Lower volume outlook
In the last article, we discussed how revenue realization from the US iron ore (or USIO) division was a disappointment for investors. But that was not the only disappointment that the division sprang on investors. Cliffs Natural Resources (CLF) also reduced the 2015 volume guidance for USIO from 20.5 million tons to 19 million tons.
Cliffs mentioned lower capacity utilization among US steel mills as the major reason for the downgrade. In turn, lower utilization is due to the heavy steel imports into the country.
Cliffs expects these conditions to improve in the second half of the year, as steel imports respond to the anti-dumping lawsuits filed. However, the volume downgrade is based on the current nominations from the customers.
Declining steel production
The above chart shows the trend in US (SPY) (IVV) steel production. For the half-year ending in June, US steel production declined 6.5%, compared with the same period last year. The US steel industry’s capacity utilization ratio also declined to 72.4%, from 77.3% in the same period last year.
Steel imports from other countries, including China, present the major reason for lower production and capacity utilization. Ongoing cheaper imports led some integrated steelmakers to close some of their iron ore mines. Steel Dynamics (STLD) idled its Minnesota iron-making operations for at least 24 months.
Previously, AK Steel (AKS) wrote off its investment in the Magnetation joint venture. Arcelor Mittal (MT) is also seeing negative impacts due to higher imports and lower capacity utilization. AK Steel forms 3.5% of the SPDR S&P Metals and Mining ETF (XME).
Idling United Taconite facility
Due to the low current nominations from customers coupled with its high inventory levels, Cliffs decided to idle its United Taconite facility. The facility will be idled in a way so it can bring production back online promptly in the event of a demand uptick.
Cost outlook intact
Despite lower volume guidance, Cliffs has maintained its cost outlook at $55–$60 per ton for the USIO division. Depreciation and amortization for 2015 are also expected to remain the same, at $5 per ton.
In the next part of this series, we’ll talk about Cliffs’ Asia–Pacific iron ore segment’s results.