CLF stock has been hit hard by falling iron ore prices
Cleveland cliffs (NYSE:FCF) shareholders are suffering today. In the last week of trading, the CLF share price has plunged nearly 13%.
What happens with CLF actions? Is the hype a sign that this American steelmaker is in trouble? Or are there other factors at play? If this is a case of the market overreacting, a 13% drop is a great opportunity to buy stocks at a steep discount.
Why the price of diving in iron ore?
The root cause of the pain in CLF stocks is the fall in the price of iron ore. In 2020, as China recovered from the pandemic, the country’s production exceeded one billion tonnes of steel for the first time in its history. It was higher steel production than any other country combined. Chinese demand for iron ore to power these steel mills has pushed up the price of the raw material. In May, it exceeded $ 230 per metric tonne.
However, the Chinese government has ordered steel producers to cut production. There are several reasons for this policy shift, including an effort to slow the growth of the Chinese economy, a trade dispute with Australia (China’s largest supplier of iron ore) and measures imposed to reduce air pollution. industrial.
The net effect of China’s decision to cut steel production has been falling iron ore prices, which have now fallen below $ 100 per metric tonne. Some analysts are forecasting further declines. UBS Group AG estimates that 2022 prices will average only $ 89 per metric tonne.
The rapid rise in the price of iron ore through 2020 and 2021 played a significant role in the growth story of CLF shares. The collapse in the price of iron ore has penalized many steel inventories, and this is the main factor currently hurting CLF.
Will US steel production keep pace with China’s?
China reigning in its steel production is a problem for iron ore producers. If the United States, currently the world’s fourth largest steel producer, followed suit, it would be disastrous.
Fortunately, this is not likely to happen. On the one hand, as I mentioned last week, the United States is embarking on a massive boom in infrastructure construction. This will force the steel mills to increase production, not reduce it. The US steel industry is also more energy efficient and more efficient at reducing CO2 emissions than China. Cleveland-Cliffs has invested in reducing greenhouse gases at its facilities. The company is particularly proud of its Toledo direct reduction plant, which was completed in 2020 and uses natural gas to produce low-carbon hot briquetted iron (HBI).
Income from CLF shares and iron ore
Cleveland-Cliffs is a vertically integrated steelmaker. So the low cost of iron ore the pellets wouldn’t really affect it one way or another – the company supplies its own raw materials. However, there is much more to the story.
It was the 2020 acquisitions of AK Steel and ArcelorMittal USA that made Cleveland-Cliffs a steelmaker. She still sells a lot of iron ore to other steelmakers, exposing CLF’s stock to the boiling iron ore market. How important is iron ore to business today? It’s hard to say for sure. In 2020, it consolidated iron ore revenues and steel production into a single “steel” segment.
However, the income from iron ore is certainly substantial. Fourth quarter 2020 steel segment revenue (which includes iron ore pellets) was $ 2.1 billion. Revenue for the fourth quarter of 2019, which would have been primarily iron ore pellets, was $ 534 million.
It is clear that CLF stocks, like many mining stocks, are exposed to iron ore prices.
Net result on CLF share
This is a company that reported record second quarter results with stocks showing an 80% gain in 2021 before the current decline. In addition, the CLF share still holds a “B” rating in my Portfolio filing cabinet.
As we see, CLF stocks can make big moves depending on the price of iron ore. This has made Cleveland-Cliffs a company that can test the nerves of investors. However, if you take a look at the long-term growth potential and the steel side of the equation instead of focusing on the volatility of iron ore prices, there is still an opportunity for CLF.
As of the publication date, Louis Navellier had a long position on CLF. Louis Navellier did not have (directly or indirectly) any other position on the securities mentioned in this article. The InvestorPlace research staff member primarily responsible for this article did not hold (directly or indirectly) any position in any of the securities mentioned in this article.
The opinions expressed in this article are those of the author, subject to the InvestorPlace.com Publication guidelines.
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