Are Higher Steel Prices an Upside to Cliffs’s Realized Prices?



Realized revenues from USIO

Volume is one variable for determining revenues. Realized revenue is another important variable that helps assess market sentiment. Realized revenue for Cliffs Natural Resources’ (CLF) USIO (US Iron Ore) segment depends on customer demand for iron ore pellets. That, in turn, depends on existing and expected steel prices in the domestic market.

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US steel prices

In 2015, steel companies’ earnings were negatively impacted by falling steel prices. These companies included United States Steel (X), AK Steel (AKS), and ArcelorMittal (MT). However, US steel companies (XLB) received significant pricing power earlier in 2016 as stiff duties were imposed on flat-rolled steel imports.

In 3Q16, steel prices fell again sharply and eroded most of the gains from the first half of 2016. Most US steel companies warned of their 4Q16 financial performance during their 3Q16 earnings calls. However, we saw a substantial improvement in US steel prices last month.

Donald Trump’s win in the presidential election was another catalyst that supported steel prices. Higher steel prices would support steel companies’ earnings in 4Q16.

Impact on realized prices

Cliffs could also report higher realized revenue per ton in 4Q16 due to better-than-expected US steel prices. The company provides realized revenue guidance per ton of iron ore pellets for USIO based on various assumptions of the seaborne benchmark price index.

Cliffs Natural Resources embedded the HRC (hot rolled coil) steel price assumption of $470 per ton to guide for realized revenue. Its realized revenue per ton guidance is between $75 and $77 per ton.

Now that we’ve looked at the US division, let’s move on to Cliffs’s Asia Pacific division.


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