The Market Vectors Steel ETF (NYSEArca: SLX) is up 11.5% over the past month, but investors should tread carefully before embracing the steel exchange traded fund as a legitimate contrarian investment idea.
Recent weakness in a widely followed chemicals index could be a sign that the pace of manufacturing could slow into 2016 – about 95% of manufactured goods are made from chemicals. Additionally, the chemical index leads the National Bureau of Economic Research’s peak business cycle by an average of eight months and its troughs by an average of four months. Late-cycle ebullience has retired as investors have grown wary of sluggish materials and industrial ETFs.
The stronger dollar is also supporting mining projects where some producers are even expanding production as currency moves diminish costs, even as commodity prices have been tumbling. Consequently, with supply continuing to rise, some observers are expecting metal prices to fall and remain pressured. [Materials ETFs in Rally Mode]
With SLX down more than 24% over the past six months and a glut of cheap foreign steel flooding the market, hampering U.S. producers in the process, it is easy to see why long SLX has been a pain trade.
“The World Steel Association forecasts that global steel demand will decrease by 1.7 percent in 2015, before growing by 0.7 percent in 2016. However Chinese demand is seen falling both this year and next, by 3.5 percent and 2 percent respectively, following a demand peak in 2013,” reports CNBC. “On Wednesday, the deputy head of the China Iron and Steel Association warned that demand for the ferrous metal was waning fast.”