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Why US Realized Prices Could Move Higher Going Forward



Realized prices in USIO

While volume is one variable for determining revenues, realized prices are important in helping you assess market sentiment. Cliffs Natural Resources’s (CLF) realized revenue for its US Iron Ore (or USIO) segment depends on the demand for iron ore pellets from its 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 Natural Resources’s realized revenues.

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Realized revenues fell

  • Cliffs Natural Resources’s average realized prices were 4% lower year-over-year (or YoY) in 3Q16 at $73.50 per ton. Prices have also declined 7.7% sequentially.
  • CLF had previously guided for lower realized prices in 3Q16 due to customer mix. This result was expected.
  • Steel prices rallied handsomely in the first half of the year but have pared away some of those gains in 3Q16. The earnings of US steelmakers such as AK Steel (AKS), Nucor (NUE), U.S. Steel (X), and ArcelorMittal (MT) are sensitive to steel prices. These impact the contract prices for Cliffs Natural Resources.

Realized revenue guidance

  • Cliffs Natural Resources expected a dip in realized revenue per ton in 3Q16 before normalizing in the fourth quarter. The realized prices should also normalize in 4Q16.
  • The company provides realized revenue guidance per ton of iron ore pellets for USIO based on different assumptions of the seaborne benchmark price index.
  • While Cliffs Natural Resources embedded the hot rolled coil (or HRC) steel price assumption of $450 per ton to guide for realized revenue for USIO in 1Q16, the HRC assumption increased to $480 per ton in the company’s 2Q16 earnings. In its 3Q16 earnings, it again reduced this HRC assumption by $10 per ton to $470 per ton.
  • However, the realized revenue per ton has improved by $3 per ton from $72–$74 to $75–$77.

Is there an upside to its guidance?

Cliffs Natural Resources is still conservative, taking an HRC price assumption of $470 per ton compared to current prices of more than $510 per ton. This could lead to a further upside if steel prices hold strong for the rest of the year. To reflect better fundamentals, CLF also hinted at free cash flow closer to the $200 million level in 2017.

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


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