The Cleveland-Cliffs stock was crushed. Why it’s worth watching.
The recession panic has erupted
Stock. But long-term demand for steel, particularly from the auto industry, combined with the company’s independence from imported iron, could help its stock soar from ‘here.
Cleveland-Cliffs (ticker: CLF) stock has lost more than a third of its value this year as fears of a recession pushed steel prices below $900 a ton from $1,500 dollars earlier this year. And with investors increasingly concerned about the possibility of a recession and the impact it would have on near-term demand, steel prices could fall even further.
Still, there’s reason to think Cliff’s actions can weather the storm. The first is the automotive industry’s demand for steel. Dealer car inventories have fallen from historic averages of 61 days in 2017 and 2018 to just 22 days currently, writes Larry McDonald in the Bear Traps report, citing data from IHS Markit. This implies a continued high demand for steel to build new vehicles as inventory is replenished, he explains.
The only risk of this thesis is that high gas prices could cause Americans to switch to sedans from SUVs, which use 20% more steel, writes Lucas Pipes, an analyst at B. Riley. But “we believe that switching consumers to electric vehicles of a similar size, as opposed to switching to a smaller style of vehicle, could mitigate this risk,” he says.
President Biden wants half of all cars to be targeted electric vehicles by 2030, and it could also give a boost to Cliffs, which supplies steel for charging stations across North America. North. And any power grid upgrade will also require a lot of steel, writes McDonald. It takes 30 tons of steel per megawatt of wind power and 40 tons per megawatt of solar power, explains McDonald. Ultimately, McDonald’s believes demand for steel will hit record highs over the next 10 years, even as short-term declines in steel prices have lowered the company’s earnings estimates. But “we’re looking across the valley to the next upward cycle,” McDonald says.
While demand may not be as bad as the market thinks, Cliff’s has also managed to avoid the supply problems faced by other steelmakers because it has its own iron mines. This vertical integration allows US-based Cleveland-Cliffs to use hot briquetted iron supplied in-house, reducing the amount of scrap and pig iron used per tonne of steel produced. “This [even] releases scrap for third-party sales…” says Pipes.
Cliffs’ vertical integration also means it doesn’t have to worry about sanctions on Russian cast iron, which accounts for 30% of the amount consumed in the United States. “For Cleveland-Cliffs, that number is zero,” writes McDonald.
Cleveland-Cliffs stock fell 1.8% to $14.90 just before noon Wednesday. It has dropped 30% over the past year.
Write to Karishma Vanjani at [email protected]