When the prices for a company’s products fall, the only way to improve profitability is to either increase volumes or reduce costs. When demand is weak, it’s not possible to drive higher volumes beyond a point. This barrier leaves cost reduction as the only source of margin expansion.
In this context, we’ll discuss Cliffs Natural Resources’s (CLF) cost-cutting efforts in relation to its US Iron Ore (or USIO) and Asia-Pacific Iron Ore (or APIO) divisions.
Cost reduction in APIO
- Cliffs Natural Resources’s cash production cost for APIO was $26.10 per ton, down 3% year-over-year (or YoY). Even when compared to 2Q16, the unit costs were 8% lower in 3Q16.
- The decline was mainly due to reduced logistics costs and lower site administrative expenses. These were, however, partially offset by an unfavorable exchange rate variance of $1 per ton.
- During the call, the company mentioned that as the seaborne iron ore benchmark holds in the mid-to high-50s, it will tightly manage costs.
- The company maintained its 2016 cash production cost guidance for APIO at $25–$30 per ton and its cash cost of goods sold guidance at $30–$35 per ton. This is based on an assumption of the Australian dollar (UUP) (USDU) exchange rate of $0.75.
- Cost reductions in the seaborne iron ore market aren’t limited to Cliffs Natural Resources. Iron ore majors such as BHP Billiton (BHP) (BBL), Rio Tinto (RIO), and Vale SA (VALE) also benefit from the exchange rate and other cost reductions. To learn more about this trend, please read Cost Deflation Could Prolong the Pain for Iron Ore Miners.
Unit cost progression in USIO
- Cliffs Natural Resources’s cash production costs for 3Q16 came in at $55.70 per ton, 14% higher YoY. This was mainly driven by additional costs incurred to restart the United Taconite mine and the timing of maintenance activity at the Tilden mine.
- The company’s non-production cash costs, however, were just $1.70 per ton in 3Q16 compared to $13.80 per ton in 3Q15.
- This drove the sales margins per ton from $8.70 in 3Q15 to $12.57 in 3Q16.
- CLF’s management maintained its cash production costs at $50–$55 per ton and its cash cost of goods sold guidance at $55–$60 per long ton for 2016.