Cliffs and the US steel industry
Most of Cliffs Natural Resources’ (CLF) revenues and earnings are tied to the US steel industry. Steel prices are also a component of Cliffs’ pricing formula. Let’s take a closer look at this and what the implications are for Cliffs going forward.
The above chart shows the prices of hot rolled coil (or HRC) in the United States. The prices have corrected by almost 20% so far in 2015. These are prevailing spot prices for HRC and the lowest HRC price since mid-2009.
Steel imports, a major headwind
Imports of flat rolled and long product have been a negative for US steelmakers for quite some time. With expectations of a strengthening US dollar, imports might become cheaper, thus putting more pressure on domestic steel players.
The cost curve is getting lower for foreign steelmakers, particularly those in China, Russia, and Korea. This is due to the currency impact and lower freight costs from a weak demand globally and cheaper crude oil. This offers a major headwind for US steelmakers, including U.S. Steel (X), Nucor Corporation (NUE), and AK Steel (AKS). Currently, U.S. Steel forms 2.86% of the SPDR S&P Metals and Mining ETF (XME).
Energy sector demand accounts for approximately 15%–20% of the total steel consumption in the United States. Steel demand from the energy sector has been quite subdued. The sharp decline in rig count is causing elevated inventory levels.
Cheaper imports and weak demand are thus causing pressure on US steel companies. This could be negative for these companies’ raw material suppliers such as Cliffs Natural Resources (CLF).
U.S. Steel and AK Steel make up 6.3% of the SPDR S&P Metals & Mining ETF (XME), which provides diversified exposure to the iron ore and steel sector.
To read more about the US steel industry and its current state, read Market Realist’s The steel industry is not in the best of health.