Could Cliffs’s Realized Prices in the US Have More Upside?



Realized prices in USIO

While volume is one variable for determining revenues, realized prices 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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Realized revenues

  • Cliffs’s average realized prices were 0.7% lower year-over-year (or YoY) in 2Q16 at $77.8 per ton. Prices have, also declined sequentially by 7.2%.
  • While domestic steel prices improved, lower iron ore prices negated that improvement that resulted in flat growth in realized prices YoY. Sequential improvement came on the back of improving hot-rolled coil (or HRC) prices in the United States. HRC prices are close to $620 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 expects a dip in realized revenue per ton in 3Q16 before normalizing back in the fourth quarter.
  • The company provides realized revenue guidance per ton of iron ore pellets for USIO based on different assumptions of the seaborne benchmark price index.
  • Previously, the company was embedding the hot-rolled coil steel price assumption of $450 per ton to guide for realized revenue per ton of $72–$74 per ton for USIO. This estimate is based on its customers’ realized prices and not an index.
  • Now, it has increased the assumption to $480 per ton, in line with the improvement in prices year-to-date. This will favorably impact the realized prices to an extent of $1–$3 per ton.
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Upside to guidance?

Cliffs is still conservative, taking an assumption of $480 per ton HRC price ads compared to current prices of more than $600 per ton. This could lead to a further upside if steel prices hold strong for the rest of the year. To reflect better fundamentals, Cliffs also guided for an EBITDA of $500 million for 2017. This guidance assumes the benchmark seaborne iron ore price of $60 per ton. The company also stated that the $500 million figure is based on conservative assumptions.

Falling imports are making US steelmakers more confident about increasing selling prices. Higher steel prices should 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.

Having looked at the US division, let’s discuss Cliffs’ Asia-Pacific division in the next part of this series.


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