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How Might Cliffs’s USIO Division’s Realized Revenue Fare in 3Q15?

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Realized revenues

Cliffs Natural Resources’ (CLF) US iron ore (or USIO) division downgraded its volume guidance for 2015 in its 2Q15 results. It also reported $5 per ton reduction in realized prices. US (SPY) iron ore’s realized revenues were $78.30 per ton in 2Q15 compared to $106.80 per ton in 2Q14. This came in lower than Cliffs’s previous guidance.

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Steel price adjustment

The decline in realized revenues was due to a significant adjustment to the hot band steel price estimate for one of Cliffs’s major contracts. Cliffs’s pellet supply agreements with steelmakers include the hot band steel price as one of the variables. So going forward, any changes in customers’ forecast prices could negatively impact revenues and profitability for Cliffs’s USIO division.

Going by the trend to date, it seems that hot rolled coil (or HRC) steel prices are on a downward spiral. Since the end of June, HRC prices have fallen further by 5%. This is in addition to the 20% fall in the first six months of 2015.

Oversupply continues

This is mainly due to oversupply in the market. According to an October 15, 2015, press release by Platts, “New orders for mills have become scarce as buyers have maintained their focus of selling inventory and are on the sidelines about taking any new physical position on material.  Multiple sources have indicated that current supply at the ports and availability from service centers and distributors are suppressing the need to buy material from the mills.”

This trend isn’t beneficial for US steelmakers such as United States Steel (X), Nucor (NUE), AK Steel (AKS), and ArcelorMittal (MT). Neither is it beneficial for the steelmakers’ raw material supplier, Cliffs Natural Resources. Any further downward revision in forecast prices for Cliffs’s customers could mean a further downside for Cliffs revenues.

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