Why We’ve Lowered Our Price Estimate For Cliffs Natural Resources To $6

Iron ore prices have fallen sharply in recent weeks from the levels seen in the early months of 2017, as illustrated by the chart shown below.

Iron Ore Spot Prices, Source: Y Charts

Prices of iron ore rose sharply in the last quarter of 2016 and the first quarter of 2017, driven by expectations of higher demand for the commodity from China, the world’s largest consumer of iron ore, and the United States. The Chinese central government instituted a fiscal stimulus targeting the infrastructure sector last year, which drove expectations of higher demand for steel from China and consequently, iron ore – which is a raw material used in steel production. ^[1] In addition, President Trump’s planned overhaul of U.S. transportation infrastructure drove expectations of higher demand for iron ore from the U.S. However, the demand for iron ore has not grown at the pace envisioned. Chinese demand for iron ore has not kept pace with the growth in imports, as indicated by the record levels of inventories at Chinese ports. ^[2] Moreover, the implementation of President Trump’s infrastructure plan is not a foregone conclusion, as securing funding for the plan is likely to involve intense political negotiations. The lower than expected pace of demand growth has led to a moderation in iron ore prices.

Given the subdued iron ore pricing environment, we have revised our pricing forecast for the North American Iron Ore division downwards by 3% by the end of our forecast period, as compared to our previous forecast.

We have also adjusted downwards our pricing forecast for the Asia Pacific division by 1% by 2019, when we expect the division to cease operations. Corresponding to the decline in our pricing forecast, we have lowered our margin forecast for the North American Iron Ore division by 100 basis points. We have maintained our capital expenditure forecasts at the same absolute levels, while the forecast driver (capex as % of EBITDA) has changed due to the change in EBITDA resulting from changes to our pricing and margin forecasts. These changes taken together have translated into our new $6.27 price estimate for Cliffs Natural Resources.

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

• Price Taker Versus Price Maker: The Perils Of Being An Iron Ore Producer
• Iron Ore & Crude Oil: The Similarities & Differences In The Market Dynamics Of These Commodities

Notes:

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Notes:

1. China plans Rmb4.7tn in infrastructure funding, Financial Times [↩]
2. Iron ore sinks as China glut unnerves traders, Financial Times [↩]