How The Potential Imposition Of Anti-Dumping Duties On Steel Imports Would Impact Cliffs Natural Resources

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

Cliffs Natural Resources (NYSE:CLF) has faced an extremely challenging business environment in 2015. Like all iron ore producers, the company has been negatively impacted by the sharp decline in iron ore prices over the past twelve months (as indicated by the chart shown below), largely due to a global supply glut. However, in addition to subdued iron ore prices, the company has had to contend with weak demand from the North American steel industry, which has been negatively impacted by the sharp increase in steel imports to the U.S. As a result of weak demand, Cliffs has reduced production levels in 2015. Domestic steelmakers contend that steel imports are priced unfairly low and have filed anti-dumping duty petitions with U.S. trade authorities. [1] Should these petitions be successful, not only will domestic steelmakers benefit, but also iron ore producers such as Cliffs. In this article, we will look at how such a scenario would impact Cliffs.

Iron Ore Prices, Source: Y Charts

 

Impact of Imposition of Anti-Dumping Duties on Steel Imports For Cliffs

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?

The domestic steel industry is currently witnessing a slump in production and capacity utilization levels. Domestic crude steel production in the first nine months of 2015 stood roughly 9% lower on a year-over-year basis. [2] Competition from cheap steel imports has eaten away at the market share of domestic steel producers, resulting in a reduction in domestic steel production. The penetration of finished steel imports in the domestic steel market rose to 28.1% in 2014, as compared to 23.2% in 2013, and is expected to rise further in 2015. [3]

The sharp increase in U.S. steel imports is largely a result of robust growth in Chinese steel exports. Chinese steel exports rose 27% year-over-year to 83.1 million tons in the first nine months of 2015. [4] Imported steels are priced much lower than domestically produced steels, with a strong Dollar making imports cheaper still. Competition from imported steels has forced U.S. steelmakers and consequently, iron ore producers such as Cliffs, to scale back production.

See our forecasts for Cliffs’ U.S. Iron Ore shipments

The U.S. International Trade Commission and the Department of Commerce are expected to give their final rulings on the petitions of domestic steelmakers by mid-2016. ((U.S. Steelmakers Seek Anti-Dumping Action Against China, Four Others, Wall Street Journal)) Should domestic steelmakers receive a favorable ruling, competition from steel imports is likely to dissipate and domestic steel production should revert to previous levels. Such a scenario would also positively impact Cliffs’ production and shipments, which have been scaled back in response to weak demand from the steel industry.

In order to model this scenario, we will assume that Cliffs’ U.S. iron ore shipments rise to 21.6 million  tons by 2022, as compared to the base case scenario of 20.5 million tons by 2022. We will also factor in higher margins corresponding to higher production levels. If we factor in these assumptions into our model for Cliffs’ stock, our price estimate for Cliffs increases by 56% from $2.89 to $4.52. Thus, there is scope for a significant upward revision to Cliffs’ stock price, should domestic steelmakers receive a favorable ruling from U.S. trade authorities.

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. Steelmakers Seek Antidumping Action Against China, Four Others, Wall Street Journal []
  2. September Crude Steel Production 2015, World Steel Association []
  3. ArcelorMittal’s 2014 20-F, SEC []
  4. China Buys More Iron From Abroad as Steel Exports at Record, Bloomberg []