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Why CLF Stock Could Have an Eventful 2020

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  • Cleveland-Cliffs (CLF) stock gained a little under 10.0% last year and underperformed the broader markets. Last year, CLF announced the acquisition of AK Steel. The company expects the deal to close in the first half of 2020.
  • This year, the company’s hot-briquetted iron plant is also expected to come online. However, the outlook for iron ore prices is somewhat bearish for 2020.

CLF stock’s 2020 outlook

CLF stock gained almost 10% last year. Looking at US steel companies’ 2019 price action, Nucor (NUE), Steel Dynamics, and AK Steel (AKS) gained 8.6%, 13.3%, and 46.3%, respectively. U.S. Steel lost 37.4%, while the SPDR S&P Metals and Mining ETF (XME) gained 11.8%. In December, Cleveland-Cliffs announced that it would acquire AK Steel in a stock-for-stock transaction. After the announcement, AK Steel rose because the deal valued it at a premium. While CLF fell after the announcement, it recouped losses as the month progressed. Read CLF Acquires AKS: A Match Made in Heaven? for a broad overview of the transaction and its strategic rationale. The deal will likely close in the first half of 2020. CLF will transform into a vertically integrated steel company after the transaction.

Why 2020 is a crucial year for Cleveland-Cliffs

AK Steel’s acquisition would make 2020 a crucial year for Cleveland-Cliffs. While announcing the deal, the company noted that the deal would be earnings accretive. CLF also needs to make a lot of strategic decisions about AK Steel. The decisions include a potential restart of its Ashland Works facility to produce pig iron, refinancing AK Steel’s debt, and selling some of AK Steel’s non-core assets. Notably, Lourenco Goncalves, CLF’s current CEO, disposed of its non-core assets to focus on the core US market.

The company also invested in the HBI (hot-briquetted iron) space. The investment would help CLF tap the electric arc furnace market. Currently, the company produces iron ore pellets that are used by blast furnaces. However, the share of blast furnaces in US steel production has gradually come down. The share is expected to fall even more. While some of the older blast furnaces are being shut, more electric arc furnaces are being added. The HBI plant is expected to come online in 2020.

CLF and the HBI plant

The DRI plant could be a key driver for CLF stock. Notably, as electric arc furnaces continue to increase their market share and focus on high-end steel products, they might look at HBI. Over the next few years, we could see a sharp rise in electric arc furnace steel production looking at the new capacity announcements from Nucor and Steel Dynamics. The churn in the US steel industry will likely benefit CLF stock. Notably, U.S. Steel is also doubling down on electric arc furnaces. Last year, the company started to construct its Alabama electric arc furnace. The company also made a strategic investment in Big River Steel, which produces steel in electric arc furnaces.

Steel and iron ore prices

US steel prices fell sharply last year. However, they recouped some of the losses in the fourth quarter. In my view, US steel prices might rise more although the consensus view is quite bearish. The US steel industry could actually be a contra play in 2020 as analysts seem too bearish on the sector. That said, any escalation in the US and Iran tensions could change the equation. Iron ore prices rose last year amid strong demand from China and supply disruptions. This year, some of the supply might come back to the market. However, Chinese steel demand might not be as strong as the last year, which could put pressure on CLF stock. The company has exited its international operations, which impacts pellet contracts with some buyers in the US market.

Wall Street doesn’t see much upside

Overall, 2020 looks like an interesting year for CLF stock. Wall Street doesn’t see much upside for the stock. The mean consensus target price suggests a potential upside of only 5.4% over current market prices. Four analysts recommend a “buy” or higher rating, four recommend a “hold,” and one recommends a “sell.”

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