Steel Products Prices North America

Cliffs: Sanity Is Back in the Iron Ore Market

February 9, 2017

“Sanity is back in the seabourne iron ore market,” said Cliffs Natural Resources CEO Lourenco Goncalves in comments during the Cliffs earnings call on Thursday. After the departure of three key executives in the Australian ore market, iron ore prices doubled and Rio Tinto, Vale and BHP are exhibiting disciplined behavior which will support strong iron ore prices for 2017, said Goncalves.

The outspoken CEO also noted that there is a “new dynamic in the Chinese market. The government’s crackdown on air pollution has resulted in steel mills demanding higher grade iron ore. Lower quality inventory is accumulating at docks in China as mills seek 62% Fe or higher grade iron ore for production. China will continue to grow and buy iron ore but be more selective, said Goncalves. “China is no longer in elementary school, China is at least a senior in high school.” “Wait till China gets to college,” said Goncalves, producers of black dirty iron ore will no longer be supplying iron ore.

Successful steel trade cases in the U.S. have resulted in a much more level playing field for domestic producers of flat rolled steel products. The new administration has promised stricter trade enforcement and resurgence in American manufacturing that “can only help and enhance” the environment Cliffs operates in, said Goncalves. “All other matters aside, President Trump delivers a message that is positive for Cliffs and our customers, the domestic steel mills,” he said.

The directives to buy and build in America will “multiply the benefits” of the current environment for manufacturing in the United States, said Goncalves. He is pleased with the appointment of Secretary of Commerce Wilbur Ross and U.S. Trade Representative Robert Lighthizer; both “industry veterans” who understand free trade and will help prevent circumvention of duties and “punish bad actors.”

Goncalves reiterated previous comments about downstream businesses that buy dumped steel. Steel buyers at U.S. distributors, service centers, and others that purchase subsidized and dumped steel reap an unfair advantage over those who play by the rules, said Goncalves. “We fully expect that the renewed emphasis on the enforcement of trade cases to be implemented by the Trump administration will soon result in identifying and punishing the recipients of illegally traded steel,” said Goncalves. “From now on, I will devote a lot of time and effort to get these downstream folks treated the way they deserve.”

When asked during the call about the restart of US Steel Keetac, Goncalves said he expects that US Steel will bring Granite City back to operation and provide pellets to the mill from Keetac. Otherwise there is no market for the pellets with Cliffs supplying ArcelorMittal, AK Steel Dearborn and Middletown, and Essar Steel Algoma. “I am watching that,” said Goncalves. “When Granite City comes back these guys who are buying pellets from US Steel right now will have to find a new supplier and guess who that is: Cliffs.”

He added, “And of course, that will come with a price because I am – among other things, I am a guy with a great memory.”

Later in the call Goncalves was asked about the tendency of big ore companies intimidating smaller companies and scaring them away from the market.

The big three companies in Australia are huge, said Goncalves. “They are big elephants. They can’t be afraid of poodles. They can’t be afraid of pussycats.” Even if several new mining companies came together they still would not be a significant challenge to the giant ore companies.

“You’ll never hear, for example, Fortescue nervous about a small mining company, because they understand their size,” said Goncalves. “When you are big, you need to behave like you’re big. The problem is when someone is small and behaves like this someone is big because sometimes this small guy will be stopping in a rail track and a freight train like Cliffs will come and pass over. That’s happening right now in the United States pellet market between Cliffs and U.S. Steel.”

Goncalves was also asked to comment on the restructuring of Essar Steel Algoma and the threatened USW strike.

Cliffs Natural Resources has agreements with Algoma to supply a total of 2.4 million tons of iron ore in 2017. The union is trying to get what is fair, said Goncalves. “But at the end of the day, they know what’s feasible, they know what’s real, they know what’s true and they know what’s a lie.” The best course of action, said Goncalves, is for the mill is to move on, fixing what needs to be fixed and getting a new owner. Cliffs has made it clear to the court that its deal with Algoma will not include any dealings with Essar Global.

The Mustang pellet project is moving along well and Cliffs expects to invest another $48 million toward development in 2017.

Q4 and 2016 Earnings

The fourth quarter 2016 earnings report showed net income of $81 million with consolidated revenues of $754 million, a 58 percent increase from Q4 2015 as a result of increased volume and pricing.

Fourth quarter iron ore sales volume from U.S. operations totaled 6.9 million long tons, up 53 percent year-over-year as result of improve steel market conditions driving increased pellet demand and new customer contracts. Sales revenue was $579.0 million.

For the full year 2016, Cliffs net income was $199 million compared to a net loss of $748 million in the previous year. EBITDA for the year was $374 million compared to $293 million in 2016. Net debt at year end was $1.8 billion, Cliff’s lowest level since early 2011.

The outlook for 2017, based on steel and iron ore prices maintaining the January 2017 average level, is $510 million of net income and $850 million of adjusted EBITDA.