Why We’re Raising Our Price Estimate For Cliffs To $8

August 9th, 2016 by Trefis Team
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Last week’s Department of Commerce (DOC) ruling confirming its preliminary imposition of antidumping duties on steel imports from seven countries is a shot in the arm for the domestic steel industry. [1] The DOC had also announced the imposition of stiff antidumping duties on steel imports from China earlier in the year. [2] Regulatory intervention over the course of the year has lowered the competition to the domestic steel industry from cheap steel imports. The share of steel imports in the domestic market had risen from 23.2% in 2013 to 29.3% in 2015, negatively impacting the realized prices, shipments and profits of domestic domestic steelmakers. [3] Since iron ore is an important raw material in the production of steel, the adverse business environment for the steel industry had negatively impacted the fortunes of domestic iron ore producers as well. Cliffs’ U.S. iron ore shipments fell nearly 20% year-over-year in 2015, reflecting a weakening of demand for iron ore by domestic steelmakers. [4]

The year 2016 has been a more positive one for Cliffs. With a recovery in the fortunes of domestic steelmakers, Cliffs fortunes have also experienced a revival. The company signed two long-term supply agreements with ArcelorMittal and U.S. Steel Canada in recent months. Moreover, Cliffs also revised the original sales guidance for its U.S. Iron Ore division upwards by 3% in Q2, reflecting a more positive outlook. Furthermore, the success of the company’s cost reduction initiatives has propped up the margins of both the U.S. and Asia Pacific iron ore operations, as reflected in the company’s Q2 results. In order to incorporate the improved prospects of the company’s U.S. Iron Ore operations (which account for around three-fourths of Cliffs’ total revenue), we have modified our estimates for the division’s realized prices and margins.  We have also suitably modified our margin forecasts for the Asia Pacific Iron Ore operations in order to reflect the latest data. Check out our new margin forecasts for Cliffs’ iron ore operations:

As a result of the modifications to our forecasts, our new price estimate for Cliffs reflects the positive changes in its business environment.

Have more questions about Cliffs Natural Resources? See the links below.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Cliffs Natural Resources

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Notes:

  1. US issues final antidumping duties for hot-rolled coil steel from seven nations, Platts [↩]
  2. U.S. levies hefty duties on Chinese corrosion-resistant steel, Reuters [↩]
  3. ArcelorMittal’s 2015 20-F, SEC [↩]
  4. Cliffs Natural Resources’ 2015 10-K, SEC [↩]