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.
Weak steel prices
The above chart shows the prices of HRC (hot rolled coil) in the United States (SPY) (IVV). US HRC steel prices have fallen below $400 per ton for the first time since June 2009. As of November 12, spot HRC prices were quoted at $375 per short ton. They are down 35% year-to-date and 41% year-over-year.
When steel prices fall, buyers, including metal service centers, hold their purchase orders and wait for better prices. The sentiment in the steel industry has worsened over the last couple of months, and these sentiments are dampening service center restocking activity. Automotive demand, on the other hand, is one of the bright spots in the US steel supply chain. Some OEMs (original equipment manufacturers), including General Motors, Fiat, and Chrysler, have agreed on preliminary deals with United Steelworkers.
Lower steel prices negatively impacted the third quarter earnings of steel companies such as U.S. Steel Corporation (X), Nucor (NUE), ArcelorMittal (MT), and Steel Dynamics (STLD). Currently, Nucor forms 2.3% of the Materials Select Sector SPDR ETF (XLB). Market participants expect prices to remain muted for the rest of the year until there is progress on the recently filed trade cases.