uploads///US iron ore pellet capacity

Weak Iron Ore Prices Are Taking a Toll on Integrated Steelmakers

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Jun. 5 2015, Published 8:13 a.m. ET

Capacity cuts

In the last part of this series, we discussed how iron ore prices were steady in May. However, they have declined by close to 55% since 2014. In response to weaker iron ore prices, iron ore miners—including BHP Billiton (BHP) and Vale SA (VALE)—have announced the cancellation of some capacities. However, amid weak Chinese demand growth and supply glut, these cancellations won’t be enough to move the needle upwards on iron ore prices.

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US integrated steel companies feel the heat

Some integrated steel companies in the US have also started to feel the heat from low iron ore prices. Recently, Steel Dynamics (STLD) decided to idle its Minnesota iron-making operations for a period of at least 24 months.

Previously, AK Steel (AKS) also wrote off its investment in the Magnetation joint venture because of economic project dynamics under the current iron ore pricing environment. AK Steel forms 4.5% of the SPDR S&P Metals and Mining ETF (XME) and 0.14% of the iShares Core S&P Small-Cap ETF (IJR).

Other integrated steelmakers like ArcelorMittal (MT) are also negatively impacted because mining operations’ profitability has diminished.

Cliffs to benefit

Cliffs Natural Resources (CLF) is a major US iron ore pellet provider. It will likely benefit to the extent the steelmakers’ captive capacity goes offline. The above chart shows the iron ore pellet capacity in the US. One of Cliffs’ major contracts with ArcelorMittal comes up for renewal in 2016. In the absence of excess capacity elsewhere, the chances for contract renewal increases. This is also positive for Cliffs.

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