Now Would Be the Ideal Time to Dump Cliffs Natural ResourcesCLF) has staged an impressive turnaround and has rallied strongly over the last few months. Although a relief rally was long overdue, Cliffs Natural Resources may have run up too high. At these levels, I think investors should sell the stock, as the upside is pretty limited.
China decides to decrease steel production
The reason behind Cliffs Natural Resources downfall in 2015 was sluggishness in worldwide macroeconomic activity that resulted in poor demand for steel and other products used for construction and infrastructure development.
Due to this, the value of iron ore as well as metallurgical coal declined.
However, the company has relished a rebound this year mainly due to the surge in iron ore prices. Iron ore has gained an advantage from the recent steel market situation in the U.S. As per Statista, iron ore monthly prices has enhanced around 50 percent.
In the previous quarter, as an outcome of the auspicious conditions in the U.S., Cliffs Natural Resources produced $46 million in EBIDTA from the iron ore segment in the U.S. That figure was twice as much as the EBIDTA produced from the Asia Pacific segment.
No doubt, the recent rally in the iron ore prices has helped Cliffs Natural Resources regain its lost value, but it is likely that this progressive trend will not last long. Most significantly, one should also consider that iron ore prices reached $70 per ton just a few months ago, and currently sit at around $50 per ton. This signifies that the iron ore prices have settled around this price, as iron ore miners also believe that the existing price point is quite realistic.
Moreover, there are signs of additional oversupply evolving in China. This will have a huge negative impact on Cliffs Natural Resources because China accounts for the prevailing importer of iron ore around the globe, as it consumes 48 percent of the world’s steel production.
Apart from these, China has also decided to decrease steel production by 150 million tons in the next five years, and this will have a direct impact on consumption of iron ore. This will result in more oversupply in the end-market and lead to additional faintness in iron ore pricing.
Iron ore prices have consolidated around the $50 mark, and although higher from the YTD lows, the prices do not justify Cliffs Natural Resources 300%+ rally. As a result, I think investors who were smart enough to ride the rally should look to sell the stock.
Published on Jul 14, 2016By Akshansh Gandhi