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Why Cliffs’ US Realized Revenues Could Fall Further in 2016

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Realized revenues from USIO

While volume is one variable for determining revenues, the realized revenues is another important variable that helps in assessing the market sentiment. The realized revenue for Cliffs Natural Resources’ (CLF) US iron ore (or USIO) segment depends on the demand for iron ore pellets by Cliffs’ customers. This, in turn, depends on factors such as customers’ order books, steel imports, and utilization level.

The customer mix, industrial commodity (DBC) prices, freight rates, energy prices (USO), production costs, and hot-band steel prices are some of the other factors influencing Cliffs’ realized revenues.

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Lower realized revenues

  • The average realized prices for Cliffs were 25% lower year-over-year (or YoY) in 4Q15 to $74.20 per ton. This represents a multiyear low realized price for USIO.
  • The decline comes in the face of declining profitability for USIO’s customer base as their utilization remains low.
  • This is mainly due to lower hot-rolled prices in the United States (VTI) (IVV), which in turn affects US steelmakers, including Nucor (NUE), U.S. Steel Corporation (X), Steel Dynamics (STLD), and Arcelor Mittal (MT). Currently, Nucor (NUE) forms 2.8% of XLB’s portfolio.

Realized revenue guidance

  • Cliffs Natural Resources provides realized revenue guidance per ton of iron ore pellets for USIO based on different assumptions of seaborne benchmark price index.
  • Cliffs guided for realized revenue of $72–$74 per ton for USIO when seaborne prices are at $40 per ton and $71–$73 per ton after that at any level of seaborne prices. Cliffs’ new guidance implies a decline of $4–$7 per ton from the previous year.
  • Cliffs’ assumes a full year hot-band steel pricing of ~$450 per short ton for the realized revenue guidance. The company stated that this estimate is based on its customers’ realized prices and not an index.
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