As we saw in the previous part of this series, Cleveland-Cliffs (CLF) stock has seen stronger gains than its US steel peers in 2018. There are a few points that position Cliffs uniquely as compared to peers.
Supplier of choice
Cleveland-Cliffs is the largest and lowest-cost supplier of iron ore pellets in the United States. Cliffs accounted for ~55% of the annual rated US capacity in 2015. Most of the rest of the iron ore pellet capacity is owned by backward-integrated steel players (SLX). U.S. Steel (X) accounted for 40%. The rest of the iron ore pellet capacity is owned by other backward-integrated steel players such as AK Steel (AKS) and ArcelorMittal (MT). For iron ore producers based in Brazil and Australia, it’s difficult to compete with local players due to logistical issues, which could easily add $30–$40 per ton to the cost of delivered pellets in the United States.
As highlighted by Citigroup, Cleveland-Cliffs offers greater leverage to steel prices than minimill producers such as Nucor (NUE) and Steel Dynamics (STLD) and earns better margins than integrated companies. U.S. Steel Corporation and AK Steel are among the integrated steel producers.
Moreover, most of its revenue is secured through long-term contracts with its customers including ArcelorMittal and AK Steel (AKS) by partially fixed-price contracts. This measure has improved revenue visibility and reduced the impact of volatility, which pleases investors.
Cliffs is also focusing primarily on US-centric growth. In the next part, we’ll see how its exit from the volatile seaborne iron ore market could be beneficial for its stock price.