Higher steel imports
Cliffs Natural Resources’ (CLF) major customers are US steel producers, which have been battling higher steel imports into the US for the past several months. This has led to a decline in the utilization of steel plants, which in turn is impacting steel producers’ profitability.
The steel industry’s capacity utilization fell 64.2% in November 2015. A ratio of 80% is regarded as healthy by analysts.
US steel companies US Steel (X), AK Steel (AKS), Nucor (NUE), and ArcelorMittal (MT) have filed a series of trade cases in the last several years to stem the flow of imported steel products into the United States (SPY) (IVV). A preliminary ruling came out on December 16, 2015, which determined that “imports of cold-rolled steel from Brazil, China, India, and Russia are benefitting from unfair government subsidies and should be subject to countervailing duties.” A final ruling should be announced in the next two to three months.
The imposition of countervailing duties on cold rolled and hot rolled steel imports should help stem the imports, which could provide some relief to the steelmakers and in turn to Cliffs Natural Resources (CLF). Cliffs has reduced its production guidance to 17.5 million tons against its previous guidance of 22 million tons in response to the weaker demand scenario.
Weak steel industry
However, investors should note that steel imports are not solely to blame for the current state of the US steel industry. A global slowdown and excess steel capacity are also pressuring the industry. Although stemming steel imports could help steelmakers operate at higher capacity levels than their current operating levels, the woes for steel industry could still be far from over.
In the next part of this series, we’ll address the question of competition for Cliffs, both domestically and outside the US.