What Factor Has Further Impacted Cliffs’ Declining APAC Operations

Cleveland-Cliffs Inc (NYSE:CLF) change in management since 2014 has diverted the focus of the company towards its more profitable U.S. operations. Cliff’s’ Asia Pacific (APAC) operation has displayed a trend of declining revenue since 2012 as it faces the supply dynamics of the larger sea-borne iron ore market. Additionally, the recent production curtailments implemented by the Chinese government has further deteriorated the company’s shipment volume for its APAC operations.

Cliffs’ APAC operations face heavy competition from iron ore giants such as Rio Tinto, Vale, and BHP which have access to low-cost and high grade iron ore deposits and operate at large economies of scale. The supply side of the iron ore market in the APAC region is dominated by the production decisions of these mining giants, in contrast to Cliffs which is a relatively small producer in the APAC region. Large production increases by these companies adversely affected international iron ore prices between 2012 and 2015, with Cliffs’ APAC operations reporting losses over this period as a result of subdued pricing.

Recently, the Chinese government has initiated a series of industrial output cuts in order to control its dreadful level of pollution. As a consequence of these production curtailments, Chinese steel producers have increased their demand for iron ore with Fe content 60% or higher as steel production with high grade iron ore is more efficient and less pollutant. This has negatively affected the shipment volume of Cliff’s, who has access to iron ore mines with Fe content lower than 58%. Moreover, Cliffs competitors in the APAC region, having access to high grade iron ore, has shifted Cliff’s existent demand to these iron ore giants.

The company in its latest quarter results revised its estimate for shipment volume from its APAC division for 2017 to 10.5 million tons. ^[1] Based on the previous quarter results, the company should be able to sell approximately 2.75 million tons of iron ore in its 4th quarter to meet this estimate. However, given the unfavorable demand condition prevalent for the company’s APAC division, we expect the shipment volume to be 27% lower than the company’s current estimate. Hence, revenue is also expected to be 18%  lower Q-o-Q, given the significant fall in shipment volume. You can view our base case for Cleveland-Cliffs here and create different scenarios using our interactive platform.

This trend of falling shipments is most likely to continue until Q1 2018 until China’s winter months are over. Additionally, as per the latest outlook released by the Word Steel Association (WSA), China’s demand for steel is expected to remain stagnant in 2018, which would in turn, put pressure on China’s demand for iron ore. Thus, we expect the shipment volume for the company’s APAC operations to remain low throughout 2018.

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

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

• A Closer Look At Cleveland-Cliffs $700 Million HBI Plant
• Cleveland-Cliffs Inc Q3 2017 Earnings Review: Sustained Performance of US Operations Drive Earnings

Notes:

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)

Get Trefis Technology

1. Cleveland-Cliffs Inc. Reports Third-Quarter 2017 Results, Cleveland Cliffs News Release [↩]