Five Ways To Profit From The Commodity Nobody Likes

by Tony D'Altorio

Five Ways To Profit From The Commodity Nobody Likes

by Tony D'Altorio, Investment U Research

September 29, 2009

Forget Superman... the real man of steel is Lakshmi Mittal, chairman of the world's biggest steelmaker, Arcelor Mittal ADR (NYSE: MT).

Mittal has built an empire - and a personal fortune - by being optimistic when it comes to the global steel industry. And he still maintains that confidence today, recently going on record to say that global demand could rise by more than 10% in 2010.

Meanwhile, many of his peers in the industry sport trembling lower lips over their present and future.

Believe it or not, that ongoing debate matters to everybody, not just those investing directly in the commodity. Steel demand feeds into a huge range of sectors, so much so that many regard it as an important bellwether of industrial trends.

The Half-Empty, Steel Glass

Other than in places like China, demand for steel has plummeted, especially in developed markets such as the U.S. Pessimists expect it to pick up by no more than 5% in 2010, and believe it could tank as much as 15% this year.

If true, that would make 2009's year-on-year decline the biggest since World War II ended, which goes a long way to explain why experts are so downbeat on the commodity.

Just ask Moody's analyst, Matthias Hellstern, who says, "So far, especially outside China, there has been little sign of a real pick-up in demand in the product areas such as construction and cars that rely on steel."

And Dan Dimicco, chairman of #2 U.S. steelmaker Nucor, agrees, advising everybody to remain "cautious about being overly optimistic for next year. The U.S. faces an extended period of low growth. It's hard to see the world going crazy [in terms of steel consumption] without a substantial contribution from the US."

Factor in that steelmakers rely on sheer volume of output to drive up profits, and the picture grows even grimmer.

Even Mr. Mittal's company has suffered. Arcelor Mittal may have produced 116 million tons of steel in 2007, but that number will likely plummet to 70 million this year - about 30% lower than in 2008. In order to erase worries about its high level of net debt - which it intends to bring down to $22 billion by the end of the year - it desperately needs a period of higher profits.

The Case for Steely Optimism

Yet despite the high debt load hanging like an albatross around his company's neck, Mr. Mittal remains upbeat about the steel industry.

Partially, that's because he believes the future still holds a more substantial economic boost than previous thought, thanks to the multi-billion dollar stimulus packages implemented by governments around the world.

But he has another reason for his unabashed optimism...

You see, he's extremely confident that emerging economies around the globe will only continue their rapid economic growth, with China and India leading the way.

And he isn't the only one who thinks so. Global mining giant BHP Billiton (NYSE: BHP) recently predicted that worldwide steel demand could even double over the next 15 years.

To back up its claim, the company notes that monthly global steel production has recovered from a low of 70-80 million tons, to a current 104 million tons - a gain that China led by increasing its manufacturing levels from 37% of the world's steel to 48%.

And like Mr. Mittal, BHP also predicts steel production in developed nations to rebound next year.

Then there's B. Muthuraman, CEO of India's Tata Steel (NSE: TATASTEEL.NS), who believes that Chinese demand could expand as much as 10% by this coming March... and then grow another 10-11% by the following spring.

He predicts more of the same for India and even foresees the European steel market "moving ahead" in the same direction.

Place Your Bets On Mittal

If you ask the developing world, things are looking up. But if you ask the developed world, forget it... demand won't recover for years to come.

That disagreement shouldn't come as any surprise though, since emerging economies have grown this year while the developed countries continue to struggle.

But here's the thing: Mr. Mittal has built up his company over the past 20 years through accurate predictions and bold gambles on what many used to consider a sunset industry.

Given his track record, I wouldn't bet against him.

If investors have the nerve to do it, they can play the industry a few different ways. That includes buying directly into steel stocks with solid exposure to emerging markets, such as Mr. Mittal's company, Arcelor Mittal.

Or check out his competition, like Korean steelmaker POSCO ADR (NYSE: PKX), or the Brazilian companies Gerdau ADR (NYSE: GGB) and Companhia Siderurgica Nacional-CSN ADR (NYSE: SID).

For broader exposure to the entire steel sector, investors can purchase shares of Van Eck Market Vectors Steel ETF (NYSE: SLX), which includes iron ore producers such as VALE ADR (NYSE: VALE).

If Mr. Mittal is right - and he usually is - a position in any one of the above could help your portfolio soar.

Good investing,

Tony D'Altorio

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