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 the implications for Cliffs going forward.
Steel prices have fallen YTD
The above chart shows the prices of hot rolled coil (or HRC) in the United States. While steel prices have risen from the lows reached in May this year, they are still down 19.8% year-to-date and 30% year-over-year. The prevailing prices for HRC are at almost the lowest levels since mid-2009.
On one hand, the China-led steel glut is negatively impacting steel prices. On the other hand, the oil price collapse led energy companies to pull back on their steel needs.
Lower steel prices negatively impacted the first quarter earnings of steel companies like US Steel (X), Nucor (NUE), and Steel Dynamics (STLD). Currently, Steel Dynamics forms 4.2% of the SPDR S&P Metals and Mining ETF (XME).
Although still low, steel prices started picking up in May and June. A continuation of this trend and declining imports due to trade cases and anti-dumping litigation could bode well for Cliffs going forward.
Although lower steel prices and declining steel production could be negative for US steelmakers, there could be a slight silver lining in the process. We’ll explore this issue next.