After watching in agony as iron ore and coal prices took a nosedive in recent months, the miners who feed steelmakers with their raw materials have decided to toss their production levels over the precipice.
This week, Cliffs Natural Resources
With about one-third of Cliffs' total iron ore production costs fixed -- meaning they are not affected by production volumes -- the company now expects costs to rise in 2009 from the anticipated 2008 cost of $57 per ton.
Despite these ongoing challenges, Cliffs' shares continue to participate in a broader near-term rally in mining stocks. They've gained more than 90% from their November lows after canceling the proposed acquisition of metallurgical-coal miner Alpha Natural Resources
Speaking of coal, Cliffs also announced plans to cut about 100,000 tons of annual coal production and 100 jobs from the company's Pinnacle mine in West Virginia. Since it makes up less than 3% of Cliffs' total U.S. coal production, though, the move is more a shave than a haircut. Alpha Natural Resources announced a West Virginia mine closure of its own last week, though the company cited regulatory issues and poor mine conditions as the leading causes. Since a shortage of worldwide metallurgical coal supply prevailed before global demand suddenly fell, I expect to see fewer production cuts for met coal than for other commodities, as stockpiles are replenished with cheaper products.
A 90% run makes it clear that shares of Cliffs Natural Resources are a hot commodity right now. While I expect great things for the company in the long run, I am wary of short-term volatility after a run like this.