Cliffs Natural Resources 4Q15 Earnings Call Notes

posted in: Notes | 0

Lourenco Goncalves

Iron Ore and Steel prices have changed a lot since 2014

“Let’s just start reviewing what changed since August 2014 when I joined Cliffs as Chairman and CEO. Iron ore prices changed a lot. The IODEX pricing for sinter feed fines sold in China went from around $100 per ton when I joined Cliffs to a recent low of $38 per ton. The steel prices changed as well. In the United States, they are above $600 per ton average price for hot-rolled steel in place since 2010; hit a 10-year low of $360 per ton in 2015. The steel production and the massive consumption in China changed too, despite the mistaking assumption by the Australian and Brazilian iron ore majors, insisting on increasing their supply to a never growing demand of their imaginary China.”

Major iron ore producers are now changing their rhetoric

“Last but not least, the elegant statements of the major iron ore producers are gone. Once is staking that the seaborne price in the $30 range was actually a good thing because it would make for the complete elimination of all other mining companies in the entire world. These major players are now realizing that they will bear the consequences of their own bad behavior. At this point in time, we can no longer hear their excitement about becoming low cost per ton producers by means of investing billions of dollars to increase their tons to unnecessary levels. In fact these companies are now realizing that the returns on investments that they promise to their respective boards have not been achieved and will not materialize.”

I laid out our strategy with the assumption that China’s steel demand is shrinking not growing

“16 months ago I laid out our strategy for Cliffs predicated on one fundamental fact, China’s steel demand is actually shrinking not growing. ”

It’s been reported that iron ore is building at Chinese ports again

“Demand for steel in China which account for about half of global steel production is shrinking, as the growth of their economy is lost, prompting the Chinese steel mills to a scale back production. It has been reported that inventory levels of iron ore at the Chinese ports continue to build over the past couple months heading back to above 100 million tons.”

The Chinese are shutting down steel plants

“Earlier this month, China’s biggest steel producing province announced that that the steel output will be cut this year to ease pollution and help curb oversupply. Three days ago, the Chinese Premier, Li Keqiang, released target numbers for steel production cuts to the order of 100 million tons to 150 million tons. The pressure on the pollution issue in China continues to mount.”

The Chinese can only solve their pollution problem with changes to their steel production process

“I have said this before, and I will state it again, China will resolve its pollution problem and it cannot do so without a major impact on its steel production, and a significant reduction of the consumption of sinter feed fines. One of the root causes of pollution in China is environmentally unfriendly characteristics of the production of sinter from iron ore clients. Differently from the United States and Europe, the vast majority of the blast furnaces in China use sinter as feedstock and not pellets. Making matters worse, a good number of Chinese sintering plants utilize lower grade iron ore sinter feed fines purchased from the iron ore majors, as well as from their own domestic mines.”

Pleased with the duties coming in from Washington on foreign steel

“So far I have been generally pleased with the preliminary duties coming from Washington on the steel trade case, especially the extremely punitive percentages placed on China. That has already started to positively affect the order books of our clients.”

In the US steel market there’s a clear difference between the end markets

“in the domestic steel market we have a clear differentiation between the steel mills that are focused on automotive and the high end of the market, more towards the cold-rolled and galvanize the steel and the ones that are more leveraged to help in. Fortunately we serve the ones that are more leveraged to the markets that are performing well like I provide the best example is the automotive market. So I will leave it at that but that’s the way we’re seeing our market developing in 2016.”

The impact of the trade case will be real

“the impact of the trade case will be real and it has already been started to be realized by the order books of the clients, our clients at least, and we expect that only to improve.”

This is the United States of America, we’re not going anywhere

“I would just one additional comment it’s more like a when we bring back production, not if, we will bring back production. This is United States of America, we’re not going anywhere. We’re going to continue to have a resilient economy, domestic steel production, domestic steel consumption, and we’re going to continue to sell pellets.”

Have a nice day Evan Kurtz

“But now that you’re talking here I have a question for you Evan Kurtz, why you’re still calling Cliffs high cost reducer, if you’re saying that we have been cutting cost so much… Yes, cost is my guidance; cost is numbers that we publish every quarter. We did it in Q3 2014, Q4 2014, Q1 2015, Q2 2015, Q3 2015, Q4 2015; you are still calling me high cost producer. So it’s hard to confuse people when they don’t want to be confused. Have a nice day Evan Kurtz.”

The mini mills of today are not the mini mills of the early 90s

“the mini-mills of today are not the mini-mills of the early 90s. The mini-mills of the early 90s were really low cost scrap, easily available driven big reservoir, nobody tapping to produce flat roll. That was when Crawford sued can [ph] corporation in 1989 and then Hickman, then the Steel Dynamics plants, and so on and so forth, you and I saw that happening real time. Fast forward we are in 2016 we have a much more material market a bigger huge presence, majority presence of mini-mills in the marketplace they have done a phenomenal job in improving the quality of their steel and their ability to produce high end materials and to be competitive against the Esperance producers, including some markets that were not the markets that were designed for as high as automotive.”