Cliffs Natural Resources Makes a Comeback

Disciplined cost control, higher iron ore prices, and a drop in steel imports due to U.S. trade cases have pushed steel prices dramatically higher from fourth quarter. Cliffs expects full-year sales volume of approximately 17.5 million long tons from its U.S. Iron Ore business. The company is also maintaining its 2016 production forecast of 16 million tons of iron ore pellets

As of the beginning of this year, Cliffs entered into an agreement with US Steel Canada to supply iron ore pellets. By second quarter, nearly all of the pellets required by USSC will come from Cliffs, said Goncalves during the company earnings call.

This week a settlement was reached with Essar Steel Algoma resolving a contract dispute and reinstated the former iron ore contract between Cliffs and Algoma. Cliffs will resume supplying a portion Algoma’s needs in 2016 and then continue under the terms of the existing agreement in 2017 and beyond.

Cliffs has recently renewed its contract with ArcelorMIttal, supplying 9 million tons of pellets annually. The company is working with engineers at ArcelorMittal on the design of the Superflux Mustang pellet that will replace the Viceroy pellet produced at the soon to be idled Empire mine.

The Northshore mine will be restarted in May and United Taconite will likely restart in fourth quarter to supply ArcelorMittal.

Goncalves was asked during the call to comment on the possibility of US Steel selling pellets in the Great Lakes region. The shutdown of the Fairfield, Granite City led to the US Steel’s long pellet capacity, said Goncalves. “But the problem is that in order to participate in the Great Lakes market for pellets, you need to have clients, and even the captive client U.S. Steel Canada, formerly known as Stelco, is now a Cliffs client.” He continued by saying that there “is no development of any customized pellets going on between U.S. Steel and ArcelorMittal, unless next week ArcelorMittal in their conference call tells you exactly the opposite.”

Goncalves noted that US Steel CEO Mario Longhi is a strong proponent of antidumping and countervailing duties and restrictions on imports and is working to bring his own steel capacity back to operation.

“If he brings his steel capacity back to operation, all this conversation about being long pellets will be long gone because he will need his pellets to feed his own facilities. So, I wish U.S. Steel to fix their own thing, to go back into being a steel mill.”

Goncalves added that should the steel industry playing field not be reestablished in the U.S., then he is a warrior, and ready to compete.

In comments on China, Goncalves was optimistic that the country will be able to solve its problems.

“The problem in China right now is how China will position themselves to continue to behave as a superpower and not to behave like a rogue country. China is in a very decisive moment. Are they going to be part of the developing world or they are going to continue to be something very big but very bothering for everyone else. And I believe that I know the answer.

“I believe that China will be a superpower, will be a first world country. We saw that happening, several times in Asia. During the 1960s in Japan, they grew production, curbed pollution, improved the quality of life of the Japanese, this is still in place. Then we saw that happen in Korea, during the 1970s, same very thing, South Korea became a first world country, very well behaved, great air quality, great quality of life for the Korean citizens. Then we saw in a very kind of pilot scale happening in Taiwan during the late 1980s early 1990s, Taiwan was a very, very, very polluted country when I started selling steel in Kaohsiung, Taiwan. Three years, four years later, we could see the difference. 10 years later, it was night and day.

“The moves are starting to happen in China. China will control pollution, China will curb overproduction. China will reduce the production of sinter feed. China we – will move more toward EAF. China will use a lot more scrap. The air in China will be a lot better than it is right now. But in the meantime, if they don’t do that, they can’t be accepted as a market economy, the WTO will not accept that.”

Goncalves confirmed he is interested in the Nashwauk mine site for a possible HBI facility, but if that does not materialize Cliffs will look towards establishing a facility at Northshore instead. He added, that the good thing about the Nashwauk site is “of course if I take over that site, it’s abundantly clear that I kick Essar Minnesota out.”

Goncalves gave the analysts on the call a bit of a hard time, asking each what their forecast for iron ore was. His own forecast was that prices for iron ore will not go below $45. Morgan Stanley is predicting the low $30s in the second half of the year followed by a $40ish range for the next two years before rising again. JP Morgan is predicting below $45, while Cowen and Company expects a range between $45 and $65.

Goncalves added, “This business is not about cash production cost per ton, this business is about cost and value in use. Cost per ton is just a metric.”