Cliffs Natural Resources: the Rally Will Die Soon

Cliffs Natural Resources (CLF) has rallied strongly since touching the year to date lows and is up over 300% in the reference period. Since Cliffs Natural Resources is a very volatile stock, investors may be wondering if the recent rally will last or not. Mentioned below are a few reasons why I think the recent rally will be short lived.

Will recent rally end soon?

Cliffs Natural Resources’ rally has even surprised the most bullish of investors. Cliffs Natural Resources had vastly underperformed the market in 2015, but 2016 has been the complete opposite for the company.
The primary main reason behind Cliffs Natural Resources’ success is the sudden surge in the iron ore prices.

China is going through weak economic situations and is trying hard to improve it. Recently, policymakers in China have indicated their alacrity to provide support to the country’s decelerating economy. The government of China will be inspiring the economy via financial easing so that it can accomplish growth.

As a matter of fact, iron ore prices have surged around 65 percent compared to lows in December 2015, and this played a significant role in taking the company to greater heights, and if this momentum carries on, it can further improve the Cliffs Natural Resources’ condition.

However, it is likely that severe descending pressure can come back to the iron ore market mainly due to the softness in China. At the present stage, it cannot be certainly said whether there is growth or shrinkage in China. On the other hand, strong strength of the dollar may breakdown the commodity rally and that will definitely have adverse effects on iron ore prices.

Apart from these, Cliffs Natural Resources has made several huge mistakes in the past, as it increased dividends in 2012, which it removed just a year later. Instead of elevating capital and improving an already feeble balance sheet, the company paid its attention to the temporary concerns of stockholders at the overhead of bond holders and employees.

And now Cliffs Natural Resources is making another huge mistake by moving away from very auspicious seaborne market at the precise wrong time, when the market is likely bottoming. Moreover, the fundamentals of the iron ore market are contrary to the company, even though Cliffs Natural Resources’ liquidity profile also is not in a good condition. With China strategizing to cut excess steel production and iron ore supply on the growth, it looks like benefits for the company because of price increase will be temporary.
Published on Jun 7, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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