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Must-know: Why it makes sense to hold on to steel companies

Part 2
Must-know: Why it makes sense to hold on to steel companies (Part 2 of 6)

Why a construction increase is a key driver for steel companies

Importance of construction

As you have seen previously, the construction industry remains the biggest consumer of steel in the United States. The fortunes of steel companies like Arcelor Mittal ADR (MT), United States Steel Corporation (X), Nucor Corporation (NUE), and Steel Dynamics (STLD) are closely tied to this industry. The construction industry can be further divided into residential, non-residential, and public construction.

constructionEnlarge Graph

Construction industry performance

The construction industry was the worst hit industry during the recession. Construction activity dipped by as much as 50%, which made the steel industry tank. The industry has increased in the past several quarters. The previous chart shows the rise in construction spending. You can see that after hitting a bottom in 2011, the spending has been on an uptrend. This has been driving the demand for steel companies.

What should you expect going forward?

It’s clear that construction spending is increasing, but what should you expect from this vital industry going forward? Construction spending had a peak of $1.2 trillion in March, 2006, and hit a low of $746 billion in February, 2011.

Right now, the difference between renting and buying is heavily skewed in favor of buying. When you consider the difference between median house prices and median rents, purchasing is cheaper. Rock-bottom interest rates and low prices for starter homes are making home ownership very affordable. As the job market improves for younger adults, those who are currently renting will contemplate home ownership. The Obama administration has been pushing banks to lend more and to use Federal Housing Administration (or FHA) loans for first-time home-buyers. FHA loans require only 3.5% down payment, so they’re perfect for the first-time home-buyer. These factors are expected to drive the construction industry and are positive for steel companies.

An investor can also consider the SPDR S&P Metals and Mining ETF (XME) to access the steel industry.

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