Steel Prices May Have Reached Bottom

 | Jan 22, 2016 | 1:00 PM EST
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Late last year, I wrote several articles about steel and metals prices (here and here) and how the outlook for 2016 would likely improve. This discussion has obviously been buried by the recent market turbulence, but the fundamentals behind it haven't gone away, and indeed, there is more evidence today that my outlook, at least as far as steel prices are concerned, might be correct.

We could finally be seeing a bottom in steel prices developing, and if this is so, it would have important ramifications in several areas. First, of course, it would be some much-needed positive news for the beleaguered steel manufacturers.

Second, it would belie the assertion by hysterical stock market short-sellers and others that the global economy is tanking.

And third, since the evidence of firming steel prices is coming from Europe, of all places, it would suggest the euro is also putting in a bottom.

The news I am alluding to is coming from MEPS International, an independent steel industry consultancy and analysis firm.

Here's what they are saying:

"European steel prices may have reached their lowest point with a slight revival of fortunes expected for 2016. In January's issue of the European Steel Review, MEPS reports that European steel mills have announced price hikes for first-quarter business. It is unclear whether the price increases will be accepted by buyers."

Note: They're actually mentioning price hikes here. That's surely something we haven't heard in a long time, not just for steel, but for materials prices in general.

Here's where the euro forecast ties in. Remember that in all markets there is a price setter. Nominally, that is the government or governments that set the price of money and credit via their central banks when they set interest rates.

In the forex market, while governments sometimes do set the foreign exchange rate of their currency (like Saudi Arabia or China when they "fix" or manage some level), it is usually large exporters that set the FX rate when they set the price of their export goods.

So, for example, when a large auto manufacturer like Daimler or Volkswagen (VLKAY) lowers the price of their cars, that constitutes a de-facto reduction in the euro/dollar (or, euro/something) exchange rate. (Europeans receive less, while American or Japanese or British consumers receive more. The euro's exchange rate has gone down.)

Steel is an extremely important commodity. It is used in the fabrication of automobiles, machinery, armaments, just about everything. When the price of steel goes up, even domestically in Europe, it affects the cost of cars or equipment manufactured by European firms. They will then try to pass along those price increases to their customers. Hence, the euro/dollar exchange rate is likely to stop falling. To restate: Price increases by European exporters, whether they are steel manufacturers, auto manufacturers or whomever, constitute a de-facto increase in the euro/dollar exchange rate or, other euro "pairs."

So if you play the currency markets or are looking to play the currency markets, being long the euro makes sense. If you don't trade forex, but would like to participate in any euro rally, then consider the CurrencyShares Euro Trust (FXE) exchange traded fund. The only problem with this fund is it's a little pricey at $105 per share, meaning it's not for everyone.

Other than that, there is the ProShares Ultra Euro (ULE), but that is a small fund with not much daily volume. However, it's trading at a more affordable $15, which is down from $26 two years ago.

For the more adventurous, you might want to try shorting a "short euro ETF" like ProShares Ultra Short Euro (EUO). That's a big fund that looks like it has seen a lot of investor inflow in the last two years and it could be ripe for a fall. Those "inverse" ETFs usually go down a lot faster than they go up, too, so that's nice.

However you play it, it's probably a good idea to take some long exposure to the euro.

Apart from the exchange-rate play implied by what's going on with European steel prices, there is the obvious opportunity in the beleaguered steel stocks themselves. I own shares in Commercial Metals (CMC), a stock that I mentioned in the December article. Of course, there are others such as U.S. Steel (X), Nucor (NUE), ArcelorMittal (MT) and Schnitzer Steel (SCHN). They're all worth taking a look at.

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