As Falls Iron Ore, So Falls Cliffs - Analyst Blog
News for Cliffs Natural Resources ( CLF ) 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 Vale ( VALE ), BHP Billiton ( BHP ) and Rio Tinto ( RIO ) 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 week.
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 quarter ago.
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 ore operation.
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.
BHP BILLITN LTD (BHP): Free Stock Analysis Report
CLIFFS NATURAL (CLF): Free Stock Analysis Report
RIO TINTO-ADR (RIO): Free Stock Analysis Report
VALE SA (VALE): Free Stock Analysis Report
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