The Rising Influence of Rising Affluence

[DewDiligence]

I have the CS report on CLF, FWIW. The summary statement is as follows:

This is not the first commodity cycle that CLF’s assets have seen , and it probably won’t be the last. We believe that this cycle is different for CLF, however; the company is now in a position of financial and operating leverage that it was not burdened with in previous cycles. Major reform is required if this business is to survive the next commodities cycle, in our view.

So, Credit Suisse’s main premise is that CLF’s balance sheet is now more leveraged than it was in 2008. Well, duh, that’s a direct consequence of CLF’s acquiring Consolidated Thompson in 2010. However, leverage is double-edged—not simply bad—and taking on debt to buy CT allowed CLF to participate in the global iron-ore market in a much bigger way than they could have without it. Interest rates are low and CLF doesn’t have any debt maturities during the next few years.

The bottom line, IMO, is still the LT outlook for global iron-ore prices. I don’t buy the thesis that they are headed into the toilet; rather, I think the coming increase in iron-ore supply is well known and is already reflected in contract prices to some degree. I concur with BHP’s CEO, Mario Kloppers, who thinks that iron-ore prices will slowly but steadily rise beginning in 2014 from a somewhat lower base (#msg-84866945 and #msg-85905399 [chart at bottom]).