You are surrounded by steel, but have you ever thought about investing in it? If so, the best way to gain exposure to this market through one of several investments. However, not all investments are simple to understand. For example, steel futures trading can be complex, and steel companies are not always public or available to invest in, even through limited partnerships.
Some of the best steel producers are private, while others are on foreign exchanges that won’t issue depository receipts in all countries.
Why Should You Invest In Steel?
Steel is an alloy made of a combination of iron, manganese, and carbon. The carbon in steel contributes to up to 2.1 percent of its total weight, giving it its incredible strength, while also making it inexpensive.
It’s one of only a handful of materials suitable for many types of building projects, and the strongest material for building high-rises and complex building structures. Because it currently has no equal in terms of strength and cost, it’s in high demand.
Assessing The Potential For Steel Investments
Steel trading is popular because its business cycle naturally lends itself to investment opportunities – especially when steel rises or falls unexpectedly, or there is volatility caused by shortages or other economic disruptions.
The usual way to do steel trading is to buy steel producers directly (i.e. steel stocks) or do steel futures trading. Construction accounts for 20 percent of all steel usage in the world, making up girders, piping, and various other applications. And, since the U.S. and China are the leading steel producers, most of the investments will be in either the U.S. or China.
The largest, and most stable companies in the steel industry are U.S. Steel, a consolidation of Andrew Carnegie’s steel companies in the early 20th century and J.P. Morgan’s startup steel company which itself was made of a consolidation of several other companies.
Nucor Corp and ArcelorMittal are the two other largest steel companies in the world.
If you’re willing to learn about steel futures trading, you can invest in future steel contracts, betting on the future price of steel.
What Drives Steel Prices?
While cheap, steel is not known for its price stability, making steel trading popular among investors. The volatility is brought on by economic boom and bust cycles, and every industry that’s tied to commercial real estate affects the price of steel.
Before you invest in steel, realize that if the market slows down, it’s expensive to get it going again. Powering on and off blast furnaces is extremely expensive, eats into company profits, and results in a phenomenon in the industry called “turning gold into straw.”
Another variable in the steel industry is the business cycle. The raw material availability drives production along with the demand for it. Steel pricing cycles run about 6 months, which means that the steel business slows down for a period and then must start up again.
But that startup process, going from idle to full or near-full capacity requires an outlay of large fixed costs, like labor, retraining, and benefits packages. This is on top of restarting the blast furnaces.