Cliffs Benefits from Asian Iron Ore Demand

Cliffs Natural Resources’ (NYSE:CLF) iron-ore revenues from its Asia-Pacific region rose strongly in the past few years, except for a dip in 2009 due to the economic crisis. The firm’s Asia-Pacific iron-ore revenues have increased from $42 per ton in 2005 to $121 in 2010 aided by rising Chinese demand for iron-ore and overall global demand for steel. Cliffs mainly competes with international mining and natural resources companies like Vale (NYSE:VALE), BHP Billiton (NYSE:BBL) and the Rio Tinto group.

Last year was very profitable for Cliffs as it managed to increase its net income five times to $1 billion from 2009 to 2010. The sharp increase in revenues earned is attributable to the Consolidated Thompson acquisition. We believe this acquisition will provide Cliffs a strong footing in Asia, which is driving demand for global commodities. While the current increases in iron-ore prices support the corresponding demand an imminent oversupply scenario could cause prices to rollover in the foreseeable future.

We expect that Cliffs’ Asia-Pacific iron-ore prices will gradually decline to $107 by the end of our forecast period. Trefis members however project a more stable price trend leading to almost $140 for the same period. The average member forecast implies an upside of 5% to our price estimate for CLF stock.

We currently have a Trefis price estimate of $103 for Cliffs Natural Resources’s stock, about 11% above the current market price of $92.34.

Cliffs Growth Plans in Asia

Cliffs decision to buy Canada’s Consolidated Thompson will help it expand presence in Asia, the world’s largest market for the steel-making raw material. Besides boosting Cliffs’ production capacity, the acquisition adds about $75 million in operational synergies for Cliffs. But most importantly, the deal also helps the North American Iron Ore division cater to the rising iron ore demand in Asia. Consolidated Thompson has a long-term supply agreement with Wuhan Iron and Steel, China’s third-largest steel manufacturer and a 19% stakeholder in Consolidated Thompson. The agreement for the sale of at least 4 million tons of iron ore will make Wuhan one of Cliffs’ biggest customers. (see Cliffs Acquisition Aimed at Growth, Foothold in Asia)

Iron-Ore Over Supply Can Cut Prices

Iron-ore prices have grown rapidly in past two years mainly due to growing demand and positive outlook for steel. Iron ore prices have risen almost three-fold since the $60 per ton lows in early 2009 to almost $190 per ton now. China contributes to almost half of the world’s total iron ore production. In spite of this, it is also the biggest importer of iron ore in the world due to the country’s rapid economic development necessitates a substantial increase in its steel production.

While China has been increasing imports, there is a continuous build-up of in its iron ore inventories over the past few years, which suggests an overcapacity in the industry. The currently stockpiled Chinese iron ore is around 79.85 million tons (mt) close to the all time high of 81.1 mt reached in February 2010. ^[1] Rising iron-ore inventories will likely result in declining prices in the future.

Our complete analysis for Cliffs Natural Resources’s stock is here.

1. Oversupply of vessels to rule the market for at least three more years says analyst, eshiptrading.com, April 18, 2011 [↩]