The Chinese government's stimulus has gone directly to railways, highways, byways and bridges... all of which require steel. Lots and lots and lots of steel.
The problem for China? Estimates suggest that mainland mines are only capable of producing 1/2 the iron ore required for housing, transportation and other projects. It follows that the Chinese have to get the goods from iron ore producers like Cia Vale and Rio Tinto.
While investing directly in a Chinese steel producer may be one way to go, an investor can choose to diversify across a wide range of companies involved in the production of steel products or mining/processing of iron ore. The Market Vectors Steel Fund (SLX) tracks the NYSE Arca Steel Index -- an index comprised of companies related to steel production as well as iron ore extraction and reduction. Cia Vale and Rio Tinto alone make up 20% of the exchange-traded fund.
It's clear that SLX, like many basic material funds, is experiencing a definitive uptrend. It crossed above its 200-day trendline in May, and has hardly looked back.
Yet before anyone gets irrationally exuberant about the possibilities, there's another side to the argument; that is, officials from the China Iron & Steel Association have consistently cautioned against an iron ore surplus from over-importing. The Association maintains that there are huge stockpiles at Chinese ports such that supply far exceeds true demand.
Indeed, China's major ports acquired 24 percent more iron ore in April 2009 than in April 2008. And the Ministry of Transport estimated stockpiles of 62 million tons sitting at ports.
It would seem that at least two scenarios could play themselves out. China could scale back on importing the commodity such that prices for the commodity and profits for foreign miners get tarnished. Conversely, China can continue to stockpile, build, and wait for demand to catch up to supply, keeping the global economy on a recovery course.
Yep... it's China's decision-making that ultimately determines how the investment markets will fare. China isn't just an emerger, but rather, the driving force behind a probable global recovery.
Yet there's another method for investing in the idea that more steel will be needed. In January 2008, the Van Eck Group responsible for the Market Vectors series launched the first ETF to target the global coal industry. The Market Vectors Coal Fund (KOL) seeks the performance of the Stowe Coal Index.
What's intriguing about coal production, transportation and equipment manufacturing is that many of the companies in the Coal ETF are based in emerging markets as untapped as Thailand and Indonesia. One is certainly going to get his/her share of foreign exposure.
There is one problem with the Coal Index, however. Some of the participants produce coal and some of them consume coal. Producers might benefit from continued appreciation in the underlying commodity, while consumers might be hindered by inflated prices.
Nevertheless, coal is required for the smelting of iron ore in blast furnaces - furnaces that use coal blends (coking coal). One may not be able to identify Chinese companies that will be the most successful at making steel or building bridges, but coal is at the front end of the manufacturing process.
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Disclosure Statement: ETF Expert is a web log (blog) that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.