Will Cleveland Cliffs Continue To Sustain Its Current Price Momentum? 

Cleveland Cliffs (NYSE: CLF) has gained considerable strength since the beginning of 2018 due to a number of favorable developments which have made the company’s stock price seemingly attractive. The company’s stock price has gained approximately 17% since the beginning of 2018 and we believe that the company will continue to hold momentum in the near term. In this note, we look at the key factors which are likely to enable the company to sustain its strength.

1. Positive Implication Of The Recently Imposed U.S. Steel Tariffs 

The U.S. government recently imposed a 25% tariff on imported steel due to the positive findings of section 232 probe initiated by the U.S. Commerce Department. The continued pressure from impacted allies around the globe has led the government to reconsider its tariff terms and hence provided temporary exemptions to certain countries until a definitive agreement was met. However, the latest news suggests that the U.S. is going ahead with the imposition of tariffs on all of its major allies, including the European Union, Mexico, and Canada. This is expected to provide a significant boost to the U.S. steel industry as its demand for imports would decline.

Since iron ore is a primary raw material used in steel production, rising steel output to substitute for the imported demand is expected to increase the country’s demand for iron ore and consequently aid its price level. Cliffs being a dominant U.S. iron ore producer is expected to benefit from such an economic condition. Cliffs’ U.S. Iron Ore mines currently have a total rated annual production capacity of 27.4 million tons of iron ore pellets, which represents about 42% of total U.S. iron ore pellet production capacity (considering only Cliffs equity ownership stake). The company in its latest earnings release raised its 2018 North America sales and revenue per ton outlook by 2.5% and 5% (assuming mid-points), respectively as a result of the aforementioned favorable market developments.

2. The Planned Closure Of Cliffs’ Asia Pacific (APAC) Operations

Cliffs aims at closing its less profitable APAC operations by June 30th, 2018. This move comes in response to the unfavorable business prospect prevalent for the company’s APAC division in the seaborne iron ore market with the growing price difference between premium grade and low-grade iron ore. Cliffs had reported a negative adj-EBITDA of $3 million in Q4 2017, which led the company to prepone its decision to discontinue its APAC operations ahead of its earlier 2019 timeline. This move has been viewed as a positive for the company, as Cliffs’ weaker APAC operations would stop weighing on its consolidated performance.

Thus, these positive developments are expected to continue and support Cliffs’ higher price level throughout the year with a possibility of gaining additional strength in case the outcome of the imposed tariffs becomes more favorable than anticipated. Our expectations from the company’s 2018 results are highlighted in our interactive dashboard. You can make changes to our assumptions to arrive at your own fair price estimate for the company.

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