What: Shares of Cliffs Natural Resources (NYSE:CLF) continued their multiyear decline again in November, falling another 14%. The majority of the decline this past month stems from the company idling its Northshore iron ore mine and the announcement that it would continue to idle its United Taconite mine through the first quarter of 2016.
So What: Iron ore and steel production have been a brutal market over the past few years. The largest culprit has been the flood of excess supply that was built up to supply China's insatiable appetite for commodities, but as that demand waned it has pushed that supply out to other markets and driven down prices to the bottom of the barrel.
Despite Cliffs' geographic advantage of supplying North American steel mills with iron ore that doesn't have the high transport costs from places like Australia and Brazil, the company still has to deal with the fact that it is saddled with too much debt. Also, the glut of imported steel has put pricing pressure on steel manufacturers, which has in turn lowered demand for iron ore.
Another item that is making things worse for Cliffs is that the company's iron ore is only used by blast furnaces to manufacture steel. In the U.S. today, blast furnaces are losing market share quickly to electric arc furnaces. According to Cliffs Natural CEO Lourenco Goncalves, electric arc furnaces now make up 60% of U.S. steel manufacturing capacity. He has stated that the company needs to move toward supplying electric arc furnaces, but that transition has not yet taken place.
All of these issues have converged and forced the company to cut its production and idle mines. The two examples above are just the most recent announcements. On top of that, the company has already shut down or sold all of its Canadian operations and is also looking to dispose its metallurgical coal and Australian iron ore facilities once the market to sell those assets improve.
Now What: Cliffs' path back to profitability is still a very long one, and without some better prices for its product it's hard to see it being a quick and easy change. Many of the major miners such as Vale SA and BHP Billiton have shown no signs that they plan to scale back their iron ore operations, so this could be a very prolonged battle for Cliffs Natural Resources that could last well into 2016 and beyond.
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