Overview: A key guide to investing in steel companies

Investment in steel companies

Investment in a cyclical industry like steel has never been for the fainthearted. It’s a high beta industry, which means that the shares of steel companies fall or rise more than the broader market indices. This is understandable, as the industry profitability fluctuates. In recessions, these companies bear the brunt of losses, while in a rising economy, these stocks jump back up to become the most sought after stocks.

Must-know: Steel companies listed in the U.S.

The major steel companies listed in the U.S. are ArcelorMittal (MT), United States Steel Corporation (X), Steel Dynamics (STLD), and Nucor (NUE). Along with these companies, ETFs like the SPDR S&P Metals and Mining ETF (XME) are also an alternative way to gain exposure to the steel industry.

Analyzing long-term returns from steel companies

Let’s begin by analyzing the long-term returns generated by some steel companies. This will help you better understand the cyclic nature and volatility of steel companies. As you can see in the chart above, the returns from steel companies have been quite volatile. These stocks defied gravity in the bull period preceding the year 2008, only to tank after the global economy went into recession.

Steel—A truly global industry

With the integration of world markets, the dynamics of steel companies have also become global. Steel companies operating in the U.S. are affected by events happening outside the U.S. borders. Steel companies’ shares react to key events in all major steel-consuming countries. One of the major reasons behind this is the rise in the global steel trade.

While this rise in global trade is a welcome sign, it’s led to contention between the U.S. and several of its trading partners. This has been due to the massive dumping of steel products into the U.S. markets. Dumping is the selling of products below the manufacturing cost. In the next part of this series, we’ll discuss the impact of dumping on the U.S. steel industry and then move forward to International Trade Commission’s positive decision in this direction.