Cliffs’ US Iron Ore Division: What Led to the Volume Downtrend?



US steel market

The US steel market is Cliffs Natural Resources’ (CLF) main customer. It’s going through a rough patch. Steel production in the US is down ~6% in the first four months of the current year. Higher levels of steel imports in the last few months and the resulting spurt in inventory with metal service centers negatively impacted steel demand. Almost all of the steel companies that reported their first quarter results saw a decline in steel shipments.

U.S. Steel (X) announced a first quarter loss of $75 million in its results released on April 28. Its mills were operating at 60% of the capacity in 1Q15—compared to 75% in 4Q14.

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AK Steel’s (AKS) first quarter steel shipments were down 13%—compared to 4Q14. Nucor’s (NUE) first quarter revenue dropped ~14% on a YoY (year-over-year) basis. Steel shipments and average selling prices both came down. Currently, Nucor forms ~3.7% of the SPDR S&P Metals and Mining ETF (XME). Carpenter Technology (CRS) forms 3.28% of XME.

During the call, Cliffs’ management stated its intention to increase the utilization rates at its four mines. Management hinted at closing the high-cost Empire mine. The mine is nearing the end of its productive life.

However, the company increased the guidance for realized pricing for USIO (US iron ore) and maintained the cash cost guidance of $60–$65 per ton—even with the lower volumes.

The increased revenue per ton expectation for USIO is the result of favorable changes in freight rates and customer mix. This will be partially offset by weaker steel prices in the US.

Silver lining?

The global iron ore market is still depressed. However, the silver lining of lower prices could be that the capacity additions in the US are falling by the wayside.

AK Steel sources one-third of its iron ore requirements from its joint venture—Magnetation. However, the plant faced financial difficulties ever since it started production. In 1Q15, AK Steel’s share of the loss from this joint venture totaled ~$16 million. So, AK Steel decided to write off its entire investment in Magnetation.

Earlier, U.S. Steel (X) announced its intention to temporary idle its Keetac pellet plant. The plant is an iron ore mining and processing facility in northern Minnesota. As a result, it announced that it would idle part of its Minntac plant in Minnesota.

AK Steel and U.S. Steel form 8.2% of XME. The ETF provides diversified exposure to the metals and mining space.


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