Cliffs Natural Resources: An Upside for US Segment in 2Q16?



Realized revenues from USIO

While volume is one variable for determining revenues, realized revenue is another important variable that helps assess Market sentiment. Realized revenue for Cliffs Natural Resources’ (CLF) US iron ore (or USIO) segment depends on the demand for iron ore pellets by Cliffs’ customers. That depends on factors such as customer order books, steel imports, and utilization levels.

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

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Considerations for realized revenue

Cliffs’ average realized prices were 9.5% lower year-over-year in 1Q16 at $83.90 per ton. Prices, however, have improved sequentially by 13%. Cliffs provides realized revenue guidance per ton of iron ore pellets for USIO based on various assumptions for the seaborne benchmark price index.

For 2016, Cliffs maintained its guidance for realized revenue of $72–$74 per ton for USIO when seaborne prices are $40 per ton. Guidance is $78–$80 per ton at a seaborne price level of $80 per ton.

Upside to guidance?

Cliffs assumes a full-year hot-rolled coil (or HRC) steel pricing of ~$450 per short ton for its realized revenue guidance. Compared to the current HRC price of $630 per ton, this guidance is conservative. Seaborne iron ore prices have also been far better than expected year-to-date.

Falling imports are making US steelmakers more confident about increasing selling prices. Higher steel prices will boost the earnings of steelmakers such as United States 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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