Cleveland-Cliffs Stock Was Hit Hard by the Drop in Iron Ore Prices

Cleveland-Cliffs (NYSE:CLF) shareholders are having a rough time of it today. In the last week of trading, the price of CLF stock has plunged nearly 13%.

Cleveland Cliffs (CLF) logo on an iPhone

Source: IgorGolovniov / Shutterstock.com

What’s going on with CLF stock? Is the pummeling a sign that this U.S. steelmaker is in trouble? Or are there are other factors at play? If this a case of the market overreacting, a 13% drop is a big opportunity to buy shares at a steep discount.

Why is the Price of Iron Ore Diving?

The root cause of the pain suffered by CLF stock is the plummeting price for iron ore. In 2020, as China ramped up in recovery from the pandemic, the country’s production topped 1 billion metric tons of steel for the first time ever. That was a higher steel output than all other countries combined. Chinese demand for iron ore to feed those steel mills drove up the price of the raw material. This May, it topped $230 per metric ton.

However, the Chinese government has ordered steel producers to cut their output. There are a number of reasons behind the shift in policy, including an effort to slow the Chinese economy’s growth, a trade dispute with Australia (China’s largest iron ore supplier) and measures imposed to reduce industrial air pollution.

The net effect of China’s move to reduce its steel output has been plummeting iron ore prices, which have now slipped below $100 per metric ton. Some analysts are pegging further drops. UBS Group AG is estimating 2022 prices will average just $89 per metric ton.

The rapidly rising price of iron ore through 2020 and into 2021 was a big part of the CLF stock growth story. The collapse of iron ore’s price has punished many steel stocks, and it’s the primary factor that’s hurting CLF now.

Will U.S. Steel Production Follow 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 — were to follow suit, that would be disastrous.

Fortunately, that is not likely to happen. For one thing, as I mentioned last week, the U.S. is embarking on a massive infrastructure building boom. That’s going to require steel mills to crank up production, not cut it. The U.S. steel industry is also more energy-efficient and more effective at reducing CO2 emissions than China’s. Cleveland-Cliffs has been investing in greenhouse gas reduction at its facilities. The company is especially proud of its Toledo Direct Reduction plant, which was completed in 2020 and uses natural gas to produce low-carbon, hot-briquetted iron (HBI).  

CLF Stock Revenue and Iron Ore

Cleveland-Cliffs is a vertically-integrated steel maker. As such, the low cost of iron ore pellets wouldn’t really affect it one way or another — the company is supplying 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. It still sells a lot of iron ore to other steelmakers, which exposes CLF stock to the roiling iron ore market. How important is iron ore to the company these days? That’s difficult to say for certain. In 2020, it rolled iron ore revenue along with steel production into a single “steelmaking” segment. 

Iron ore revenue is certainly substantial, though. Fourth quarter 2020 steelmaking segment revenue (which includes iron ore pellets) was $2.1 billion. Q4 2019 revenue — which would have been primarily iron ore pellets — was $534 million.

It’s clear that CLF stock — like many mining stocks — does have exposure to iron ore prices.

Bottom Line on CLF Stock

This is a company that reported record Q2 results with shares that had posted a gain of 80% in 2021 before the current dip. In addition, CLF stock still holds a “B” rating in my Portfolio Grader.

As we’re seeing, CLF stock can make big moves based on the price of iron ore. That’s made Cleveland-Cliffs a company that can test the nerves of investors. However, if you look at long-term growth potential and the steelmaking side of the equation instead of focusing on the volatility of iron ore prices, CLF still offers opportunity.

On the date of publication, Louis Navellier had a long position in CLF. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.

The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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