The materials sector is one of the worst-performing groups in the S&P 500 this year and part of the sector’s woes can be attributed to still struggling steelmakers. The Market Vectors Steel ETF (NYSEArca: SLX) is down nearly 31% year-to-date.
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. That could also imply it is time for the ETF to rally.
“In the past month, 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.