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Why Cliffs Raised Guidance for US Volumes

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US iron ore volumes

US iron ore (or USIO) is the main driver for Cleveland-Cliffs’s (CLF) top and bottom lines. Volumes and realized prices drive the top line.

US steelmakers like AK Steel (AKS) and ArcelorMittal (MT) are CLF’s main customers. We’ll analyze Cleveland-Cliffs’s 1Q18 USIO volumes in this part of our series.

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US volumes lower but better than expected

Cleveland-Cliffs (CLF) reported volumes of ~1.6 million long tons for its USIO division for 1Q18. The volumes in the latest quarter reflect a year-over-year (or YoY) decline of 48%. There were two main reasons for this decline:

  • lower carryover tonnage from previous year nomination
  • change in the method of sales recognition, which now includes the weaker month of March (volume-wise) compared to December

While the change in sales recognition has negatively impacted its 1Q18 volumes, this should be offset with higher expected growth during the rest of the quarters. Moreover, these volumes were higher than the 1.0 million tons the company predicted in its 4Q17 results. Its customers’ low pellet inventories and favorable shipping conditions helped Cliffs deliver increased volumes at the end of March.

Volume guidance upgraded for 2018

For 2Q17, the company has guided for ~5.5 million tons of sales volumes. The company says the estimate is higher than what is typical of a second quarter. These strong volumes are a result of the expectation of carryover of the strong demand into the second quarter.

Given the strong demand dynamics, Cleveland-Cliffs upgraded its US sales volume guidance for 2018 to 20.5 million tons from 20.0 million tons previously. The guidance implies growth of 10% year-over-year (or YoY). The sales volume will include a part of the inventory built by the company at the end of 2017 as its production volume guidance stays at 20.0 million tons.

Management’s comments

Cleveland-Cliffs expects demand to remain strong in 2018. CLF’s CEO, Lourenco Goncalves, also mentioned that notwithstanding the impact of Section 232, the demand in the US for domestic steel will remain strong. During the 1Q18 earnings release, Mark D. Millet, Steel Dynamics’s CEO, said, “We remain confident that current and anticipated macroeconomic and market conditions are in place to benefit domestic steel consumption in 2018.” The positive outlook reiterated by CLF and STLD is good news for other steel companies (XME) such as U.S. Steel (X), AK Steel (AKS), and ArcelorMittal (MT), which are expected to release results over the next few weeks.

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