When steel rises, shipping rises

SLX and SEAEnlarge GraphComparing industries’ performances is used by analysts to understand their relationships. By doing so, sometimes investment opportunities can be uncovered that the market has overlooked. The steel industry is one example of an industry that often moves with the shipping industry. When the steel industry rises in value, it is often positive for shipping companies.

The steel industry ETF, Market Vectors Steel Index Fund (SLX), is currently priced at ~$48.88 per share in the market. It seeks to replicate the returns of the New York Stock Exchange’s Arca Steel Index. As of the same date, February 13th of 2013, the Guggenheim Shipping ETF (SEA) is available for ~$17.31 per share. Over the past two and a half years, the two ETFs have moved closely to each other with a strong correlation of 0.88.

Global trade for raw materials used in steel manufacturing makes up about 15% of the shipping industry’s trade value. However, it is also important to note that the steel industry is highly sensitive to the global economy. When global economic activity rises, demand for commodities tend to rise as people consume and businesses spend more. This means higher global trade volume.

Over the past year and a half, SLX and SEA have both stabilized at around $45 and $15 as several countries enacted policies to stabilize a slowing economy. The largest importer of raw materials used in steel manufacturing, China, unveiled ~$160 billion in infrastructure investments in September 2012. That helped to lift the SLX and SEA above from their stabilized levels.

Higher steel use means more revenue and earnings for steel producers, as well as the shipping industry in general. If SLX continues to rise, as steel companies’ revenues and earnings grow, it should also support shipping companies such as DryShips, Inc. (DRYS), Diana Shipping, Inc. (DSX) and Eagle Bulk Shipping, Inc. (EGLE). Of course, SLX rising is also positive for the Guggenheim Shipping ETF (SEA).