Cliffs and the Outlook for US Steel Prices: What Does It Mean?
Steel prices: A major component
The pricing of Cliffs Natural Resources’ (CLF) contracts with ArcelorMittal (MT) and other customers depends on many variables, especially the price of US steel. US HRC (hot-rolled coil) prices are $630 per ton, but Cliffs has assumed the price of $450 per ton. Based on current levels, Cliffs’s guidance has an upside potential.
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Rising steel prices
With US-government-imposed tariffs on steel imports from countries such as China, Russia, and the United Kingdom, US (DIA) steel prices have been on the rise lately. US steel imports fell to 8 million metric tons in 1Q16, a decline of 29% year-over-year.
The above graph shows the recent trend in spot HRC prices. As you can see, prices have risen sharply in the last few months. They’ve increased more than 70% this year. In May 2016, prices averaged $605 per ton, an increase of 24% month-over-month.
Steel price outlook is strong
Most market participants share the view that HRC steel prices will remain above $600 per ton in the coming months due to limited imports. Imports have started slowing down, and the supply-demand gap will have to be filled by domestic producers, which should lead to higher capacity utilization as well as higher prices.
Higher spot steel prices would benefit steel companies such as United States Steel (X), Nucor (NUE), and Commercial Metals (CMC). This scenario is quite favorable for Cliffs’s realized prices as well as volumes.
It’s worth noting, however, that steel imports could pick up again as the spread between US and global steel prices widens. If that happens, the United States might not be able to fill the demand on its own. However, prices still might not see levels as low as 2015.
Next, let’s see how positive sentiment for US steel stocks could help Cliffs Natural Resources.