How Sensitive Are Cliffs’ Revenues To Benchmark Iron Ore Prices?

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Cliffs Natural Resources’ U.S. Iron Ore and Asia Pacific Iron Ore operations have different sensitivities to changes in benchmark iron ore prices, as far as realized prices are concerned. Pricing contracts for the U.S. Iron Ore operations consist of a base price and annual price adjustment factors. Typically, these price adjustments depend upon changes in certain price indices such as those for industrial commodities, energy, cold rolled steel, and the Platts’ IODEX, the benchmark price index for the seaborne iron ore trade. [1] Pricing contracts for the Asia Pacific Iron Ore operations are more closely linked to spot prices, and therefore the Platts IODEX, as compared to those for the U.S. operations. Based on company guidance, we have illustrated this difference in sensitivities for realized product revenues for Cliffs’ two iron ore divisions. For full year benchmark iron ore price estimates in the $50-60 per ton range, a $5 per ton increase in the IODEX boosts U.S. Iron Ore revenue by 1-2%, whereas Asia Pacific Iron Ore revenue increases by 10-12%. Overall revenue for Cliffs increases 3-4% for every $5 change in the IODEX, as illustrated below.

Revenue Sensitivity To Changes In IODEX

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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. Cliffs Natural Resources’ Q2 2016 10-Q, SEC []