Cliffs’ Northshore Mine The Latest Casualty Of Weakness In Domestic Steel Demand

The adverse business conditions facing the domestic steel industry continue to take their toll on iron ore producer Cliffs Natural Resources (NYSE:CLF), with the company announcing plans to idle its Northshore Mining operations in Minnesota. ^[1] The fully-owned Northshore Mining operations accounted for nearly a quarter of Cliffs’ share of its 25.5 million tons U.S. iron ore production capacity at the end of 2014. ^[2] This decision follows the company’s decision to idle its United Taconite facility earlier in the year, which represented roughly one-fifth of Cliffs’ U.S. iron ore production capacity at the end of 2014. ^[2] The company expects to meet the muted demand for iron ore pellets from the domestic steel industry from its pellet inventory, with both the Northshore and United Taconite facilities expected to remain in an idled state till the end of Q1 2016. ((Cliffs Natural Resources Inc. Adjusts U.S. Iron Ore Production, Cliffs Natural Resources)) The woes of the domestic steel industry, which are also negatively impacting Cliffs, largely stem from competition from cheap steel imports.

Challenging Business Conditions

The domestic steel industry, which constitutes the client base of Cliffs’ U.S. Iron Ore operations, is currently characterized by muted production and capacity utilization levels. U.S. crude steel production in the first nine months of 2015 stood roughly 9% lower on a year-over-year basis. ^[3] The prevailing global oversupply of steel, fueled by burgeoning Chinese steel exports, has negatively impacted the profitability of steelmakers globally. Chinese steel exports rose 27% year-over-year to 83.1 million tons in the first nine months of 2015, which exceeds the total steel produced by Japan, the world’s second largest steel producer, over the same period. ^[4] The penetration of finished steel imports in the domestic steel market has risen steadily, standing at 28.1% in 2014, as compared to 23.2% in 2013, and is expected to rise further in 2015. ^[5] Imported steels are priced significantly less than domestically produced steels, with a strong Dollar making imports cheaper still. With rising steel imports impacting U.S. steel production and consequently demand for iron ore, Cliffs has been forced to scale back production.

Global weakness in demand for steel, as a result of the supply glut, has not only resulted into weak demand for iron ore, but has also translated into a decline in prices of the commodity, which is also currently characterized by an oversupply situation.

Declining Iron Ore Prices, Source: Y Charts

If the status quo in the domestic steel market prevails, and cheap steel imports continue to eat away at the market share of the domestic steel industry, prospects look fairly bleak for iron ore producers such as Cliffs. However, domestic steel producers have petitioned U.S. authorities for the imposition of anti-dumping duties on steel imports, which domestic steelmakers contend are priced unfairly low. ^[6] The outcomes of these trade related cases are expected sometime in 2016. A positive outcome for the domestic steel industry could go a long way in improving the business prospects of not only domestic steelmakers, but also iron ore miners such as Cliffs.

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1. Cliffs Natural Resources Inc. Adjusts U.S. Iron Ore Production, Cliffs Natural Resources [↩]
2. Cliffs Natural Resources 2014 10-K, SEC [↩] [↩]
3. September Crude Steel Production 2015, World Steel Association [↩]
4. China Buys More Iron From Abroad as Steel Exports at Record, Bloomberg [↩]
5. ArcelorMittal’s 2014 20-F, SEC [↩]
6. U.S. Steel’s Q3 2015 Earnings Call Transcript, Seeking Alpha [↩]