The Market Vectors Steel ETF (NYSEArca: SLX) is down more than 44% this year amid a savage rout for commodities and the related equities. A decline like that could, in some cases, be enough to signal that worst is over, but more declines could be ahead for steel stocks and SLX.

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.

Earlier this year, AK Steel, Essar Algoma, and U.S. Steel have all announced output  curtailments, primarily citing challenging market conditions. The key culprit remains imports, although, DOC license data has been indicating a gradual decrease moving into year-end. With HRC prices (Platts) only $30/st above the low of $380/st hit in mid-2009 during the Great Financial Crisis, we think additional production curtailments could be on the horizon. EAF producers have been able to remain profitable during this challenging time, however, we expect integrated producers to book losses in 3Q. We likely need HRC prices in the upper $400/st range in order for integrated producers to return to profitability, in our view,” said Cowen in a research note posted by Ben Levisohn of Barron’s.

Late-cycle ebullience has retired as investors have grown wary of sluggish materials and industrial ETFs. In theory, materials stocks should be winner in a low energy price environment because lower oil and gas prices reduce input costs for energy-intensive materials producers and chemicals manufacturers. In reality, that was not the case last year. [Materials ETFs hit by Falling Oil Prices]

“Due to expectations that prices will continue to be under pressure, Deutsche Bank analyst Jorge Beristain has seriously reduced his expectations for the companies exposed. For AK Steel and US Steel, he cut his 2016 earnings estimates by 74 percent and 62 percent respectively; he then cut his price target on AK to $1 from $3, and on US Steel to $5 from $13. This after each stock has fallen more than 70 percent in 2015,” reports CNBC.

Market Vectors Steel ETF

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.