Cliffs’s US focus
Cliffs Natural Resources (CLF) is the largest and lowest-cost supplier of iron ore pellets in the United States. Cliffs accounted for ~56% of the annual rated US capacity in 2015. Most of the rest of the iron ore pellet capacity is owned by backward-integrated steel players U.S. Steel Corporation (X), AK Steel (AKS), and ArcelorMittal (MT). CLF is moving toward becoming a pure-play US (DIA) producer as its Asia-Pacific iron ore mines’ productivity comes to an end.
Competition from external players
For iron ore producers based in Brazil and Australia, it’s difficult to compete with local iron ore players due to logistical issues. Cliffs had a cash production cost of $48 per ton in 1Q16 for iron ore pellets. Any pellets from producers outside the United States must be unloaded at the mouth of the St. Lawrence River, where it must travel through multiple locks before reaching a port. After reaching a port, it must be transported internally.
This could easily add $30–$40 per ton to the cost of delivered pellets in the United States. According to Cliffs’s estimates, any potential competition from outside has a break-even cost of $95–$100 per ton. Moreover, the Great Lakes market is effectively closed for three months in the winter, as the lakes are frozen. This makes any external competition very difficult.
Local competition too muted
Until some time back, the Essar Steel Minnesota plant could have been a threat to Cliffs, but not anymore. The ArcelorMittal (MT) contract was the only significant window of opportunity for Essar.
While the market was worried about Cliffs’s renewal of the ArcelorMittal contract, one of the bigger worries for the market is its debt position. We’ll analyze this in the next part of our series.