Is It a Race to the Bottom for Cliffs Natural Resources stock?



Iron ore market remains oversupplied

The iron ore market remains oversupplied from ongoing capacity additions by BHP Billiton (BHP), Rio Tinto (RIO), and Vale S.A. (VALE). This is a deliberate strategy on their parts to push the high-cost players out of the market.

Some capacity has gone off line from China and elsewhere, but even that isn’t enough to correct the oversupply situation.

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China’s growth slows

The world’s largest iron ore consumer, China, is slowing down. China consumes close to two-thirds of all seaborne traded iron ore. The data out of China lately have been mostly negative.

These two things combined are putting unrelenting pressure on iron ore prices. The bad news is that this isn’t expected to correct anytime soon. To find out more about the iron ore indicators investors should track, read Iron ore indicators to track before investing.

Has Cliffs Natural Resources stock hit bottom?

The only glimmer of hope for Cliffs Natural Resources (CLF) is its US iron ore division, which is not totally exposed to the volatile seaborne iron ore market. The question is whether Cliffs will be able to come out of the debt trap it got into due to its noncore assets. Will it come out on the basis of earnings from its US iron ore division alone?

There doesn’t seem to be any positive near-term catalyst for Cliffs Natural Resources stock. Long-term fundamentals are also quite bad.

We believe management is doing everything to exit the lossmaking and noncore operations and focus on its profitable US iron ore business. But Cliffs may not have everything under control as far as the macro commodity price environment is concerned.

Cliffs Natural Resources stock price has dropped ~35% year-to-date. Iron ore prices need to find a bottom before Cliffs can start rerating. Renegotiation of contracts and their rebasing to lower levels is also a risk Cliffs currently faces.

It’s important to note that CLF forms 2.9% of the SPDR S&P Metals & Mining ETF (XME. XME provides broad exposure to the iron ore industry.


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