Cliffs Natural Resources: The Potential Impact Of A Sustained Increase in Steel Imports to the U.S.

-0.35%
Downside
20.07
Market
20.00
Trefis
CLF: Cleveland-Cliffs logo
CLF
Cleveland-Cliffs

Steel imports into the U.S. have risen sharply over the course of the last year. This has negatively impacted the fortunes of the U.S. steel industry, with competition from steel imports negatively impacting both realized prices and shipment volumes. Steel sheet imports to the U.S. accounted for 22% of the domestic market in 2014, up sharply from 15% of the domestic market in 2013. [1] The adverse business environment for the U.S. steel industry has also impacted the fortunes of iron ore producers such as Cliffs Natural Resources (NYSE:CLF), since iron ore is the primary raw material for steelmaking. As a result of the adverse business conditions impacting the U.S. steel industry, Cliffs revised downward its shipment guidance for its U.S. Iron Ore division for 2015 to 20.5 million tons, from its previous guidance of 22 million tons. [2]

If steel imports continue to negatively impact the U.S. domestic steel industry, it would also negatively impact the prospects of iron ore producers such as Cliffs. In this article, we will look at the potential impact of a sustained increase in steel imports into the U.S. on Cliffs.

The Potential Impact of a Sustained Increase in U.S. Steel Imports

Relevant Articles
  1. What’s New With Cleveland-Cliffs Stock?
  2. What’s Happening With Cleveland-Cliffs Stock?
  3. Why We Are Raising Our Price Estimate For Cleveland-Cliffs Despite A Weak Q4
  4. With Contracted Prices For 2023 Up, Is Cleveland-Cliffs Stock A Buy?
  5. Company Of The Day: Cleveland-Cliffs
  6. What To Expect From Cleveland-Cliffs Q3 Results?

Two important reasons for the increase in steel sheet imports are the strengthening of the U.S. Dollar and the sharp increase in Chinese steel exports. Steel imports to the U.S. have been bolstered by the strengthening of the U.S. Dollar against global currencies over the course of the last year, as indicated by the Dollar Index shown below, which is a measure of the relative strength of the U.S. Dollar against a basket of currencies. The strengthening of the U.S. Dollar has made these steel imports cheaper in Dollar terms.

 

Dollar Index, Source: Bloomberg

In addition to the strengthening of the Dollar, there has been a sharp increase in steel exports from China. The Chinese steel industry is currently facing weak domestic demand, primarily due to a slowing Chinese economy. Domestic demand for steel stood at 711 million tons in 2014. [3] In comparison, Chinese steel production in 2014 stood at 823 million tons in 2014. [4] This oversupply situation in the Chinese domestic steel market has provided a sharp boost to Chinese steel exports, which rose 36% year-over-year in the first four months of 2015. [5]

As per the U.S. steel industry, a significant proportion of these imports are priced unfairly low. In response to the sharp rise in steel imports, domestic steelmakers have petitioned the U.S. International Trade Commission  seeking the imposition of anti-dumping duties on imported steel from China, India, Italy, South Korea, and Taiwan for alleged unfair pricing of these imports. [5] A final ruling on the petition by the domestic steel industry to impose anti-dumping duties on steel imports is expected by 2016. [5]

If U.S. authorities do not impose anti-dumping duties on cheap steel imports, it is likely that these imports will continue to eat away at the market share of the domestic U.S. steel industry. This is likely to lead to a fall in demand for iron ore, and consequently a fall in demand for Cliffs’ U.S. iron ore shipments. In order to model this scenario, we will factor in a 10% decline in Cliffs’ U.S. iron ore shipments by 2021, as compared to our current estimates, as well as a corresponding decline in margins, resulting from lower production levels.

See our forecasts for U.S. Iron Ore shipments for this scenario

If we factor in these assumptions into our model, our price estimate for Cliffs decreases by around 69% from $5.74 to $1.79. Thus, if steel imports continue to eat away at the domestic steel industry’s market share, a severe downward revision in valuation could potentially follow for Cliffs Natural Resources.

See our complete analysis for this scenario here

 

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. U.S. Steel’s Q1 2015 10-Q, SEC []
  2. Cliffs Natural Resources Q1 2015 Earnings Call Transcript, Seeking Alpha []
  3. Short Range Outlook 2015-16, World Steel Association []
  4. World Crude Steel Production, World Steel Association []
  5. U.S. Steelmakers Seek Antidumping Action Against China, Four Others, Wall Street Journal [] [] []