Cliffs Natural Resources: Chances of Turnaround are Very Slim

The last few years have not been good for iron ore miners as the prices have crashed considerably. Shares of all iron ore miners have reflected the fall in iron ore prices and have moved downwards. While some miners are surviving the commodity crash by cutting-costs, the weak prices have made it impossible for the companies to turn their businesses around. Cliffs Natural Resources (CLF), in particular, has been cutting-costs drastically and recently sold its coal business. While cutting-costs can help the Cliffs Natural Resources in the short-term, I believe the long-term future of the company hinges on iron ore price.

The primary reason behind Cliffs Natural Resources selling its left over coal business was the plummeting coal prices, which moved from $330 per ton in Q1FY11 to $90 per ton in Q4FY15.
Coal producers worldwide had capitalised in boosting production capacity to take benefit of mounting prices in 2011, betting on unrelenting Chinese demand for coal.

The world’s prevalent consumer of coal, China, is steadily shifting away from thermal coal as a fuel for electricity generation, keeping in mind its crackdown on carbon dioxide emissions, which started before the landmark Paris climate agreement. Moreover, the Government of China strategies to put restrictions on coal imports, so as to safeguard domestic coal protection. The import limitations and weak domestic demand lead to 38 percent fall in Chinese imports of thermal coal on a yearly basis in the starting eight months of previous year. Crammed coal market have occasioned in falling coal prices, which pushed Alpha Natural Resources, one of the major coal manufacturer in the U.S., into bankruptcy.

However, with the existing economic slowdown in China, the need for steel has also declined which directly affects the demand for metallurgical coal. Although coal producers globally have decreased capital expenditure and also lazed substantial amount of high-price production capacity, with the demand for coal fading, it could be long time before coal prices improve expressively, provoking the Cliffs to walk out of the coal business.

While Cliffs natural Resources’ decision of selling its coal business has proven to be the right one, investors should expect the company to turnaround any time soon due to depressed iron ore prices. Cliffs Natural Resources relies heavily on iron ore market and since the prices are expected to stay low, investors should stay on the sidelines.

Conclusion

Cliffs Natural Resources has been cutting costs extensively, however the company’s fortunes entirely depend on iron ore prices. Given the current market is plagued with oversupply and the fact that the demand is falling, weak iron ore prices are here to stay. Hence, I think Cliffs Natural Resources will need to more than cost cutting to turn profitable.
Published on Jan 28, 2016
By Akshansh Gandhi

Copyrighted 2016. Content published with author's permission.

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