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Dimming US Steel Industry Pressured Cliffs’ YTD Share Prices

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Iron ore prices and Cliffs

The benchmark seaborne iron ore prices have fallen by 45% year-to-date (or YTD), through December 18. Only the last month has seen a fall of 19%. The iron ore prices hit $38 per ton on December 11, 2015, which is the lowest under the spot-based system. The decline has accelerated since October 2015, when it fell below $50 per ton.

The seaborne prices impact Cliffs Natural Resources’ (CLF) Asia-Pacific iron ore division directly. They impact its US iron ore division indirectly by the diversion of excess capacity in the rest of the world in the form of cheap steel exports into the US.

The weak steel utilization among Cliffs’ US steelmakers customer base led to the company idling two of its iron ore facilities in a matter of just four months. The company expects both plants to remain temporarily idled through the first quarter of 2016.

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Lackluster run for Cliffs and US steel companies

This volume pressure, as well as lower prices in the domestic market, led to a steep fall in Cliffs’ share price. Since Cliffs’ announced the idling of its second iron ore plant a month ago, its stock price has fallen by 42%. During this period, the seaborne benchmark iron ore prices fell by 20%. The bleak outlook for the US steel industry, along with lower seaborne prices, doesn’t bode well for Cliffs’s future share price performance.

Most steel companies including U.S. Steel Corporation (X), ArcelorMittal (MT), and AK Steel (AKS) have also had a lackluster run in the same timeframe. Currently, XME has invested almost half of its holdings in US-based steel companies. Seaborne players such as BHP Billiton (BHP), Vale SA (VALE), and Rio Tinto (RIO) are also under pressure, as can be seen in the above graph.

Series overview

In this series, we’ll discuss the current state of the US domestic steel industry amid increasing steel imports and a possible way forward. Additionally, we’ll talk about the factors that investors should examine to get a direction on Cliffs’ share price.

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