Why Cliffs’ Asia-Pacific Segment Could Disappoint Again in 1Q18



Asia-Pacific Iron Ore segment

While Cleveland-Cliffs’ (CLF) Asia-Pacific Iron Ore (or APIO) segment doesn’t contribute much to its revenue and earnings, it still accounts for many of its stock price movements via changes in seaborne iron ore prices.

Through this division, CLF directly competes with seaborne iron ore giants (PICK) BHP (BHP), Rio Tinto (RIO), Vale (VALE), and Fortescue Metal (FSUGY). Together, these four miners control more than 70% of seaborne iron ore production.

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Accelerated closure of operations

Cliffs’ APIO segment’s 4Q17 sales volumes came in at 2.0 million tons, reflecting a fall of 30% YoY (year-over-year). This fall was due to operational decisions reflecting the current market conditions and quality ore availability. The company hasn’t provided guidance for APIO volumes for 2018, as it’s decided to accelerate the timeframe for the projected closure of its mining operations in Australia. As we’ll discuss in detail in the next part of this series, the company now expects to close its Australian operations by June 30, 2018.

Realized prices to weaken further

APIO’s realized revenue per ton was $42.61 in 4Q17, a fall of 26% YoY and 1.7% sequentially. While seaborne iron ore prices were healthy, China’s shift from low-grade material to high-grade material expanded the price differential between the two products. CLF’s APIO division produces sub-benchmark ore, which attracts a discount. The company mentioned during its 4Q17 earnings call that over the past two years, its expected realized prices relative to the benchmark have fallen over 40%.

While the discount should continue, seaborne iron ore benchmark prices have taken a dive in 1Q18, especially in March 2018. This should be reflected in the form of even weaker realized revenue for Cliffs’ APIO unit in 1Q18.


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