How Long Can Seaborne Iron Ore Volatility Haunt Cleveland Cliffs?



Volatility continues for iron ore prices 

Iron ore price volatility is apparently not dying down anytime soon. Benchmark iron ore prices are trading at $65.30 per ton. Higher grade iron ore is showing strength on the back of higher Chinese steel futures, with robust Chinese economic data helping commodities. China’s manufacturing PMI for May rose to 51.9 from 51.4 per month earlier. Production expanded at the fastest rate in six months. While recent data signaled strength in the economy, many economists believe it’s a temporary boost due to the easing of pollution controls.

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Iron ore miners

Year-to-date, major iron ore miners (XME) BHP Billiton (BHP), Rio Tinto (RIO), and Vale SA (VALE) have risen 8.5%, 7.6%, and 12.4%, respectively. In comparison, Cleveland-Cliffs (CLF), whose earnings are driven by the domestic US market, has returned 22%.

While firm iron ore prices have helped seaborne miners, the imposition of 25% tariffs on steel imports into the United States has, in turn, helped US steelmakers and CLF. Cleveland-Cliffs has a small direct exposure to the seaborne iron ore market through its Asia-Pacific iron ore division. However, its stock price was disproportionately impacted by volatile iron ore prices.

CLF’s closure of seaborne operations

However, Cleveland-Cliffs (CLF) will no longer be directly exposed to the seaborne iron ore market. CLF has announced the closure of its Asia-Pacific unit by June 30. The unit was attracting discounts for its products due to lower-than-benchmark (sub-62%) iron ore content.

The accelerated closure could actually be positive for CLF stock since it has seen a lot of volatility due to seaborne iron ore price movements, even when the overall contribution of this division to its bottom line has been insignificant. It’s primarily a US-based iron ore pellet producer and should be valued as such.

However, until then, CLF stock will likely continue to be affected by seaborne iron ore prices. In the rest of this series, we’ll look at the factors that impact seaborne iron ore prices.


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