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Declining US Steel Production is Hurting Cliffs

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Nov. 20 2020, Updated 2:24 p.m. ET

Cliffs and the US steel industry

Cliffs Natural Resources (CLF) is the largest supplier of iron ore pellets to US steelmakers. US steel production trends are a good indicator of the health of Cliffs and other integrated iron ore producers in the United States, such as AK Steel (AKS), ArcelorMittal (MT), and U.S. Steel Corporation (X).

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Declining steel production

The above chart shows the trend in US (SPY) (IVV) steel production, with data released on a weekly basis by the American Iron and Steel Institute. Year-to-date (to the second week of November), US steel production has declined 7.5% from the same period last year. The US steel industry’s capacity utilization ratio has also declined, to 67.7%, from 76.5% in the same period last year. The reduced blast furnace capacity utilization among its customers is one of the major reasons for Cliffs idling its plants.

Is there more downside?

Steel imports from other countries, including China, are one major reason for lower production and capacity utilization. Steelmakers including Commercial Metals (CMC), POSCO (PKX), and Tenaris (TS) have been crying foul over what they claim are “unfairly traded” Chinese steel products. ArcelorMittal (MT) and U.S. Steel (X) slashed their 2015 EBITDA (earnings before interest, tax, depreciation, and amortization) guidance during their respective fiscal 3Q15 earnings conference calls. Currently, U.S. Steel forms 3.7% of the SPDR S&P Metals and Mining ETF (XME).

Cliffs’ management sounded hopeful in its 3Q15 results call when they said that preliminary countervailing and anti-dumping duties should come into effect later this year and early next year, which could lower steel imports going forward. However, considering the prevailing steel market conditions, even some positive traction on trade might also prove to be “too little, too late.”

In the next part of this series, we’ll see how US steel prices are progressing. This could have a significant bearing on Cliffs Natural Resources’ fortunes.

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