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How Steel Prices Are Impacting Cliffs’ US Iron Ore Division

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Realized revenues from USIO

While volume is one variable for determining revenues, realized revenue 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, which 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 that influence Cliffs’ realized revenues.

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Considerations for realized revenue

The average realized prices for Cliffs were 25% lower year-over-year (or YoY) in 4Q15 at $74.20 per ton, which represented a multiyear low realized price for USIO. The decline was a result of declining profitability for USIO’s customer base as their utilization remained low.

Cliffs provides realized revenue guidance per ton of iron ore pellets for USIO based on different assumptions for the seaborne benchmark price index. For 2016, 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 for seaborne prices below that. Cliffs’ new guidance implies a decline of $4–$7 per ton from the previous year. Seaborne prices have been far better than expected year-to-date.

Upside to guidance?

Also, Cliffs assumes a full-year hot-band steel price 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. Falling imports are making US steelmakers more confident about increasing selling prices. Higher steel prices will boost the earnings of steelmakers like U.S. Steel (X), AK Steel (AKS), Nucor (NUE), and ArcelorMittal (MT). This is positive for Cliffs and could lead to an upside for its realized revenues.

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