Cleveland-Cliffs: It’s Time (NYSE:CLF) | Seeking Alpha

Friends, we have traded Cleveland-Cliffs Inc. (NYSE:CLF) stock many times, and have opined many times as to what is driving the action. Today we have a horrific market, and normally, the stock would be finding its way to the very low teens, if not worse. Certainly you would think the stock would try to find new lows, as it is expected that there is going to be a pretty decently sized earnings recession for the market, whereas a recession on Main Street may be mild. If there is a global reduction in demand for steel products, it will certainly hurt overall spot pricing.

But that is odd, did you know spot prices have been on the rebound? A lot of this has to do with the prospect of China really reopening following the short-term destruction of its economy with its zero COVID policies, but it is getting messy over there. Demand from automobile makers remains high, and this is a very important market for Cleveland-Cliffs. Sure, the demand could wane to a small degree, and that is not a positive, but we do not see the company suffering from a true collapse in demand. As such, we think that as the stock pulls back here, buying under $15, yes, it is time. While we are of course awaiting future earnings guidance from the entire market to give us some sense of direction, the fact of the matter is that Cleveland-Cliffs continues to take matters into its own hands to protect their revenues. We continue to be bullish, mildly at this level, because of the moves they have made on pricing. What they must do beyond this is control the cost side of the equation, and improve the balance sheet.

Cleveland-Cliffs is repricing future contract sales higher

As we all know, pricing of steel has been on a sharp decline in 2022. Each time Cleveland-Cliffs or other competitors report earnings, it seems collectively they reduce the outlook for pricing. Why is that an issue? Well, obviously if pricing is down, volumes need to be up to maintain the same degree of revenue, right? But pricing often reflects higher demand, so there is a decent linkage between the two. There is some elasticity on both ends of this, but the correlation is pretty moderately positive. In short, as the demand softens, prices generally do too, and vice versa.

The big sources of demand right now are from car makers, but the big wildcard now is from the Chinese reopening. It certainly seems to be happening. Now, if the Main Street recession is pretty mild, then we think that demand in industry, construction, etc., will continue to be about average, and that is fine, given the trajectory of shares seemingly pricing in severe earnings declines. Certainly, these declines are of course coming, but we see this as a shorter-term problem.

Make no mistake commodities, especially metals, often fall first when inflation begins to fall, just like those prices rise as inflation worsens. Certainly it seems from the most recent CPI and the report before it that disinflation is underway. Excellent news for almost everyone. With the rate hikes, steel pricing fell pretty much all year. When Cleveland-Cliffs reported its Q3 earnings, there were lower volumes in steelmaking than expected and pricing was down. This was a so-called double whammy that combined to hurt revenues and earnings. Making matters worse, Cleveland-Cliffs’ expenses are up. EBITDA and earnings were both quite weak.

Without a doubt, declining pricing has been problematic. The trends has been quite painful for pricing. Back in the second quarter, management still had a $1,410 per net ton as the 2022 average selling price. That was down from Q1. Further, in Q3, management once again reduced its forecast. For 2022, management saw $730 for the average hot-rolled coil pricing, and full year selling prices of $1,370 per ton. Translation? Lower revenues per ton sold, and generally, lower stock prices.

But we have been growing bullish because Cleveland-Cliffs has slowly been laying a floor in pricing, and that floor is getting higher. A few weeks ago we told you about how we loved that Cleveland-Cliffs made a move to raise some prices, as management was not happy with the declines. So, as of November 28, 2022, current spot market base prices were increased for “all carbon hot rolled, cold rolled and coated steel products by a minimum of $60 per ton.” So that was effective immediately with all new orders, and while it may not be massive, it is a boost.

Then we learned that this week Cleveland-Cliffs took further action once again. With the latest action, the company raised current spot market base prices by a minimum of $50 per ton for all carbon hot rolled, cold rolled, and coated steel products. That increase is for any orders that come in now and in the future. Folks, that raises Cliffs’ minimum base price for hot rolled steel to $750 per net ton. The floor is being laid, and it is being raised. That is good news, that even bears cannot deny. Well, we suppose they can deny, or customers can go elsewhere, but the bottom line is that it helps revenues, and hopefully margins.

The other side of the equation

We saw last quarter that prices were down, volumes were down, and expenses were up. This latter part of the equation is what the company must control. Investors should closely take note of expenses, and any commentary on expenses, when the company reports its Q4 results in 2023. The action in pricing can certainly help offset revenues which are falling.

Q3 revenues were $5.7 billion, falling 5% from last year, and falling 10% from the sequential quarter. Guys, volumes are what they are, the company can somewhat impact its pricing, but it has to control expenses. It is unacceptable to have Q3 expenses that rose from a year ago when revenues are falling hard. Now, some of it is acceptable, such as the fact that inflation has increased steelmaking unit costs. We know there were higher costs in natural gas, electricity, scrap work, and alloys, though there have been Q4 declines here which should help the report. The market has not really picked up too much on that overall. When the company reported it thought these costs could drop by $80 per ton but it is likely to be even more.

Take-home: Putting our money in

In our previous coverage of Cleveland-Cliffs Inc., we told you that “$15 has been a key pivot level so we are trading around that for now.” Well, folks, it is time to start doing a little buying, with plans to add on the way down. We took a stab at $14.70 for a first buy, and will add again at $13.60. We think a nice exit point for a fast trade in Cleveland-Cliffs Inc. is 16+. That is our play here.