLX's most recent dividend was $2.88 per share, translating to a 4.33% yield, nearly triple the yield on the SPY ETF that tracks the S&P 500 index.

While SLX does not hold Chinese companies, steel and other metals prices depend on Chinese economic strength for appreciation. Therefore, a long position in SLX is a bet that China's economy will improve. The bullish trend since late May shows signs of faltering, and the latest Chinese data could push the ETF lower over the coming weeks. However, buying SLX on a scale-down basis with its attractive dividend is a way to bet on Chinese growth without direct exposure to Chinese companies.

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