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Why CLF’s Asia-Pacific Segment Could Remain Weak in 2Q17

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Asia-Pacific Iron Ore division

While the contribution from Cliffs Natural Resources’ (CLF) Asia-Pacific Iron Ore (or APIO) segment is not a substantial part of its earnings, it still accounts for a large part of its stock price movements through its direct exposure to the seaborne iron ore market. 

APIO competes directly in the seaborne iron ore market with iron ore giants such as BHP Billiton (BHP), Rio Tinto (RIO), Vale (VALE), and Fortescue Metal (FSUGY).

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Realized prices to trend lower

After remaining resilient in 2016 and in 1Q17, iron ore prices started weakening in 2Q17. Miners’ realized prices depend on the benchmark prices adjusted for factors such as moisture, iron ore content, and freight. As a result, Cliffs Natural Resources and its seaborne peers could experience a decline in realized prices in 2Q17.

In 1Q17, the realized prices for APIO showed marked improvement by increasing 32% year-over-year (or YoY) to $54.30 per ton. Although seaborne iron ore prices were quite high at $86.00 per ton during the quarter, price adjustments, the timing of the contract settlement, and increased freight rates offset this rise. 

Although some of the impact of higher prices in 1Q17 should flow through to the realizations in 2Q17, the overall trend in realized prices should be lower.

Downside to earnings

Cliffs Natural Resources achieved EBITDA[1. earnings before interest, tax, depreciation, and amortization] of $54 million in 1Q17, which was more than double its 1Q16 EBITDA. The company has cut its overall EBITDA guidance for 2017 due to weaker seaborne iron ore and US (DIA) (DOW) HRC (hot rolled coil) prices. Because the prices were even weaker in 2Q17, its EBITDA should be lower.

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