The Rising Influence of Rising Affluence

[winchem21]

I really don't understand this industry well enough to invest more than a small amount in a couple of large players. Will anyone who follows CLF closely explain why it has dropped 30% over the last 6 weeks or so while earnings have moved up exponentially? Thanks for any observations.

Hot Rolled Coil (HRC) futures have dramatically dropped from the $2,000 sky-high (and unsustainable) prices seen in late 2021 due to steel shortages and increased demand. Some analysts are forecasting a return of HRC prices to the $500-$600 historical range in 2023 and beyond. The first half of 2022 is also seeing HRC weakness due to the imported steel bought by service centers, lack of auto demand, and the increase opening of new plants in the US. The back half of 2022 should see a strong snapback in HRC prices with the expected decline in imports, the need for service centers to buy to restock and the expected surge in auto demand expected to last several years.

CLF acquired two steel companies at bargain prices in 2019-2020 and 2020-2021; that coupled with the surge in 2021 HRC prices, drove earning ups and the stock price to its present value that is ~ five time higher than two years ago. 2022 earnings are expected to remain as strong as 2021.

Longer-term, the central question revolves around HRC prices in out years. The US steel industry is much more consolidated; import restrictions are in place, and the price of scrap steel (~80-85% of EAF feed) has dramatically risen (e.g.; 67% to $508/ton for NUE in Q4, 2021) and will continually to do so placing EAF producers at an increasing cost disadvantage. There will be a shift to the use of more reduced iron (HBI/DRI) as feedstock for EAFs. It is highly unlikely HRC prices will return to historical levels and a strong case can be made for them being over $1,000 for a number of years going forward. At that level, steel companies are printing a lot of cash.

CLF now owns most of the blast furnaces in the US (X owns the rest) and is retrofitting them to use Natural Gas and HBI, increasing their productively and lowering CO2 emissions. They also recently bought the leading US supplier of scrap steel that owns 15% of the market and plan to expand that soon. Scrap steel can be used in the BOFs tied to blast furnaces which CLF intends to start doing, CLF also built a ~2 Mton per year HBI plant in Toledo; the plant is fed by DR-grade pellets from its mines and processing facilities in Minnesota.

Both X and CLF are dirt cheap right now and in a very strong position going forward. X's market cap is ~1x its 2021 EBITDA and CLF's market capo is ~ 1.5 times that.