Cleveland-Cliffs Inc Q3 2017 Earnings Review: Sustained Performance of US Operations Drive Earnings

by Trefis Team
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Cleveland-Cliffs Inc.
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Cleveland Cliffs Inc. (NYSE:CLF) reported its Q3 2017 earnings results and conducted a conference call with analysts on Oct 20, 2017. [1] The company reported better than expected EPS (Non-GAAP) of $0.36 majorly driven by the sustained healthy performance of its US Operations while its Asia Pacific (APAC) operations strive for survival due to the implications of the environmental curtailments in the Chinese economy.

The company has, however, lowered its 2017 sales estimate by 3% to 18.5 million tons due to significant reduction in pallet nomination by a long term contract customer as a result of the increase in domestic import of steel in the US. Iron ore is used as a raw material for steel production and an increase in domestic import of steel impacts the domestic steel industry and its subsequent demand for iron ore. The impact of this reduction is most likely to be slightly offset by an increase in the company’s exports to the seaborne iron ore market in Q4 2017. However, with the falling iron ore prices in the seaborne market, it would be difficult for the company to be dependent on this revenue.

The same reasoning  as stated above coupled with higher freight charges has led to a fall in average realized price per ton of the company’s US iron ore pallets by 6% in comparison to Q2 2017. This demand is most likely to recover by Q1 2018 owing to China’s long term ambition to limit its steel production in order to protect its environment and as global steel demand stays intact. This would result in significant reduction of cheap steel imports into the US and in turn, would boost the US domestic demand for iron ore.

Volume shipment from the company’s APAC operations went down by 20% as Chinese consumers have increased their demand for refined iron ore with Fe content greater than 62% due to stricter regulatory requirements in the country to control pollution. Refined iron ore with greater Fe content emits less coke for each ton of steel produced.  [2] Cliffs operations in Australia has access to iron ore mines with Fe content of 58%. Thus, in an already struggling business environment, these regulatory requirements have made it increasingly difficult for Cliffs to maintain its revenues. Cliffs’ management plans to continue its APAC operations as long as their operations are breaking even. [1]

We are still awaiting to see the outcome of the Section 232 probe initiated by the Trump administration on the impact of steel imports on US Security. The results of the investigation are due in January and would have a significant influence on the US steel and iron ore industry. [3]  With Cliffs becoming a pure play US producer, we wait to see how these developments would shape out for the company’s future prospects.

Have more questions about Cleveland Cliffs? See the links below.

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. Cleveland-Cliffs’ (CLF) CEO Lourenco Goncalves on Q3 2017 Results – Earnings Call Transcript, Seeking Alpha [] []
  2. Iron ore prices hit four-month high, Financial Times []
  3. Commerce 232 resolution coming ‘soon’, American Metal Market []
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