The Year 2016 In Review: Cliffs Well Placed To Benefit From Favorable Business Conditions Going Forward

The year 2016 witnessed a sharp revival in the fortunes of Cliffs Natural Resources. The company’s stock price has risen sharply from levels of around $2 in January, as illustrated by the graph shown below.

(Source: Google Finance)

Cliffs’ stock benefited from the stabilization of iron ore prices after three years of continuous decline, complementing the success of the company’s cost reduction efforts. Moreover, the improvement in Cliffs’ fortunes mirrored an improvement in the fortunes of the U.S. steel industry over the course of the year. Regulatory intervention by U.S. authorities against unfairly traded steel imports and the stated policies of the incoming White House administration have boosted the prospects of the domestic steel industry going forward. The improved prospects of the domestic steel industry have translated into an improved business environment for Cliffs Natural Resources going forward.

Iron Ore Prices & Cost Reduction Efforts

Iron Ore Spot Prices (Source: Y Charts)

As illustrated by the foregoing chart, iron ore prices stabilized in 2016 after three straight years of decline. A global oversupply situation fueled by rising production by mining giants such as Vale and Rio Tinto, as well as weakening demand for iron ore from China, translated into a decline in prices of the commodity. A reduction in output by low cost iron ore producers as well as a moderated increase in production by the low cost producers has allowed prices to stabilize. Whereas the upside for iron ore prices remains limited going forward in the face of weak demand from China, the stabilization in prices certainly helped Cliffs report improved quarterly results over the course of the year.

Cliffs’ own cost rationalization efforts helped prop up its results. The operational improvements instituted by the company helped lower its production costs. As a result, Cliffs’ U.S. Iron Ore and Asia Pacific Iron Ore divisions reported declines of 13% and 17%, respectively, in their cash production costs on a year-over-year basis in the first nine months of the year. ^[1]

Improvement In Outlook For Domestic Steel Industry

The domestic steel industry has been negatively impacted by competition from imported steels over the past few years. Domestic steelmakers petitioned U.S. authorities to take action against steel imports from a number of countries, alleging that these imports were priced unfairly low. In response to the petition by domestic steelmakers, U.S. authorities imposed anti-dumping duties on steel imports from a number of countries including major exporters to the U.S. such as South Korea and China. ^[2] The imposition of these duties by U.S. authorities should help create a level playing field for domestic steel producers in the coming quarters, which will also benefit suppliers of iron ore to these companies such as Cliffs Natural Resources. The company raised the sales guidance for its U.S. Iron Ore division by 3% to 18 million tons in June after the signing of a new supply agreement with ArcelorMittal (replacing the earlier agreement between the two companies), perhaps an early indication of firming demand conditions in the U.S. ^[3] In addition to these developments, the outcome of the U.S. presidential elections in November has added to the positive sentiment surrounding the steel industry.

The Road Ahead

President-elect Trump has taken a tough stance against unfairly traded steels and has promised to continue the campaign to ensure a level playing field for domestic steel producers. Moreover, the President-elect has also outlined plans for a $1 trillion overhaul of domestic infrastructure. ^[4] President-elect Trump’s promises have raised the outlook for U.S. steel demand over the next few years, boosting the prospects and stock prices of domestic steel producers. With a more favorable business environment for steel producers expected over the next few years, Cliffs Natural Resources, the largest iron ore supplier to the domestic steel industry, should benefit from the same.

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

• What Is Cliffs Natural Resources’ Fundamental Value Based On 2015 Results?
• What Is Cliffs Natural Resources’ Revenue And EBITDA Breakdown?
• How Has Cliffs Natural Resources’ Revenue Composition Changed Over The Last 5 Years?
• By What Percentage Did Cliffs Natural Resources’ Revenue & EBITDA Decline Over The Last 5 Years?
• By What Percentage Can Cliffs Natural Resources’ Revenue & EBITDA Change Over The Next 3 Years?
• How Will Cliffs Natural Resources’ Revenue Composition Change by 2020?
• How Do Cliffs Natural Resources’ Margins Compare With Those Of Iron Ore Mining Giants Such As Rio Tinto And Vale?
• Why ArcelorMittal Is The Most Important Customer For Cliffs’ U.S. Iron Ore Sales

Notes:

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1. Cliffs Natural Resources’ Q3 2016 10-Q, SEC [↩]
2. U.S. levies hefty duties on Chinese corrosion-resistant steel, Reuters [↩]
3. Cliffs Natural Resources Inc. Announces Earlier Restart of United Taconite and Increases 2016 Sales Guidance, Cliffs Natural Resources News Release [↩]
4. Trump’s $1 Trillion Promise vs. Congress, Wall Street Journal [↩]