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3 Steel Stocks That Are Melting Down

The sector is rolling over again as China continues to let steel capacity go unused

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While U.S. stocks continue their month-long sideways amble, emerging-market stocks have been absolutely hammered, with Chinese stocks down more than 40% from their post-crisis highs. This is a clear warning signal that all is not right in the areas most sensitive to the global economic cycle.

Stack of solid steel aluminum plates 630
Source: iStockphoto

This is the same story being told by steel stocks, which are closely linked to the fate of the emerging markets — especially China — because steel has been the center of the Chinese infrastructure and fixed-asset investment gorge fest. As the China miracle has slowed, so too have the fortunes of steel stocks as prices have fallen and extra smelting capacity has been idled.

After recovering in the second half of 2013, steel stocks — as represented by the Market Vectors Steel (SLX) — are rolling over again.

Caroline Bain at Capital Economics sees ongoing weakness for steel prices in 2014 before a possible stabilization in 2015 if the Chinese can consolidate their overbuilt steel industry. Currently, capacity utilization is running around 75% — which means that 25% of capacity is sitting unused. It’s a politically connected industry, with steel an important source of jobs and local government revenue. But the current situation is simply unsustainable.

Also weighing on steel prices has been a drop in iron ore and coking coal prices, with lower input costs allowing steelmakers to in turn keep their prices low.

With all that said, here are three steel stocks that look like attractive short-side opportunities as the sector continues to roll over.

Article printed from InvestorPlace Media,

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