The global iron ore market has recovered from its decade-low prices in April. Still, 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.
Due to weak Chinese demand growth and supply glut, these cancellations won’t be enough to move the needle upward on iron ore prices.
US integrated steel companies are also impacted
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 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 3.2% 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.
While we believe that higher steel imports into the US and falling steel prices are negative for steelmakers as well as Cliffs, there might be a slight silver lining in the process.
Because Cliffs Natural Resources (CLF) is a major US iron ore pellet provider, it can benefit to the extent that the steelmakers’ iron ore 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.
Cliffs’ management stated that in 2015, the price sensitivity for iron ore is expected to be $4–$5 per $10 seaborne ton price change. In comparison, the sensitivity was $2–$3 per $10 change in 2014. More contracts will be linked to the Platts benchmark price next year, making Cliffs much more sensitive to the seaborne iron ore prices.
Seaborne iron ore prices depend on the market’s supply and demand dynamics, and China consumes close to two-thirds of the seaborne iron ore. In the next part of this series, we’ll see how steel production and steel prices are progressing in the Chinese markets.