19 Sep

US Steel Guidance: A Negative Read for Cleveland-Cliffs

WRITTEN BY Anuradha Garg

Cleveland-Cliffs (CLF) and its US steel peers are on a roller-coaster ride in 2019. CLF fell 25.5% in August alone. The loss came after the stock gained 39% in the first seven months of the year. YTD (year-to-date), it’s up 6.4%.

In contrast, U.S. Steel (X), AK Steel Holding (AKS), ArcelorMittal (MT), Nucor Corporation (NUE), and Steel Dynamics (STLD) have seen YTD returns of -31.7%, 12%, -22.1%, 2.1%, and 1.6%, respectively.

Three US steel companies provided weaker-than-expected guidances

It’s mainly macroeconomic issues that have been affecting US steel stocks and Cleveland Cliffs rather than company-specific news. However, more recently, these issues have started catching up with US steel companies. This week, three US steel companies have downgraded their guidances.

Nucor’s earnings guidance

On September 16, Nucor released its earnings guidance for the third quarter. It expects EPS of between $0.75 and $0.80 during the quarter. At the midpoint, this implies a fall of 38.5% sequentially and a fall of 63.6% YoY (year-over-year). The company’s guidance is also below analysts’ expectations. The difference has a lot to do with a noncash impairment charge of $0.26 per share. Nucor’s guidance disappointed markets, and its stock fell 1% after its guidance update.

Apart from its disappointing guidance, Nucor also painted a bleak picture of end use market demand, pointing to the weakening auto, power transmission, and agricultural product markets.

Steel Dynamics’ third-quarter guidance

Steel Dynamics provided its third-quarter earnings guidance on September 17. The company is guiding for EPS in the range of $0.66–$0.70. This guidance implies sequential and YoY declines, as its EPS in the second quarter of 2019 and the third quarter of 2018 were $0.87 and $1.69, respectively. Wall Street analysts were expecting EPS of $0.72 from the company in the third quarter.

Steel Dynamics is attributing its lower earnings expectations to lower profitability in its sheet steel operations. However, its comments on end user demand are somewhat different: “Underlying domestic steel demand remains principally intact for the primary steel consuming sectors, with particular strength in construction.”

U.S. Steel’s weaker guidance

Yesterday, after the market closed, U.S. Steel Corporation provided dismal guidance for its third-quarter earnings results. The company guided for third-quarter adjusted EPS of -$0.35. Analysts were expecting adjusted EPS of -$0.07. U.S. Steel expects its adjusted EBITDA to come in at $115 million.

In its commentary, the company said, “The positive flat-rolled steel market indicators experienced earlier this summer have softened after a brief recovery in steel selling prices.” Due to the combined impact of weakening steel prices and scrap prices, the company is expecting a negative impact on its flat rolled steel earnings in the second half. It expects its two blast furnaces to remain idle through the end of 2019. U.S. Steel thus reduced its shipment guidance from 11 million tons to 10.7 million tons. Its stock was down around 11.0% at 1:30 PM ET today.

Negative read-through for CLF

Due to the recent negative guidance updates, CLF was down about 2% at 1:30 PM ET. The read-through from the flood of negative guidance updates from these companies is negative for Cleveland-Cliffs, which produces the iron ore pellets they use. CLF’s strength depends on the strength of the US steel market. The negative commentary from major steel companies doesn’t bode well for end user demand for its products.

US steel prices in a downtrend

In Why CLF’s CEO Sees a Big Upswing in US Steel Prices Soon, we highlighted that the company’s CEO, Lourenco Goncalves, was expecting a reversal in steel prices. Steel prices in the US, however, have only been getting worse by the day.

According to Argus, US HRC (hot rolled coil) prices are down to $577 per ton to date in the third quarter compared to $630 per ton in the second quarter. The decline is much steeper than the average HRC price of $875 per ton in the third quarter of 2018, according to Argus.

Iron ore prices are softening too

Apart from weak US steel prices, softer iron ore prices are also weighing on CLF. In defiance of other commodities, iron ore prices remained resilient through the first half of 2019. Supply concerns due to Vale’s (VALE) dam burst in January and strong Chinese demand were the major drivers of this resilience. Now, however, iron ore prices have started weakening substantially. In August alone, they fell about 27%.

The investors will eagerly await CLF’s third-quarter results, which are scheduled to be released on October 18. CLF’s CEO has provided quite a lot of context in terms of sector demand and supply trends. Investors should note that Cliffs’ second-quarter results were upbeat, as it beat analysts’ estimates on both revenue and EPS.

CLF’s expectations for the second half

Cliffs expects its full-year shipping volumes to come in at 20 million tons, implying volumes of 12.2 million tons for the second half. During its second-quarter results, the company said it expected its average realized revenue for 2019 to be between $109 and $114 per ton. However, due to the recent weak spell in steel and iron ore prices, management could scale back its expectations. It’s worth noting that CLF’s expectation is based on the YTD average of certain variables and doesn’t constitute guidance by the company.

You can read more about CLF’s fundamentals and valuation in CLF Stock: Buy Now in the Current Dip?

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