Why steel investors should keep a close eye on central bank policy
Why monetary policy affects the steel industry
Monetary policy and the resultant interest rates are a key driver for the steel industry. Monetary policy affects the steel industry in several ways:
- Demand for interest rate–sensitive goods: As we’ve seen, most steel globally goes to real estate and automobiles. Both these sectors are interest rate–sensitive, with high-value purchases and funding from financial institutions. An increase in interest rates rises the cost of owning these assets for consumers and reduces their demand. Lower demand from key industries ultimately affects the steel industry.
- Interest burden for steel companies: The steel industry is capital-intensive. So changes in interest rates affect steel companies’ profit margins. As we move forward, we’ll see how this is a key driver for steel companies
- Steel prices: Steel, like all other commodities, trades on commodity exchanges worldwide. The recent stimulus and loose monetary policies have led to speculative trading in commodities. The prices of all commodities, including steel, normally go up as this hot money chases assets in expectation of earning higher returns.
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We’re in a low interest rate regimen. Central banks in developed countries are sitting on near-zero interest rates. Even globally, rates are much lower compared to the pre-crisis period. You can see this in the graph above. The current rate environment isn’t sustainable. It should revert to long-term averages. Any reversal in this policy could be a negative for companies and ETFs like Arcelor Mittal ADR (MT), United States Steel Corporation (X), Nucor Corporation (NUE), Reliance Steel & Aluminum (RS), and the SPDR S&P metals and mining index (XME).