uploads///APIO Margin

Will Cliffs’ Asia Pacific Iron Ore Realized Prices Improve?

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Asia Pacific Iron Ore division

Cliffs Natural Resources (CLF) will operate its Asia Pacific Iron Ore (or APIO) segment until it’s sold out. The remaining life left for this operation is less than three years. The APIO segment directly competes in the seaborne iron ore market with iron ore giants such as BHP Billiton (BHP), Rio Tinto (RIO), Vale (VALE), and Fortescue Metals Group (FSUGY).

The seaborne iron ore prices have been resilient since the start of 2016. The strong imports from China (YINN) (FXI) amid higher steel prices is helping seaborne prices. The benchmark seaborne iron ore prices have risen 23% in 1Q16. Thus, realized prices for the APIO segment are expected to be higher than the 4Q15 price of $33.7 per ton.

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More reduction in costs

On the other hand, costs could benefit from the depreciating Australian dollar against the US dollar as well as lower freight costs. While cash costs per ton for the APIO segment were $34.30 per ton in 2Q15, they were just $26 per ton in 4Q15. The reduction was mainly due to reduced mining and administrative costs.

Guidance

Cliffs expects 2016 sales volumes for its APIO segment to be 11.5 million tons, which is flat year-over-year (or YoY). The product mix is expected to be 50% lump and 50% fines. The management commented that out of 11.5 million tons, 9 million tons will be mined while the remainder will be sold from the company’s work-in-progress inventory, which should improve the company’s cash costs and lower its inventory levels. However, investors should note that while there is a limited scope for cash improvement in this division apart from currency depreciation, the downside to seaborne prices could be substantial.

Investors who don’t want to invest in individual companies can invest in ETFs such as the SPDR S&P Metals and Mining ETF (XME), which gives diversified exposure to the metals and mining space. CLF forms 3.6% of XME.

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