Cliffs' Goncalves: Good Guys Win

Cliffs Chairman and CEO Lourenco Goncalves said he wants to “make our balance sheet bulletproof to withstand the cyclic downturns that are so common in this industry.” On the strategy side Cliffs believes DRI-fed EAFs are the future of steelmaking in the U.S. and that the company will continue to produce DR-grade pellets. Regarding integrated steel mills, Goncalves said the U.S. industry will not be building new blast furnaces, but will transition to EAFs which, because of quality requirements for automotive, will not be able to grow on scrap and will require high grade pellets.

China will be moving toward more use of scrap with the introduction of more EAFs. “We anticipate scrap being serious tradable commodity into China for a period of time that should change the net balance of scrap inflows and outflows here in United States,” said Goncalves.

Cliffs is maintaining its full-year expectation of U.S. sales of 18 million long tons and production of 16.5 million long tons.

Regarding acquisition of the Minnesota mineral rights, Goncalves, told analysts on the earnings call that the rights are bogged in Chapter 11 proceedings but will eventually belong to Cliffs. In his colorful style, Goncalves said that the rights are still tied with the “criminal enterprise called Essar Global” that has two branches: one the Canadian “family” and the other the Minnesota “mob.” As the “good guys,” Cliffs will win, he said.

Trade cases have resolved a great deal of the problem of unfairly traded steel imports, said Goncalves, but illegally traded products are still entering the country through service centers that “hide behind the order of records.” Goods that are circumvented are illegal, he said, and “even if you have an invoice you are still receiving stolen goods.” He expects that some services centers will be “hit hard by the force of the law.” “We are getting evidence and of course we are not going to hit a lot of people, we are going to hit just two or three.”

Inventories are also too low at service centers, said Goncalves, with many below two months. Service centers keeping dangerously low inventories resulted in weak order books at steel mills. Thus, the weakness in steel prices is demand driven rather than supply, he said. “You can’t operate a service center business with inventories that low,” said Goncalves. “Service centers are in the business of carrying inventory, if they don’t want to carry inventory they are in the wrong business.”

Steel prices are transitioning higher said Goncalves because service centers will have to restock. “So we’re going to see a price movement up here in United States and that this price movement up can be pretty significant, pretty aggressive, and then things will slow down a little bit and then they will stabilize.”