A Closer Look At Cleveland-Cliffs $700 Million HBI Plant

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Cleveland-Cliffs (NYSE:CLF), which is a dominant iron ore producer in the U.S., has initiated the development of its first hot-briquetted iron (HBI) plant in the U.S. to cater to the rising demand of its Electric Arc Furnace (EAF) customers in the Great Lakes region. The plant will be strategically located at Toledo, Ohio and have an annual capacity of 1.6 million metric tons. [1] 

HBI is the need of the hour, given the increasing concerns over environmental sustainability. EAF production facilities use electric energy rather than coke for steel production, where HBI is used as its primary raw material. As per the latest data released by the World Steel Association (WSA), 66% of the total steel produced in North America in 2016 was from EAF facilities rather than from the traditional Oxygen Blast Furnace (OBF) technology. [2] However, there is limited availability of HBI across the globe due to which, EAF facilities use pig iron or steel scrap as an alternate for steel production. Pig iron and HBI are majorly imported from Brazil, Russia, Ukraine, and Venezuela to meet the EAF demand requirement of North America. Thus, a huge market for HBI prevails in the North American region.

(Source: World Steel Association)

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As per Cliffs estimates, a 3 million metric tons HBI market is prevalent in the Great Lakes region itself, which could replace the import market for EAF steel producers and enable them to lower their input cost. Cliffs remains a dominant iron ore producer in the U.S. and thus its expansion into HBI facilities makes sense, given its strong balance sheet position. The company has eliminated all its near term maturity debt, with the next debt of $211 million due in 2020. [3] This provides the company greater financial flexibility to venture into the HBI market.

Cliffs is currently looking for potential investors to invest into its HBI plant, however, given the scenario that a suitable investor is not found, Cliffs has projected the below capex schedule over the course of the next two years. You can view our base case for Cleveland-Cliffs here and create different scenarios using our interactive platform.

Thus, the capital expenditure for Cliffs over the next 2 years is going to be significantly higher. However, given the potential benefit that the company would be realizing post the commencement of its HBI operations, the company’s revenue could grow strongly as it would be able to meet the North American demand requirement for HBI.

We have $6.23 price estimate for Cliffs which is 3% below the market.

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. Cliffs Natural Resources Inc. Announces its First HBI Production Plant in the Great Lakes Region, Cleveland Cliffs News Release []
  2. WORLD STEEL IN FIGURES 2017, World Steel Association []
  3. Cleveland Cliffs Q3 2017 10Q, Cliffs Financial Information []