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Why Is CLF’s Management Confident about Strong US Volumes in 2017?

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US iron ore volumes

A company’s shipped volumes usually depend on demand from end consumers and adjustments to its production profile. This is one of the functions, along with realized prices, of a company’s revenues.

Cliffs Natural Resources’s (CLF) US Iron Ore (or USIO) segment mainly sells iron ore to integrated steel companies in the United States and Canada. The companies include AK Steel (AKS) and ArcelorMittal (MT). In this article, we’ll analyze Cliffs’s 3Q16 USIO volumes.

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Lower USIO volumes

  • US volumes were 5.3 million long tons in 3Q16, which is a decline of 5.6% year-over-year and an improvement of 28% quarter-over-quarter.
  • The management was expecting to ship 5.5 million tons in 3Q16.
  • The year-over-year decline was mainly due to the termination of a customer contract in 4Q16, which was offset to a large extent by a new customer contract.
  • There was also a negative impact of a customer’s inventory capacity limitation.

Volume guidance maintained

  • Cliffs Natural Resources’s management maintained its guidance to ship 18 million long tons in 2016, which implies shipments of ~6.7 million tons in the fourth quarter of 2016.
  • Previously, Cliffs had guided for 17.5 million tons from USIO. The increase is mainly reflective of additional sales to US Steel Canada.
  • The guidance for production, however, is lower at 16.5 million tons as 1.5 million tons of inventory is worked through.

Management expectations

Cliffs Natural Resources’s management mentioned during the 3Q16 earnings call that the company will start receiving the nominations for 2017 in the fourth quarter. Based on its initial feedback, the company is comfortable with its preliminary 2017 sales volumes forecast of 19 million tons.

The Materials Select Sector SPDR ETF (XLB) is an alternative way to play the materials space. Currently, Nucor (NUE) forms 2.8% of XLB’s portfolio.

After having looked at the volumes in the USIO segment, let’s focus on the realized prices in this division.

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