Citi is bearish on iron ore and steel prices, expecting bad news for Cleveland-Cliffs (CLF) and US steel companies. This year, CLF stock is trading almost flat, while U.S. Steel Corporation (X) is down sharply.
Last week, CLF stock closed with a year-to-date gain of only 1.5%. Meanwhile, U.S. Steel was down almost 27% and AK Steel (AKS) was up 13.3%. AKS and X diverged after their Q3 earnings releases. Whereas AKS slumped after the company missed Q3 estimates, X rose after the company posted a narrower-than-expected loss. CLF’s earnings were better than expected, but some analysts lowered the stock’s target price following the earnings release.
Citi on iron ore and steel prices
Citi is bearish on iron ore and steel prices. S&P Global Platts reports Citi research analyst Tracy Liao said, “Average prices for 62% Fe iron ore fines delivered to China may fall to $80/mt in 2020, from $94/mt in 2019, before sliding to $60/mt in 2021 and 2022.” She also expects steel prices to “moderate,” and said that weak steel margins and a higher supply have pressured pellet premiums. She was particularly concerned about the automotive sector’s steel demand.
ArcelorMittal (MT) and AK Steel are CLF’s top two customers. ArcelorMittal is the largest automotive steel supplier, and AK Steel ships most of its products to automotive customers.
US steel prices
Iron ore prices could moderate next year, and China’s iron ore demand could soften. China’s steel production has been healthy this year, boosting its iron ore demand. However, based on the fact that China’s land purchases for future production have been falling, its property investments could be lower next year.
Bringing some solace for CLF stock, US steel prices might have bottomed out and could rise. A US-China trade deal would also boost US steel producers and CLF stock.
Long-term drivers for CLF stock
Meanwhile, CLF’s HBI (hot briquetted iron) plant is set to come online next year. It could be a key driver for CLF, expanding its margins and profitability. Also, with blast furnaces facing a cyclical slowdown in the steel industry and a structural shift toward EAFs (electric arc furnaces), CLF’s HBI plant could position the company favorably in the US steel industry. Incidentally, after restarting construction at its Alabama EAF, U.S. Steel Corporation announced an investment in Big River Steel, which produces steel in EAFs.