The steel industry is considered as a high beta industry as the prices of steel stocks rise or fall more than the market. This market volatility exposes many investors to unnecessary risks but can also provide good returns.
Though the steel market is seasonal in nature, it still carries a lot of significance for serious investors to take risks and make bigger profits in the market. Steel industry profitability often swings with economic conditions. During the good economic conditions, profitability soars and when the economy is going down, steel companies do not perform well.
If you decide to invest in steel-related stocks, here are some really useful tips for you:
Understand pricing dynamics
There are different factors which determine the prices of steel products in the market. One of the key factors is the Chinese economy.
China has remained one of the largest buyers of steel in the world due to the explosive growth the country observed in the last decade. Their demand for steel has been high due to the construction of dams and railway network.
Global infrastructure demand is also another factor which determines the prices and profitability for steel producers. Large scale infrastructure projects in countries like India, US, Russia
Learn these dynamics before you decide to invest in steel stocks as pricing volatility can hurt your investments in a short time horizon.
Evaluate long-term returns
The steel industry is seasonal in nature so to get a better view of the returns, it is extremely useful to check the long term i.e. over 10 years returns in this industry. You can also check the long term profitability of the steel companies.
The 10-year horizon period is crucial as it provides almost a complete cyclical picture of the trends in the stock markets. If you are able to spot the trends in the cycle, make sure you design your trading strategies accordingly.
Always follow what the market suggests in terms of trends.
Know the global dynamics
The steel industry is a global industry, therefore, its dynamics are defined under the global perspective. If the industry is not performing in the domestic market, it could be due to the slump in the global markets.
It is always important to understand global trends. Demand from big markets such as China can swing because of global trends or production can halt due to political reasons in other countries. A savvy investor should, therefore, always find out the current global trends before making any large investment in the steel industry.
To protect its own industry, the US recently imposed heavy tariffs on the steel imports in the country. Dumping of steel products is another global issue with the potential to threaten the supplies of big players in the market.
Learn about the latest trends
The steel industry is facing stiff competition from other alternative technologies such as 3D printing. Manufacturing through a metal stamping kit is another technique which is used at a smaller scale. It provides smaller players to provide metal precision technologies at a relatively high speed and low cost. Such mushrooming of small steel players in the market eat away the profitability of the bigger players.
A good investor must need to know how technology and smaller players in the market can influence the profitability of larger players.
The steel industry is dynamic and risky so if you are planning to invest in this industry, learn as much as you can.
(Featured image by Nok Nok via Shutterstock)
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.
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