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Why It’s Time to Be Cautious on Steel, Steel ETFs

This article was originally published on ETFTrends.com.

The VanEck Vectors Steel ETF (SLX) rallied earlier this year after the White House unveiled tariffs aimed at helping U.S. steelmakers, but the steel ETF has since given back all those gains after the White House unveiled a diluted version of its original tariff plan.

SLX tries to reflect the performance of the NYSE Arca Steel Index, which follows global companies involved in the steel industry. While more than a third of SLX’s lineup is allocated to U.S. steel producers, the ETF has a heavily global tilt, including exposure to ex-US developed markets and emerging markets steel companies.

With SLX down more than 7% over the past month, some analysts are growing bearish on steel stocks. The initial tariff effort was met with hostility from U.S. trading partners, causing some market observers to speculate that a trade war could result from the Trump Administration’s efforts to protect U.S. steelmakers.

Related: Steel ETF Tumbles After White House Tariff Plan

Issues Remain for Steel ETFs

“In mid-February, to incorporate the impact of these tariffs on our steel price deck, we increased our forecasted spread between U.S. steel prices and global marginal cost,” said Morningstar in a recent note. “Accordingly, we raised our fair value estimates for every U.S. steelmaker we cover. However, we still expect global marginal cost to decline materially in the coming years, driven by decelerating Chinese fixed-asset investment, waning Chinese stimulus effects, and faltering cost support from steelmaking raw materials.”

The SPDR Metals & Mining ETF (XME) is another ETF that could be pinched by faltering steel equities. XME tries to reflect the performance of the S&P Metals & Mining Select Industry Index, which is designed to track the metals and mining segment of the S&P Total Market Index, a broad U.S. equity market index. However, unlike the traditional cap-weighted indexing methodology, XME follows a more equally weighted approach. XME is lower by about 9% over the past month.

Related: Trump’s Tariff Plan: Best Ways for ETF Investors to Capitalize

A problem with the new, diluted tariff scheme is that excludes many of the largest importers of steel to the U.S.

“Additionally, the steel tariff program appears to have less bite than many initially feared, as a number of key steel exporters to the U.S. have now received temporary exemption,” said Morningstar. “Those exempt include Canada, Mexico, the E.U., Argentina, Australia, Brazil, and South Korea. Together, these countries accounted for 65% of U.S. steel imports in 2017.”

For more information on the steel industry, visit our steel category.