Cliffs Natural Resources’ Q2 2017 Earnings Review: Favorable Business Conditions In The U.S. Drive Earnings Growth

July 28th, 2017 by Trefis Team
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Cliffs reported a substantial improvement in its second quarter earnings result, driven by the superior performance of its U.S. Iron Ore operations.

Cliffs’ U.S. operations benefited from the favorable prevailing business conditions for steelmakers, with higher demand for iron ore, a raw material used in the production of steel, by the company’s customers driving growth in the shipments of the U.S. Iron Ore division. In addition, the U.S. Iron Ore division reported a sharp increase in realized prices, in contrast to the decline reported by the Asia Pacific Iron Ore division.

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Cliffs’ U.S. Iron Ore operations enjoy significant advantages over its Asia Pacific operations. The U.S. operations sell iron ore pellets, a value-added product directly used in blast furnaces, while the Asia Pacific operations are involved in the production and sale of iron ore fines, which require further processing. The U.S. operations are characterized by pricing contracts that are more closely linked to demand-supply dynamics in the U.S. as opposed to the Asia Pacific operations, which are subject to pricing contracts closely linked to the demand-supply dynamics in the international seaborne market for iron ore. In addition, the U.S. operations are characterized by longer term pricing contracts as compared to the Asia Pacific operations (pricing for which is largely linked to spot prices), which translates into more stable price realizations for the U.S. operations vis-a-vis the Asia Pacific operations.  In addition, Cliffs’ Asia Pacific operations are subject to direct competition from iron ore majors such as Vale, Rio Tinto, and BHP Billiton, whereas the company is the largest iron ore producer in the U.S. The seaborne iron ore market has been characterized by oversupplied conditions in recent years, which has adversely impacted pricing realizations for the Asia Pacific division.

Given Cliffs’ competitive advantages in the U.S., the company management reiterated its commitment to focus on its U.S. operations going forward. [1] The company’s Asia Pacific operations are expected to cease production in the next 2-3 years in the absence of additional development activities. Given the favorable business conditions in the U.S., enabled by regulatory action taken by trade authorities against unfairly traded steel imports over the course of the past year, Cliffs’ U.S.-centric strategy should translate into favorable results in the coming quarters.

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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’ Q2 2017 Earnings Call Transcript, Seeking Alpha [↩]