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Why Cliffs’ Agreement with ArcelorMittal Means a Strong Position

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New agreement with ArcelorMittal

In May 2016, Cliffs Natural Resources (CLF) entered into a new long-term agreement with ArcelorMittal (MT) for the supply of pellets. The agreement will run through 2026 and replace the contracts that were due to expire in December 2016 and January 2017. The new agreement also establishes a minimum tonnage of 7 million tons, which is higher than the current minimum tonnage under the previous two contracts combined.

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Sole outside supplier to ArcelorMittal

These agreements also preserve Cliffs’ position as a sole outside supplier to ArcelorMittal. Cliffs accounted for ~56% of the annual rated US (QQQ) 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).

To read more about this deal, see What Does ArcelorMittal’s Deal Mean for Cliffs Natural Resources?

Long-term partnership

During the earnings call, management mentioned that it’s on track to deliver Mustang pellets to ArcelorMittal when the shipping season starts next year. Mustang pellets are developed by Cliffs as a replacement for Viceroy pellets. Out of the total capital expenditure of $75 million for 2016, $25 million relates to the producing this pellet.

Cliffs’ management also mentioned that they were quite confident about signing a contract with ArcelorMittal as “the pellet business in the United States is based on producing and supplying high-quality, tailor-made pellets designed to optimize the performance of specific blast furnaces.” On the back of this synergy between the buyer and the supplier, Cliffs remains confident about a long-term partnership with ArcelorMittal.

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