What Drove Management’s Guidance for US Iron Ore Volumes?



US iron ore volumes

The volumes shipped by a company usually depend on the demand from end consumers and adjustments made by the company to its production profile. This is one of the functions along with realized prices to arrive at company’s revenues.

Cliffs Natural Resources’ (CLF) US Iron Ore (or USIO) segment mainly sells iron ore to integrated steel companies in the United States and Canada. The companies include U.S. Steel (X), AK Steel (AKS), and ArcelorMittal (MT). In this article, we’ll analyze Cliffs’ 4Q15 USIO volumes.

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Weak USIO volumes

  • USIO pellet volumes were 4.5 million for 4Q15, which is a 42% decrease year-over-year (or YoY) and 20% decline quarter-over-quarter (or QoQ).
  • The decrease was mainly due to the termination of a contract with Essar Steel Algoma and lower demand by US steelmakers.
  • It is worth noting that Cliffs had idled two of its pellet processing facilities in 2015 to adjust its production to the weaker demand.
  • USIO’s full year 2015 volumes came in at 17.3 million tons, which is marginally lower than its downwardly revised guidance of 17.5 million tons.

Guidance for 2016

  • The management has guided for USIO shipments of 17.5 million tons for 2016, which implies flat growth from 2015 shipments. This assumes that steel utilization rates of Cliffs’ customers remain at current levels throughout the year.
  • The guidance for production, however, is lower at 16 million tons as 1.5 million tons of inventory is worked through.
  • During the call, management mentioned that currently they have a capacity of more than 20 million tons. However, after the cessation of Empire mine, which is close to the end of its mine life, it will have a capacity below 20 million tons.
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Management expectations

Cliffs Natural Resources’ (CLF) management also stated that the idled capacity can be quickly brought back online, within less than a quarter, when the demand situation in the US (SPY) (DIA) steel sector improves. The company’s management sounded hopeful during the call that the recent punitive penalties levied on some countries, including on China (FXI) (MCHI), are positive and should affect the order books of US steelmakers positively.

US steelmakers include Steel Dynamics (STLD), Nucor (NUE), U.S. Steel (X), and AK Steel (AKS). The Materials Select Sector SPDR ETF (XLB) is an alternative way to play the materials space. Currently, Nucor (NUE) forms 2.8% of XLB’s portfolio.

While penalties could help stem the flow of cheap exports to an extent, 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 the steel industry could still be far from over.

Taking another shot at its potential competitor, Essar Steel Minnesota, Cliffs’ management stated its plant will not become operational any time soon to take away market share away from Cliffs.


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