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Key Highlights from Cliffs Natural Resources’s 3Q16 Earnings Call

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Progress on DRI front

During the company’s 3Q16 earnings call, which was held on October 27, 2016, Cliffs Natural Resources’s (CLF) CEO, Laurenco Goncalves, acknowledged that the electric arc furnaces (or EAF) mills account for nearly two-thirds of steel production in the US (QQQ). If CLF want to operate in the long term, it will have to be involved in the EAF business.

The company has made great progress on this effort so far at its Northshore mine. There, the company has reduced and continue to produce direct reduced-grade pellets for shipment to its client in Trinidad.

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Will US steel prices gain strength?

Goncalves mentioned that the steel prices during 3Q16 were weaker and were mainly demand driven rather than supply driven. He, however, noted that while its blast furnace steel customers have remained disciplined, the service centers are keeping the inventories too low.

Moreover, some service centers are also trying to import illegal steel. During the 3Q16 earnings call, Goncalves made it clear that this would be like “playing with fire.” This action is not sustainable and with inventories below two months, the company will have to restock sooner rather than later. This, along with the ongoing trade cases, Goncalves noted, should keep the steel prices strong going forward.

Supplier of choice

Magnetation, which is a joint venture between Magnetation and AK Steel (AKS), finally announced in October that it is closing its Reynolds pellet production plant and its iron ore concentration plant. Cliffs Natural Resources noted that this tightens the Great Lakes pellet market even further. The company has a production capacity of 19 million tons.

During its 3Q16 earnings call, Cliffs Natural Resources’s CEO, Lorenco Goncalves, said, “We foresee multiple scenarios in which we are oversubscribed on our pellet orders for 2017, which we obviously feel is a very good position to be in.”

Cliffs Natural Resources is a sole pellet supplier to mills in the Great Lakes area. Most of the remainder of the iron ore pellet capacity is owned by backward-integrated steel players such as United States Steel (X), AK Steel (AKS), and ArcelorMittal (MT).

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