Cliffs Outlook is Solid Despite Wobbly Market

Cliffs Natural Resources (NYSE:CLF) may face a decrease in demand for iron ore and metallurgical coal in the upcoming quarter. Both iron ore and metallurgical coal are used primarily in steel production. Worldwide steel demand is expected to decrease as indicated by readjusted forecasts put out recently by Alpha Natural Resources (NYSE:ANR). Last week, major mining stocks decreased due to uncertainty in the market as steel production is strongly correlated with economic growth and have recovered slightly this week.

See our full estimates for Cliffs Natural Resources

Miners Driven by Macro Sentiment for Now

Recent concerns about the US economy and the European debt crisis led analysts to believe that demand for steel and related raw materials in developed economies will slow in the coming months. We expect the demand for steel in developing economies to drop less than for developed markets and could see a recovery as emerging markets such as China restock. From April to August of this year, China produced 47 percent of steel worldwide.

Additionally the supply of higher quality iron ore is decreasing while the demand for higher quality iron ore from steel makers is increasing. Higher quality iron ore reduces the amount of metallurgical coal required, reducing the carbon foot print in the process.

Those companies able to supply higher-quality iron ore are able to earn premiums of 14%.

Though 58.4% of Cliffs Natural Resources’ stock price is in North American Iron Ore, it is well diversified geographically with Asia Pacific Iron Ore comprising nearly 20% and Asia Pacific Coal comprising just under 5% of the stock price.

Cliffs Natural Resources is a supplier of higher quality iron ore. Currently the market price for Cliffs Natural Resources has fallen in recent days to $61; however the Trefis price is still at $103 indicating that the stock may still be undervalued in the market.

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