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Steel Trading


The Ultimate Guide

Why is Steel Valuable?

Steel is one of the most important metals used worldwide in the construction and engineering industries.

It is an alloy made up mostly of iron and containing smaller amounts of carbon, manganese, silicon, phosphorus, sulfur and oxygen.

Its relatively low cost and strong physical properties make steel a popular choice for fabricating a wide variety of items. Consumer durables such as refrigerators and washing machines use steel, as do items ranging from cargo ships to buildings to surgical equipment.

How is Steel Produced?

Steel production takes place in furnaces using three different methods: 

Blast Furnace – Basic Oxygen Furnace (BF – BOF): This method uses iron ore, coal, and some recycled steel. Iron ores are reduced to iron and then converted to steel in blast furnaces. Steelmakers cast and roll the steel and deliver it as coils, plates, sections or bars.  The BF – BOF method accounts for about 75% of global steel production.

Electric Arc Furnace (EAF): This method uses mostly recycled steel and electricity, but sometimes other sources of metallic iron. Electricity melts recycled steel in EAFs, which account for about 25% of global steel production.

Open Hearth Furnace (OHF): This energy-intensive and environmentally unfriendly method accounts for less than 0.5% of global steel production.

How is Steel Made?
Steel Making Flowline via Steel.org

Global steel production exceeds 1,600 million metric tons annually. Production is global, but it has shifted dramatically over the past decades from Western countries to China. Chinese producers now account for almost half of the global supply of steel. The largest producing countries include: 

World's Biggest Steel Producers

Top 10 Steel Producing Countries

RankFlagCountryMillions of Tonnes Produced per Year
#1Flag of ChinaChina808.4
#2Flag of JapanJapan104.8
#3Flag of IndiaIndia95.6
#4Flag of USAUnited States of America78.5
#5Russia70.8
#6Flag of South KoreaSouth Korea68.6
#7Flag of GermanyGermany42.1
#8Flag of TurkeyTurkey33.2
#9Flag of BrazilBrazil31.3
#10Flag of UkraineUkraine24.2

Demand for steel has climbed steadily over the past few decades as emerging market economies developed larger infrastructure needs. China uses 45% of annual steel production, while other Asian nations use nearly 17%.  The EU accounts for a little over 10% of annual steel demand, and NAFTA countries comprise close to 9%.

The following industries comprise most of the demand for steel:

6 Main Uses of Steel

Uses of SteelDescription
Construction and Infrastructure
Construction Industry
Builders and engineers use steel to construct high-rise buildings, industrial sheds, residential buildings, bridges, parking garages, rail lines and other structures. Construction and infrastructure account for about half of the annual steel consumption globally.
Mechanical Equipment and Automotive Sector
Automotive Industry
Steel sheets are used in vehicle frames, hoods, doors, mufflers, bumpers and fuel tanks. Specialty steel is used in engine parts, transmissions, and suspensions. These sectors account for about 30% of annual steel demand.
Metal Products
Washing Machine
This sector includes consumer goods such as refrigerators, washing machines, and air conditioners and accounts for about 11% of annual steel demand.
Other Transport
Train Icon
This sector includes shipbuilding and trains and comprises 5% of annual global steel demand.
Electrical Equipment
Electrical Plug
This sector comprises about 3% of global steel demand and includes connector and component brackets and other equipment.
Domestic Appliances
Cookware Icon

Knives, cookware and other small kitchen appliances use steel. This sector accounts for about 2% of annual demand.

What Drives the Price of Steel?

Diverse industries all over the world use steel in their products.  Therefore, the price of steel is a good barometer for global economic strength. The following five areas represent important specific determinants of steel prices:

  1. Chinese Economy
  2. Global Infrastructure Demand
  3. Transportation Demand
  4. Input Prices
  5. Substitution Costs

Chinese Economy

China uses about half of the annual global supply of steel and, therefore, may be the biggest determinant of steel prices.

Double-digit growth in Chinese GDP over the past decade has created robust demand for steel in office buildings, residential housing, infrastructure and other types of construction.

However, China is also a major exporter of steel. As its growth trajectory has slowed, Chinese demand for steel has waned. Chinese producers have flooded international markets with cheap steel exports and depressed prices. 

Ultimately, strong internal Chinese demand generally creates higher steel prices, while weak demand leads to oversupply on the global markets and lower prices. To a lesser extent, demand from other emerging economies such as Brazil and India also impacts steel prices.

Global Infrastructure Demand

Construction and infrastructure represent a very large percentage of steel demand. Mature economies including the United States are planning large-scale infrastructure projects to replace crumbling bridges, airports and transportation systems. The demand for such large-scale projects in major Western economies can drive steel prices higher.

Transportation Demand

Demand for ships, trains, and cars impacts the price of steel. When the global economy is strong, the need for ships to transport cargo grows. Similarly, a strong global economy creates increased consumer demand for automobiles. Ultimately, the transportation sector is a very reliable barometer for the overall economy, so economic strength helps the price of steel, while economic weakness depresses it.

Geely Car Assembly Line
Geely Car Assembly Line in Beilun via Wikimedia Commons

Input Prices

Scrap metal and iron ore are the two main materials used to produce steel. Emerging economies China, Brazil and India provide much of the global supply of these materials, and they also have large-scale steel production industries. The global availability and cost of these materials may depend on the size of the domestic demand from these countries.

Energy costs are another important input cost of making steel since the heat needed to melt iron ore is significant.

Substitution Costs

Advances in technology have produced strong composite materials that compete with steel. Carbon fiber reinforced polymers, for example, have properties including strong strength-to-weight ratios that make them suitable substitutes for steel in many applications. Further improvements in composite technologies could lessen demand for steel.

3 Reasons You Might Invest in Steel

Steel is used in production all over the world, so its demand is a great indicator of the strength of the manufacturing economy.  Manufacturing is an important part of the overall economy, so investing in steel is a way to express a bullish view on world GDP growth. Some of the best specific reasons for investing in the metal include:

  1. Bet on Massive Infrastructure Programs
  2. Bet on Emerging Market Growth
  3. Bet on Transportation Demand

Bet on Massive Infrastructure Programs

The quantity of steel required to build bridges, railways, and airports dwarfs the amount required in other applications.

The United States has not invested in major infrastructure projects in decades. Should such infrastructure investments come to fruition, the price of steel could move significantly higher. Similarly, as other developed economies replace their infrastructure, steel prices should benefit.

Constructing New Infrastructure
Constructing New Infrastructure Pushes Up the Demand for Steel – Image via Pixabay

Bet on Emerging Market Growth

The insatiable demand for infrastructure and building construction in emerging economies, especially China, has been a vital constituent of steel demand. Government stimulus measures in these economies could further buoy the market in coming years. Investors that are interested in participating in emerging market growth without investing in stock markets in those countries should consider investing in streel.

Bet on Transportation Demand

The global economy depends on transportation to support growth. Ships transport goods internationally, while trains and trucks send goods across countries. Similarly, individuals need cars and trucks to travel to work. Pro-growth policies in industrial and emerging economies should boost demand for steel in transportation products.

Should I Invest in Steel?

Investors should consider these four reasons for investing in steel:

  1. Diversifying a portfolio may be the most compelling reason to invest in steel. Commodities such as steel provide traders with a way to mitigate the risk of having assets concentrated solely in stocks and bonds.
  2. Steel investing is a way to bet on infrastructure and construction demand. If developed and emerging countries find themselves competing for steel to complete large-scale building projects, then steel prices should move much higher.
  3. Accelerating growth in both the emerging and developed world could create more demand for offices and housing, and steel prices could see a big boost.
  4. Steel investing also offers a way to make a bet on a strong manufacturing sector. Strong global growth usually boosts demand for manufactured goods such as refrigerators, cars and washing machines. Investors optimistic about global growth can express this view with an investment in steel.

Steel investing, however, also has risks that traders should consider:

  1. A significant slowdown in the Chinese economy could lessen internal demand for steel and flood international markets with a cheap supply of the metal.
  2. A slowdown in the global economy would probably lessen demand for automobiles and consumer durables.
  3. Changes in the political climate could negatively affect steel prices. If governments decide to scale down infrastructure plans, steel prices would likely suffer.
  4. If technological advances in composite materials make significant strides, then demand for steel would almost certainly decline.

What Do the Experts Think About Steel?

Industry experts are divided about the prospects for steel prices over the coming years.

A report by Visiongain states that oversupply of steel will impact the market for the next decade. The report cites resistance by China to cut production levels combined with declining demand from the rest of the world.

Experts' Opinions on Trading Steel

A leading mining company concurs with this view:

China (has not been unfairly targeted). They are the perpetrator, they are the problem and they had a chance to discuss this within the OECD (Organization for Economic Co-operation and Development) and they elected not to participate…China has been walking away from a negotiated deal.

-Lourenco Goncalves, chairman and CEO of Cleveland-Cliffs Inc.

Goncalves also blames India, Taiwan, Italy and South Korea for contributing to a global glut in steel.

Other experts, however, see reasons to be bullish on steel:

A Merrill Lynch research report cites three positive catalysts in China that should contribute to higher steel prices:

  1. A shutdown of illegal furnace operations that contribute to excess supply
  2. A restocking of low inventories
  3. Renewed growth in infrastructure spending

How Can I Invest in Steel?

Steel traders have several ways to invest in the commodity:

Steel Trading Methods Compared

Method of InvestingComplexity Rating (1 = easy, 5 = hard)Storage Costs?Security Costs?Expiration Dates?Management Costs?

Leverage?

Regulated Exchange?
Steel Futures5NNYNYY
Steel Options5NNYNYY
Steel ETFs2NNNYNY
Steel Shares2NNNNYY
Steel CFDs3NNNNYY

Steel Futures

The New York Mercantile Exchange (NYMEX), which is part of the Chicago Mercantile Exchange (CME), offers a contract on US Midwest Domestic Hot-Rolled Coil Steel that settles into 20 short tons of the metal.

The contract trades globally on the CME Globex electronic trading platform.

Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions.

Steel futures contracts expire on the business day prior to the last Wednesday of the named contract month.  At expiration, the contracts are financially settled.

Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.

Steel Options on Futures

The NYMEX offers an options contract on steel futures.

Options are also a derivative instrument that employs leverage to invest in commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.

Options buyers pay a price known as a premium to purchase contracts. An options bet succeeds only if the price of steel futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in steel futures to profit from their trades.

Steel options contracts expire on the business day prior to the last Wednesday of the named contract month. 

ETFs

These financial instruments trade as shares on exchanges in the same way that stocks do. There is currently only one steel exchange-traded fund (ETF) that invests purely in companies that produce steel:

  • VanEck Vectors Steel ETF

There are several other ETFs that invest generally in industrial metals, including:

Shares of Steel Companies

There are many companies engaged in mining and processing iron ore or producing steel. While these companies are not pure-play investments in steel, the performance of their shares is generally correlated with the price of steel.

Top 4 Iron Ore Mining Stocks

 Current PriceOverviewListingsFoundedNumber of EmployeesInteresting Fact
Rio Tinto 

UK metals company that mines, processes and markets mineral resources.New York (NYSE)
London (LSE)
Sydney (ASX)
187350,000The Rio Tinto (Red River) mines in Spain, date back to about 750 BC and once supplied the civilizations of Ancient Greece and Rome.
Vale SA
Vale SA Logo
Brazilian company engaged in the production and sale of iron ore and iron ore pallets for steelmaking.New York (NYSE)194276,500+Vale is the world's largest producer of nickel and iron ore.
BHP Billiton
BHP Logo
Australian company that acquires, develops and markets natural resources worldwide.New York (NYSE)188565,000BHP Billiton is the world's second-largest mining company by revenue.
Cleveland-Cliffs Inc.
Cleveland-Cliffs Logo
US mining and natural resources company that produces and supplies iron ore.New York (NYSE)18463,000Cleveland-Cliffs is the oldest and largest iron ore mining company in the United States of America.

Companies that produce steel include:

  • ArcelorMittal SA –
  • United States Steel Corp. – 

CFDs

One way to invest in steel is through the use of a Contract for Difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of steel production or iron ore mining company shares. The value of a CFD is the difference between the price of the shares at the time of purchase and the current price.

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Many regulated brokers worldwide offer CFDs on steel production companies. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that traders can have exposure to steel producers without having to purchase shares in the companies.

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