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Could Cliffs Natural Resources’ US Volumes Fall below Estimates?

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Jan. 26 2016, Updated 7:35 a.m. ET

US volumes

In its 3Q15 results, Cliffs Natural Resources (CLF) downgraded its 2015 volume guidance for the U.S. Iron Ore, or USIO, division from 19 million tons to 17.5 million tons. This was mainly to reflect the termination of the Essar Steel Algoma pellet sale and purchase agreement in October. Cliffs had already downgraded guidance due to lower capacity utilization among US (SPY) steel mills. In November, Cliffs idled its Northshore Mining operation in line with its reduced guidance.

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Expectations for 4Q15

Management is hopeful that steel imports will drop as preliminary countervailing and antidumping duties go into effect later this year and early next year. This, in turn, should benefit the blast furnace clients’ orderbooks. However, the guidance from US steel companies including Steel Dynamics (STLD) and AK Steel Holding Corporation (AKS) implies that they expected fewer shipments in 4Q15, which would bode negatively for Cliffs Natural Resources’ USIO volumes.

According to management, its customer nominations usually come during the month of November, as fourth quarter sales and 2016 nominations firm up. It may adjust its production to match expected sales.

Falling steel production

US steel production has been falling since the beginning of the year. Weekly steel production figures have been falling in the ballpark of 8% YoY (year-over-year) for the past few months. This production slowdown intensified in November and December. In November, US steel production fell by 15.6% YoY. December was no better, with US steel production falling more than 14% YoY in the first three weeks.

This is negatively impacting US steelmakers, including United States Steel Corporation (X), Steel Dynamics (STLD), Nucor Corporation (NUE), and ArcelorMittal (MT). Since Cliffs Natural Resources supplies pellets to US steelmakers, declining utilization rates and declining steel production in the United States are expected to negatively impact US sales volumes going forward. Nucor and US Steel form 8.1% of the SPDR S&P Metals and Mining ETF (XME).

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