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Cliffs Natural Resources’ US Iron Ore Volumes Have More Downside

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Weak volumes in USIO

Cliffs Natural Resources’ (CLF) US Iron Ore (or USIO) segment mainly sells iron ore to integrated steel companies in the United States and Canada. The companies include United States Steel (X), AK Steel (AKS), and ArcelorMittal (MT).

USIO pellet volumes were 5.6 million for 3Q15, which is an 18% decrease year-over-year (or YoY). The decrease was mainly due to lower demand by US steelmakers.

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Guidance lowered further

After lowering its volume guidance for USIO in 2Q15 to 19 million tons, Cliffs Natural Resources management once again lowered the volume guidance by another 1.5 million tons to 17.5 million tons for 2015. This is mainly to reflect the termination of the Essar Algoma Pellet Sale and Purchase Agreement in October.

The new sales forecast doesn’t assume any sales to Essar Algoma for the rest of the year. However, management mentioned that this could change if a new commercial agreement is established in place of the terminated contract.

Cliffs’s management also commented on recent news regarding the idling of one of AK Steel’s (AKS) plants, the Ashland Works blast furnace. It said that based on its contract, the tons supplied by it will not get impacted by this idling nor will the presence of Magnetation pellets impact the tons in 2015 or 2016.

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Expectations from the US steel market

Cliffs management continues to believe that 2016 will be better in terms of the domestic US steel market. Management said that while import penetration was at 34% in January, it declined to 25% by September 2015. This encouraging trend is due to the four major trade cases filed by US steelmakers against several countries, including China (FXI) (MCHI).

Management is hopeful that as preliminary countervailing and anti-dumping duties come into effect later this year and early next year, steel imports should go down going forward. This, in turn, should benefit the blast furnace clients’ order books.

According to management, its customer nominations usually come during the month of November, as fourth quarter sales and 2016 nominations firm up. It may adjust its production to match expected sales.

However, until that happens, Cliffs is trying to match its production to the prevailing weak demand scenario. In keeping with this, Cliffs idled its United Taconite mine in Minnesota in August 2015. However, if the pace of steel imports into the United States doesn’t slow down and the domestic demand remains weak, there’s a real chance that Cliffs’s US volumes could decline further.

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