Steel Mills

Cliffs Terminates Pellet Contract with Essar Steel Algoma

Written by Sandy Williams

Cliffs Natural Resources has terminated its iron ore supply agreement with Essar Steel Algoma alleging Essar made multiple and material breaches under the agreement.

“While the agreement has been terminated, Cliffs remains open to discussing supplying Essar with pellets on commercially reasonable terms consistent with a just-in-time iron ore supply arrangement,” said Cliffs in a statement on Tuesday.

In response, Essar Steel Algoma has filed a request for a Temporary Restraining Order. The supply matter is currently in dispute and before a federal judge in Cleveland, Ohio. In the meantime, Essar says it expects Cliffs to honor the supply agreement.

Key Banc analyst Phil Gibbs says the move by Cliffs may be a positive for U.S. iron ore prices. If Essar Steel is forced to purchase ore at spot prices that could help boost prices. Higher prices would put Cliffs in a better leverage position to negotiate new contracts with ArcelorMittal in late 2016/early 2017.

Citigroup analysts Brian Yu and Daniel Knauff agree that the move could benefit pricing. However, they noted, “Alternatively, there is risk that Essar turns to US Steel, who has excess capacity at their Minnesota operations due to reduced utilization at their steel mills. Our understanding is that Cliffs offers a freight advantage vs US Steel, but Essar could choose to diversify their supplier base to mitigate a potential cost increase.”

Cliffs is the sole pellet supplier to Essar Steel Algoma, shipping around 3 million tons annually to the mill. The timing of the announcement puts pressure on Essar to find a solution in order to build inventory before the Great Lakes freeze and halt shipping.

The $1.9 million Essar Steel Minnesota taconite plant is currently under construction and scheduled for completion in mid-2016. Once that plant is operational, Essar Steel Algoma will receive its iron ore pellets from the Nashwauk facility. The plant will have an annual production capacity of 7 million tons of iron pellets and will also supply ArcelorMittal.

Essar Steel Algoma is currently struggling with a sustained drop in steel prices and demand in North America. As a result, the company is adjusting production and will lay off 100 employees until market conditions improve.

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