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Must-read overview: Can steel companies strengthen your portfolio?

Part 3
Must-read overview: Can steel companies strengthen your portfolio? (Part 3 of 13)

Key drivers of steel consumption: A must-know overview

Key steel consumers

Steel serves as a raw material for various industries. You and I don’t consume the crude steel that’s produced in factories directly. The construction and transportation sector, including both automobiles and railways, consumes most steel worldwide. Cumulatively, these two sectors consume two-thirds of the steel produced globally. Other sectors that are major consumers of steel include energy, home appliances, machinery, and defense.

Steel demand globally depends highly on economic activity. Let’s analyze the trends in steel consumption compared to changes in GDP.

gdp and steelEnlarge Graph

Steel consumption and the economy

As the graph above shows, steel consumption globally has been following the GDP growth rate. The reason is quite straightforward. Most steel-consuming industries like construction—real estate and infrastructure—automobiles, and heavy machinery depend on economic growth.

Let’s take the example of real estate, which is the biggest consumer of steel globally. The real estate sector depends on demand from end users. End users are people who purchase a home to actually live in it. The sector also depends on investors.

In a growing economy, end users are more confident about getting into long-term commitments like buying a home. Banks normally relax their credit policies. This means more people become eligible to buy a home on a mortgage. As the real estate prices in a growing economy trend upwards, there’s a lot of interest from investors. This further fuels demand for real estate.

On the contrary, in recessions, the real estate cycle turns upside-down. People lose their jobs and aren’t able to service their mortgages. Banks put a lot of homes up for sale to recover their dues. So there’s excess supply with no matching demand. Investors also shy away, as the prices trend downwards.

An economy’s growth rate is a driving factor for steel consumption. So investors in companies and ETFs like Arcelor Mittal ADR (MT), United States Steel Corporation (X), Nucor Corporation (NUE), Reliance Steel & Aluminum (RS), and ETFs like the SPDR S&P metals and mining index (XME) should keep a close eye on economic growth.

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