Cliffs Maintains Focus On U.S.-Centric Strategy With Plans For New Ohio Plant

June 23rd, 2017 by Trefis Team
-3.98%
Downside
20.83
Market
20.00
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Cliffs Natural Resources has announced plans to set up a hot briquetted iron (HBI) production plant in Ohio, which is in line with the company’s strategy to focus on its profitable U.S. operations. [1] Construction on the 1.6 million ton production capacity facility will commence in 2018 and is expected to be completed by mid-2020. [1] The plant, which will cater to the Electric Arc Furnace (EAF) steel market, will boost Cliffs’ existing U.S. production capacity of 27.4 million tons. [2]

Focus on the U.S. Market

Cliffs Natural Resources decided to focus on its U.S. operations post a top management shake-up in 2014. Participation in the seaborne iron ore market catering to the Asia Pacific region brought Cliffs in direct competition with the iron ore mining giants such as Rio Tinto, BHP Billiton, and Vale. These companies, which enjoy access to low-cost iron ore deposits, have sharply increased their iron ore production over the past few years, betting on growth in iron ore demand from China. However, Chinese demand growth did not keep pace with the increase in iron ore supply, resulting in a sharp decline in iron ore prices over the course of 2014 and 2015. Pricing mechanisms for Cliffs’ Asia Pacific operations are closely linked to spot prices in the seaborne iron ore market, which negatively impacted the profitability of the company’s Asia Pacific operations. In order to decouple itself from the seaborne iron ore market, Cliffs decided to not invest further in its Asia Pacific operations. As a result, the Asia Pacific operations are expected to cease production over the next couple of years, as illustrated by the chart shown below.

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Pricing mechanisms for Cliffs’ U.S. operations are more closely linked to demand-supply dynamics in the U.S. rather than those in the international market, though some pricing adjustments are based on international iron ore prices. Thus, focusing on its U.S. operations allows the company to partially decouple itself from the demand-supply dynamics of the seaborne iron ore trade. The plans for the new plant in Ohio are a reaffirmation of Cliffs’ U.S.-centric strategy.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such 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 Inc. Announces its First HBI Production Plant in the Great Lakes Region, Cliffs Natural Resources [↩] [↩]
  2. Cliffs Natural Resources 2016 10-K, SEC [↩]