How Big Can Cleveland-Cliffs Be In The Iron Ore And Pellet Market By 2025?

The iron ore market was one of the most volatile markets of 2019, with iron ore prices rising sharply in the first half of the year, on fear of lower supply following the announcement of production cuts by Vale. This was followed by a drop in prices toward the end of the year, due to higher than expected supply and lower demand, especially from China, affecting full year top line growth of all major players. However, Trefis analysis shows that Cleveland-Cliffs (NYSE:CLF), which is one of the smallest players in the market, is set to see the sharpest growth in its market share, which is expected to rise from 2.7% in 2019 to 4.3% in 2025 (marking a growth of close to 60%), primarily eating into Rio Tinto and BHP Billiton’s share. (Note: For this analysis, iron ore and pellet market comprises the top 4 players in the sector)

View our interactive dashboard Is Cleveland-Cliffs Set To Increase Its Market Share In The Iron Ore And Pellet Space? for further details

Takeaway

• The iron ore and pellet market is dominated by four major players with Vale leading the pack with revenues of nearly $29.3 billion in 2019.
• While Rio Tinto and BHP Billiton are behind with iron ore revenues of $24.1 billion and $17.3, respectively, Cleveland-Cliffs (CLF) is the smallest player with a revenue base of $2 billion in 2019.
• However, CLF provides the best quality of output in the industry, with all of its production made up of pellet, which commands better pricing in the market.
• Additionally, CLF’s new hot-briquetted iron (HBI) plant at Toledo is set to become functional at the end of 2020, contributing an additional 1.9 million tons to its output. The output from new plant can also be used in electric arc furnaces (EAF) compared to CLF’s products being used only in blast furnaces currently, which would help CLF gain more customers in the near future, thus leading to higher shipments.

Current Market Size

• The top players in the iron ore and pellet space generated around $72.6 billion in revenues over 2019, posting a y-o-y growth of about 15.5%, and much higher than $46.2 billion in 2015.
• Market size has continuously increased due to higher output and pricing.
• Vale currently leads the iron ore and pellet market with about $29.3 billion in iron ore and pellet revenues over 2019, followed by Rio Tinto, BHP Billiton, and Cleveland-Cliffs, which posted revenues of $24.1 billion, $17.3 billion, and $2.0 billion, respectively. All major iron ore & pellet companies have seen a growth in revenue base from 2015 to 2019.
• However, the market size is expected to remain almost at the current level in 2025, as a sharp drop in pricing and lower demand from China is to lead to significant drop in revenue in 2020, with the recovery expected to be slow.

Below we explore the volume, price, and revenue forecast for major iron ore companies, and how CLF is increasing its market share

Volume Trends

• Though all companies are expected to see higher volume in 2025 compared to 2019, the growth in CLF’s volume sales is likely to be the highest.
• The major dam accident at Vale’s site in Brazil led to a drop in output in 2019, with recovery being slow. Demand for RIO’s and BHP’s lower grade output is to be low from China due to its environmental policy.
• CLF’s superior pellet output is expected to have higher demand. Additionally, its new hot-briquetted iron (HBI) plant, which will become fully operational by the end of 2020, is likely to add 1.9 million tons to its total output.
• Acquisition of AK Steel has helped it secure >25% of its shipments.
• CLF’s foray into electric arc furnaces (EAF), as against only the blast furnace currently, is also expected to lead to higher demand for its product along with additional customer reach.
• CLF’s pellet shipments are expected to rise from 19 million tons in 2019 to 25 million tons in 2025.

Price Trends

• Price realization is expected to decrease in the near term from 2019 due to lower demand from China with many steel firms shedding capacity.
• Additionally, the outbreak and spread of coronavirus is expected to lead to a decline in global demand and economic growth, leading to a subdued price environment for iron ore.
• However, as economic growth picks up, leading to higher demand, prices are expected to go up from 2022 onward.
• Environmental and cost concerns are expected to lead to higher demand for higher grade ores or pellet.
• Thus, CLF’s output is likely to continue to command the highest price for its product, with it rising from $103/ton in 2019 to $125/ton in 2025, marking a growth of 22%, compared to lower prices for its competitors, mainly due to quality of output.

Rise In Revenue and Market Share

• CLF is expected to see the highest growth (among its peers) of 57% in its revenues from 2019 to 2025, followed by 7.5% for Vale.
• Rio Tinto and BHP are expected to see their revenue base shrink by 13.8% and 3.5%, respectively, during this period.
• Thus, CLF’s market share in the iron ore and pellet market is expected to rise continuously from 2020 to reach 4.3%, which marks a growth of almost 60% from 2.7% market share in 2019.
• This compares with – Vale’s Market share growth from 40.3% in 2019 to 43.7% in 2025; Rio Tinto’s market share decline from 33.2% in 2019 to 28.8% in 2025; and BHP Billiton’s market share decline from 23.8% in 2019 to 23.1% in 2025.
• Thus, the main factors that could help CLF eat into the market share of its rivals are the company’s superior product, addition of new plant, production of pellet that can be used in EAFs, securing >25% of demand with acquisition of AK Steel, and pick up in global price levels.

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