Cliffs Natural Resources
) is not so good of late. The leading iron ore miner's shares
drift down roughly 10% last week on concerns surrounding demand
for iron ore and weak pricing. In fact, Cliffs' shares have
melted down roughly 53% so far this year, hurt by a volatile iron
ore pricing environment.
Cliffs and other major iron ore miners such as
) are hamstrung by weak iron ore pricing. Iron ore price is a key
element in driving profitability of these big miners. However,
the steelmaking raw material is in free fall lately, hit by weak
steel demand outlook in China, the world's largest iron ore and
steel consumer, and oversupply in the market.
Excess capacity and weak Chinese demand has been a drag on
commodity prices. The impact is broad based, as like iron ore,
prices for other major commodities such as copper and aluminum
are also slumping as indicated by recent price movements.
The uneven balance between demand and supply is weighing on
iron ore pricing. After reaching its acme for this year in
February, iron ore price recently tanked roughly 30% to a
seven-month low. According to price reporting agency The Steel
Index, benchmark 62-percent seaborne iron ore spot price slid
from the year's high of around $158 a ton to roughly $110 last
Aggressive restocking by Chinese steel mills pushed up the
iron ore price in the first two months this year. China's
annualized crude steel output reached record levels during
first-quarter 2013. However, destocking by Chinese mills coupled
with supply glut and a bearish steel demand outlook led to the
recent fall in price.
Adding to the misery is the recent cut of Chinese economic
growth forecast by the International Monetary Fund (IMF). Last
week, IMF dialed back its 2013 growth outlook for China to 7.75%
from 8% on global economic weakness and insipid export demand.
China's GDP ticked down to 7.7% in first-quarter 2013 from 7.9% a
Concerns are widespread that the world's second-largest
economy may continue to slither as evidenced by the recent data
showing a contraction in manufacturing activity. China's
Purchasing Managers' Index (PMI) slipped to 49.2 in May from 50.4
a month ago, its nadir since October last year.
Weak iron ore pricing wreaked havoc on Cliffs' bottom line in
the first quarter. Its profit sank roughly 74% year over year to
$97.1 million or 66 cents per share in the quarter.
Sales slipped around 6% year over year to $1,140.5 million.
Decline in global iron ore sales volumes led to the fall. U.S.
Iron Ore pellet sales volume decreased to 3.1 million tons in the
quarter from 3.4 million tons a year ago. Lower volumes to a
customer due to bankruptcy and seasonal shipping constraints on
the Great Lakes led to the decline.
Cliffs is witnessing lower pricing for sea borne iron ore
across the U.S., Eastern Canada and Asia Pacific. Moreover, its
North American Coal segment is under pressure due to soft pricing
for coal products.
Cliffs is also contending with higher labor and mining costs,
which makes it more vulnerable to the weak pricing backdrop than
low-cost producers such as Vale, BHP Billiton and Rio Tinto. Cash
costs are expected to be higher in 2013 across Cliffs' U.S. Iron
Ore and Eastern Canadian Iron Ore segments, as reflected in its
guidance. In addition, Costs are expected to rise in Eastern
Canada given the planned maintenance work at the Bloom Lake iron
Overseas demand and economic conditions strongly affect the
prices of iron ore. The current rickety macroeconomic
environment, including the lingering crisis in Europe and the
soft demand scenario in China, may impact Cliffs' operations and
its results in the second quarter and beyond.
Cliffs currently holds a short-term (1 to 3 months) Zacks Rank
#3 (Hold). While both Vale and BHP Billiton retain a Zacks Rank
#3 (Hold), Rio Tinto is a Zacks Rank #4 (Sell) stock.
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