The Key to Recovery for Cliffs Natural Resources in 2014

Cliffs Natural Resources (CLF +0.57%) was one of the worst-performing stocks in the market in 2013, falling as a result of huge declines in demand for the iron ore and metallurgical coal it produces. Yet even as investors point to similar struggles that coal producers Alpha Natural Resources (NYSE: ANR) and Walter Energy (WLT +0.00%) and iron-ore giant Vale (VALE 1.08%) faced last year, Cliffs Natural also has to address its own company-specific challenges in order to recover fully from its terrible year.

For Cliffs, the real driver for future growth lies in steel production. The more steel gets produced around the world, the more demand there is for iron ore and met coal in order to help produce it. Upticks in economic conditions around the world have led to some signs of a possible turnaround for Cliffs and its peers in steel's raw materials, but it'll take a lot of demand to reverse the price declines for commodities recently. Let's take a closer look at Cliffs Natural Resources and its prospects for 2014.

Cliffs Northshore Mine. Source: Cliffs Natural Resources.

Stats on Cliffs Natural Resources

Source: S&P Capital IQ.

What's next for Cliffs Natural Resources in 2014?
As you can see above, analysts don't think Cliffs Natural Resources has much more upside in its stock price, with their target price resting right at the current market price for the shares. That's not the case for Alpha Natural or Walter Energy, both of which are seen with 20% to 25% upside potential. Vale sports even better promise, with a target almost 50% higher than current levels.

The best potential news for Cliffs is that iron ore prices have done reasonably well in recent months, having bounced off their lowest levels at mid-year 2013. Yet many industry experts remain unconvinced of the rally, believing that returns to 2013 lows could hit iron-ore-sensitive companies especially hard. Barclays recently gave Vale much worse marks than peers BHP Billiton and Rio Tinto because of Vale's greater exposure to iron ore, and Cliffs would be in the same category if iron ore prices fall from current levels.

Moreover, prospects for metallurgical coal continue to look dismal. Downgrades of Walter Energy and Alpha Natural Resources hinged on the surplus of met coal in the current market, and that has led to some sympathetic selling for Cliffs. Yet it's important to remember that met coal represents only a small part of Cliffs Natural's overall revenue, with iron ore prices remaining far more important to the company's total success.

But some are looking to new markets as potentially stoking steel demand. Even though China remains with a glut of overcapacity, Indonesia has emphasized its need to build up its own steel supply capabilities, with new steel-plant construction aimed at bridging the perceived gap between supply and demand. Similarly, India believes it will increasingly rely on imports of iron ore in order to meet the production needs of its rising steel and iron industries.

Operationally, Cliffs has also made some progress that could help it make the most of better industry conditions whenever they happen. December's agreement with the United Steelworkers Union for a new six-year labor contract should help Cliffs stay competitive at its Pointe Noire site in Quebec, helping its eastern Canadian iron-ore operations deal better with the tough iron-ore pricing environment.

For Cliffs to recover in 2014, it needs the positive factors helping the iron-ore market to outweigh the negative factors that have held prices down recently. Recoveries in Europe and in emerging markets would go a long way toward setting the stage for improvement in the industry, and for Cliffs shares in particular.

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