Cleveland-Cliffs Faces Stock Challenges Amid Declining Steel Prices

Cleveland-Cliffs (NYSE: CLF), a company that operates integrated steel mills, has seen its stock price drop over 30% in the past six months. This decline is largely a result of tough business conditions in the steel industry. Falling prices for steel in the U.S., weak demand domestically and globally, and a sluggish Chinese economy have contributed to this situation. In mid-September, CLF stock hit a 52-week low of $10.21; it has experienced a slight recovery since then. The company’s Q2 2024 revenues dropped about 15% year-over-year, amounting to $5.1 billion, primarily due to lower steel prices and reduced sales volume. Earnings were reported at around $0.11 per share.

In terms of sales, CLF’s external volumes dropped nearly 5% year-over-year to 3.98 million net tons. The average price of steel fell by 10% compared to the same period last year. However, the company has successfully implemented cost-cutting measures, achieving its targets in the second quarter. CLF aims for an annual cost reduction of approximately $30 per ton of steel, facilitated mainly by lower iron ore and coal costs. Additionally, operating cash flows have allowed the company to reduce net debt by $237 million, marking substantial progress.

Considering performance over the past three years, CLF’s stock returns have been inconsistent: a gain of 50% in 2021 was followed by a decline of 26% in 2022, and a recovery of 27% in 2023. This volatility contrasts sharply with the Trefis High Quality (HQ) Portfolio, which includes 30 handpicked stocks and has consistently outperformed the S&P 500 during the same timeframe.

What’s Behind the Differences? Stocks in the HQ Portfolio tend to yield better returns with less risk than the S&P 500, offering a smoother performance experience. Given the current uncertain economic landscape, marked by potential interest rate cuts and ongoing global conflicts, some analysts wonder whether CLF might repeat its 2022 performance, underperforming relative to the S&P over the next year.

Nevertheless, we remain optimistic about CLF stock, assigning it a valuation of approximately $20 per share, representing a potential upside of 40% from its current price. The company is poised for long-term advantages through its strategic initiatives. In addition to ongoing cost reductions, demand from the automotive sector signals positive cash flow prospects. CLF is also set to acquire Stelco Holdings Inc., which is expected to close in Q4 2024. This acquisition is intended to expand CLF’s flat-rolled product range and enhance geographical diversity while improving profit margins.

Furthermore, the company’s focus on reducing debt has led to a significant decrease in net debt levels by $237 million in Q2 2024. Compared to other steel manufacturers, Cleveland-Cliffs benefits from substantial vertical integration, providing better insulation against geopolitical risks. It also relies less on imported raw materials than many of its U.S. competitors. For a deeper look at our valuation of Cleveland-Cliffs and insights into its revenue streams, check out our analysis: Cleveland-Cliffs Valuation: Is CLF Stock Expensive or Cheap? Additionally, see our report on Cleveland-Cliffs Revenue for more details regarding the company’s revenue drivers and future trends.

Investors might also want to compare how CLF’s peers stack up in essential metrics. Our section on CLF’s Peers offers valuable comparisons across various industries. As market watchers hope for a soft landing for the U.S. economy, the potential for future downturns looms. Our dashboard titled How Low Can Stocks Go During A Market Crash analyzes how key stocks reacted during previous market crashes.

[1] Returns as of 10/21/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.