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Seaborne Iron Ore: Cliffs’ CEO Weighs In

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Strong iron ore outlook

Cliffs Natural Resources (CLF) released its annual 2016 results on February 9, 2017. The company’s management was quite upbeat on the prospects of seaborne iron ore prices in 2017.

The company was so positive about the outlook, in fact, that it has given its EBITDA (earnings before interest, tax, depreciation, and amortization) guidance for 2017 based on the benchmark iron ore price of $81 per ton, which was the actual average over January 2017. The average of iron ore prices (COMT) over 2016 has been close to $59 per ton, in comparison.

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Sanity in the iron ore market?

Cliffs CEO Lourenco Goncalves has been quite vocal in his disappointment over iron ore giants’ strategy of flooding the market with cheap iron ore to gain market share. Goncalves describes Rio Tinto (RIO), BHP Billiton (BHP) and Vale (VALE) as “the Three Stooges” and the execution of this strategy as a “bear strategy of self-destruction.”

During Cliffs’ 4Q16 earnings call, Goncalves stated: “We finally have sanity back in the seaborne iron ore market. I truly commend Rio Tinto and Vale for eliminating their reckless behavior that had infected the market for a number of years and destroyed several billions of dollars in equity value.”

Goncalves went on to state the following: “Once the market analysts saw iron ore prices at $40, they believed that this was the new normal. Not the case. For a controlled commodity like iron ore, in which only three big players have the ability to move market price up or down, this should never be the case. Iron ore at $40 is not, nor will it ever be normal.”

Demand side stable

On the demand side, Goncalves believes that China continues to perform and holds that pollution control in China will lead to the demand for better quality ore.

Notably, Goncalves mentioned the following during the 4Q16 conference call: “We’re not going to see China not producing, not buying iron ore, not deploying fixed assets. It’s the opposite. They will continue to grow fixed asset investments. They’ll continue to buy iron ore, but they will be more selective.”

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