Cliffs Posts Strong Q2 Profits, Says Even Better Days Ahead

Car companies are expected to make up for constrained production as parts supplies become more readily available, bolstered by pent-up demand for electric vehicles, Cliffs said.

The Cleveland-based company thinks that it should see an outsized benefit from that trend because it is the largest steel supplier to the North American automotive industry.

“Our industry-leading exposure to the automotive sector separates us from all other steel companies in the United States… this important distinction of our business relative to other steel producers should become clear as we progress through the remainder of this year and into next year,” company chairman, president, and CEO Lourenco Goncalves said in a statement released along with earnings data on Friday, July 22.

The health of the steel market over the past 18–24 months has been largely driven by construction demand, while automotive has lagged far behind, even as demand has outpaced production. “Consumer backlog for cars, SUVs, and trucks has become enormous,” he said.

As supply chain constraints are resolved, Cliffs anticipates light vehicle backlogs and pent-up demand for electric vehicles to charge further, allowing the steelmaker to “be the primary beneficiary among all steel companies in the United States,” said Goncalves.

As for the second quarter of 2022, Cliffs recorded net income of $601 million, down 25% sequentially, and down more than 24% versus the $794 million posted in the second quarter of 2021, though revenue rose more than 25% year-over-year to $6.33 billion from $5.04 billion.

The company posted net income of $1.41 billion for the first half of 2022, nearly doubling the $852 million seen the prior year. Revenue rose 42% to $12.92 billion from $9.09 billion during the same year-ago period.

Cliffs’ bullishness is reminiscent of its sentiment just six months ago when spot prices for hot-rolled coil were plunging, only to recover because of the initial shock of the war in Ukraine. And the same reasons remain today as they did then—higher average fixed-priced sales contracts in automotive.

“As we move into the second half of the year, we expect this healthy level of free cash flow to continue, as a result of declining capex needs, the accelerating release of working capital, and the heavy use of fixed-price sales contracts. In addition, we expect to see further significant increases in the average selling prices for these fixed contracts resetting on October 1,” Goncalves said.

Cliffs said the current futures curve implies an average hot-rolled coil price of $850 per ton ($42.50/cwt) for the balance of the year, while it expects its average selling price—thanks to fixed-price contracts—to be higher than that: an average of $1,410 per ton ($70.50/cwt).

Automotive’s annual contracts are typically negotiated in the fall of the prior year. With a bullish forward-looking sentiment and an expected rebound in automotive manufacturing when supply chain deficits correct, Cliffs feels it’s well-positioned to capitalize.

By David Schollaert, David@SteelMarketUpdate.com