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What to Expect from Cliffs Natural Resources’ 2Q17 Earnings

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Part 2
What to Expect from Cliffs Natural Resources’ 2Q17 Earnings PART 2 OF 11

Factors That Could Impact CLF’s US Volumes in 2Q17

US volumes in 1Q17

In 1Q17, Cliffs Natural Resources (CLF) achieved impressive growth of 63% year-over-year (or YoY) in US volumes to 3.1 million tons. While this was a sequential drop of 55%, it was expected due to the usual seasonality of the business.

The Great Lakes area, one of Cliffs Natural Resources’ operational regions, is frozen during the winter, hindering the movement of material. The improved YoY volumes in the first quarter were mainly due to an improved steel market and increased customer demand.

Factors That Could Impact CLF’s US Volumes in 2Q17

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Volume expectations in 2Q17

Cliffs Natural Resources (CLF) kept its guidance for fiscal 2017 unchanged at 19 million tons. This is the company’s production strength while operating at full capacity. The company is expecting to produce ~3.5 million tons of iron ore pellets in 2Q17.

Cliffs Natural Resources’ CFO, Timothy Flanagan, noted during the company’s 1Q17 earnings call that the volumes would increase after 2Q17. After the second quarter, the company expected shipment restrictions to end and that the steel mills would build tonnages before the start of winter.

This guidance implies that Cliffs Natural Resources’ volumes would be back end–weighted, with the second half contributing ~65% of the total volumes for the year.

Factors impacting volumes

As Cliffs Natural Resources’ US Iron Ore (or USIO) segment’s major customers are the integrated steelmakers in the US (SPY) (SPX), these companies’ orderbooks impact CLF’s volumes. In turn, the orderbooks are determined by US steel demand and steel imports into the country.

The downtrend in steel imports has favored the orderbooks of Cliffs Natural Resources’ customers in 2016. While the imports are trending higher year-to-date, the pending Section 232 investigation into steel imports could be a positive catalyst for companies such as AK Steel (AKS), U.S. Steel Corporation (X), Nucor (NUE), and ArcelorMittal (MT).

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