Cliffs Natural 4Q16 Earnings Call Notes

C. Lourenco Goncalves

We finally have sanity back in the seaborne iron ore market

“The most important point I would like to make today, we finally have sanity back in the seaborne iron ore market. I truly commend Rio Tinto and Vale for eliminating their reckless behavior that had infected the market for a number of years and destroyed several billions of dollars in equity value. Once the market analysts saw iron ore prices at $40, they believed that this was the new normal. Not the case. For a controlled commodity like iron ore, in which only three big players have the ability to move market price up or down, this should never be the case. Iron ore at $40 is not, nor will it ever be normal.

Encountered new dynamics in Chinese market

“We have also encountered some new dynamics in the Chinese market, between the improved profitability of the Chinese steel mills, the elevated prices of coking coal, and most importantly the increasingly serious crackdown on pollution sponsored by the Chinese Government, demand for higher-grade iron ore has risen significantly. As a consequence, low-grade 56% iron content ore is having a tougher time to find a home with good clients. This is evident as we observe the wider spread between the 62% Fe reference price in the price of low iron content ore.”

Iron Ore piling up at Chinese ports is low quality

“Previously, when the Chinese mills were not being forced to pay attention to pollution and coking coal prices were extremely low, iron content didn’t matter. Now, it does matter. And that’s why we continue to see higher ore inventories at the ports. They stopped accumulate in port side; it’s not the good ore. It is pollution heavy, low-iron content material. In some, these port stocks could stay high or even go further up and that will continue to have a very limited influence on the 62% iron ore price index.”

Trump rhetoric adds to the positive environment

“In the U.S. market, on top of the reduction of imports associated with the positive outcome of the trade cases, a major event with a potential to positively impact the market in 2017 and beyond is the result of the presidential election. All other matters aside, President Trump, delivers a message that is positive for Cliffs and for our customers, the domestic steel mills. The stated commitment of President Trump to create real conditions for the resurgence of manufacturing in America can only help and enhance the environment we are operating in. While we cannot give the new president all or even most of the credit for this improved outlook as it’s actually a result of the 2016 trade cases, President Trump’s directives on buy American and build in America have the potential to multiply the benefits of the current positive environment for manufacturing in the United States.”

Service centers have also been beneficiaries of dumped steel

“Talking about bad actors, foreign steel mills and trading companies benefiting from subsidies to produce steel and then dump it into the United States are not alone as perpetrators of this illegal activity. A number of steel buyers within the boundaries of United States including, but not limited to, distributors and service centers have built their respective business on being the final recipients of illegally traded steel. With that, they benefit from an unfair advantage against other steel buyers in service centers that play by the rules.”

If Trump delivers on a portion of his promises it will be great for us

“In sum, if President Trump delivers on, not all, but just a portion of what he promises he’s going to deliver while in office regarding domestic manufacturing, and with the 2016 anti-dumping countervailing and circumvention trade cases in place and being strict to enforce it, Cliffs will benefit significantly in 2017 and beyond.”

China is transitioning

“Iron ore demand, okay. Well, China continues to perform. China is moving toward a more responsible way of performing. The pollution combat in China is real now and we are going to see more and more and more and more moves toward China becoming a lot more like Japan, a lot more like South Korea, because don’t forget, Japan and South Korea in the mid- to late-1990s transitioned from what China is now to what they are now. So, the dynamics will be exactly the same.”

China is going to keep buying Ore

“We’re not going to see China not producing, not buying iron ore, not deploying fixed assets. It’s the opposite. They will continue to grow fixed asset investments. They’ll continue to buy iron ore, but they will be more selective. So, the times of the so-called low-cost iron ore – and nobody talks about iron content, nobody talks about other properties, nobody talks about residuals – it’s gone. China is no longer in elementary school. China is at least a senior in high school. Wait until China gets to college, it will be impossible for this guy that produce black stuff, and they called it the black dirty iron ore, to continue to be called suppliers of iron ore. It’s a different ballgame that’s moving in China. But demand is phenomenal. It’s great. We’ll continue to support production of good stuff. And the bad stuff, for now, we accumulate at the port. Very soon, we will be accumulating in Australia. ”

JP Morgan Analyst

sucking up to management

“I just wanted to say a couple of things. First of all, congratulations, but most of all, thank you for making my job so much easier in covering Cliffs. You’ve been so honest and you’ve given everyone the details of your analysis of the iron ore marketplace over the last year-and-a-half. You’ve been spot-on and anyone who listen to you would be spot-on too with their call on Cliffs. So again, congratulations and thank you.”