Cliffs: Will the US Steel Market Support Higher Realized Prices?



Realized revenues from USIO

While volume is one variable for determining revenues, realized revenues are another important variable that helps you assess market sentiment. Cliffs Natural Resources’ (CLF) realized revenue for its US iron ore (or USIO) segment depends on the demand for iron ore pellets from Cliffs customers. This demand, in turn, depends on factors like customers’ order books, steel imports, and utilization.

The customer mix, industrial commodity (DBC) prices, freight rates, energy prices (USO), production costs, and hot-rolled band steel prices are some of the other factors influencing Cliffs’ realized revenues.

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Higher realized revenues

  • Cliffs’s average realized prices were 9.5% lower year-over-year in 1Q16 at $83.9 per ton. Prices have, however, improved sequentially by 13%.
  • Sequential improve came on the back of improving hot-rolled coil (or HRC) prices in the United States. HRC prices are close to $520 per ton currently compared to $400 per ton in 4Q15.
  • Price increases have started favorably impacting US steelmakers, including Nucor (NUE), U.S. Steel Corporation (X), Steel Dynamics (STLD), and Arcelor Mittal (MT). Currently, Nucor (NUE) forms 2.8% of XLB’s portfolio. These increases are positive for Cliffs.

Realized revenue guidance

  • Cliffs Natural Resources provides realized revenue guidance per ton of iron ore pellets for USIO based on different assumptions of the seaborne benchmark price index.
  • Cliffs maintained its guidance for realized revenue of $72–$74 per ton for USIO when seaborne prices are at $40 per ton and $78–$80 per ton at a seaborne price level of $80 per ton.
  • Cliffs assumes a full-year hot-band steel pricing of ~$450 per short ton for its realized revenue guidance. The company stated that this estimate is based on its customers’ realized prices and not an index.
  • Despite an increase in steel prices, for now, Cliffs is maintaining its $450 per ton assumption. But management mentioned that it will adjust it “as the market and our order book evolves.”

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