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Low Steel Prices May Hurt Cliffs Natural Resources’ USIO Division

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Realized revenues

In 3Q15, Cliffs Natural Resources’ (CLF) realized revenues from its USIO, or U.S. Iron Ore, division were lower than expected. The USIO division reported revenue realization of $76.50 per ton in 3Q15 compared to $100.70 per ton in 3Q14.

Average realized prices were negatively affected to an extent of $24.20 per ton on a year-to-date basis. This was mainly due to lower hot rolled steel prices in the United States (SPY) (IVV), which in turn affect US steelmakers, including Nucor Corporation (NUE), United States Steel Corporation (X), Steel Dynamics (STLD), and ArcelorMittal (MT). Currently, Nucor forms 2.8% of the Materials Select Sector SPDR Fund (XLB). Metal producers currently make up ~9% of XLB’s portfolio.

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Increased realized revenue guidance

Cliffs Natural Resources had increased its USIO realized pricing guidance by $5 per ton for when seaborne iron ore prices are between $55–$60 per ton and $80–$85 per ton. This was mainly due to the improved customer mix, which generated a benefit of $4 per ton.

Downside to realized revenue?

However, since then, seaborne iron ore prices have fallen below $45 per ton. This should negatively impact the USIO division’s realized prices, as well. Cliffs Natural Resources’ (CLF) pellet supply agreements with steelmakers include the hot band steel price as one of the variables. Lately, hot rolled steel prices have been on a downward spiral. This has made spot sales unprofitable for several US steel companies. Steel companies have reduced their spot sales in response to depressed spot steel prices.

Despite lower volumes, CLF’s management maintained its guidance for the cost of goods sold at $60–$65 per ton. These costs include expected idle costs.

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