I could not let this one go, I posted the Great Lakes shipping plans as outlined by Michigan State University where the port of Escanaba is the alternate route to move iron ore when the Soo Locks are frozen shut. Coupled with stockpiled inventories at mills and ports, this keeps the flow of iron ore to the steel mills so they don't have supply disruptions. Like I have said before, provide me information on just one steel mill in the area that has had supply disruptions. I think I have outlined how companies like CLF have been dealing with predictable cold weather events.
Thanks, finally a reasonable reply. There is absolutely no information on a supply disruption for iron ore in the Great Lakes region.
From the Daily Press:
"Only the port of Escanaba increased its shipments from 117,310 net tons in January 2013 to 402,555 tons in January 2014."
This 3.5 times the amount shipped from last year. So far no one has given any quantifiable information about the weather other than it is cold outside.
Exactly what I am trying to say! I have not heard of a single mill that is running out of raw material or even being put on some type of allocation. If there was a shortage of iron ore, US spot pricing would have increased which again is not the case. Weather can be blamed for a lot of things but I have not seen any evidence that it has effected iron ore supplies other than a 37% decrease of ore shipped on the Lakes in January and increased shipments out of the Escanaba port on upper Lake Michigan. Because of the lack of evidence other than record cold, I think people and analyst are making more out of this than what is real.
As long as production holds, CLF will be able to replenish low supplies quickly and at low costs. Otherwise they will have to expand production to make up the shortfall with added overhead.
If the US iron ore supplies are taken out of the supply chain, the cost to ship iron ore will increase and offset the price advantage of the low cost miners. Again, CLF will make money if iron ore falls below $100 off their distribution network, long term contracts and lower cost US operations. But iron ore has to fall below $100 and hold that average for an extended period before it would impact their long term contract pricing.
All of this is true, all I am saying is I have not heard of one instance where a steel mill has stopped or slowed production because of a shortage of iron ore. What I will be watching is the number of tons produced, not what is sold because that number needs to remain high in order to keep the mills supplied year around.
Is it true that the Escanaba port remains open year around and is used as a temporary substation for the Soo Locks?
This information convinces me that VALE needs to buy CLF to secure it's contracts and distribution network in the US. They can sell off everything else to offset part of the cost and would be left with the US assets that would net them more than their cost in just a few years. But they will able to bring in Brazilian pellets and get them to the mills at a lower cost.
So why is iron ore shipments out of Escanaba above normal levels? The reason is according to MSU, iron ore during the winter moves by rail to this port and then ships out to the lower lakes until the Soo Locks are opened. Happens every year, last as long as needed.
I have never advocated the selling of any of their assets, but for the next couple years, there is no need to expand assets and need to concentrate on reducing overhead and building cash.
There is no high iron content ore in the US area, but the cost of transportation to bring ore in from Brazil makes the low quality ore the best material.
I also think that the future for CLF is not only the chromite mine, but building the smelting facility where they can capture revenue from other miners to process their ore before shipping to the steel mills.
Given the current production and profit, CLF should be a $35 stock now. Based on projected production and profit, it should be a $45 stock a year from now.
Look at the current US ISM and PMI numbers, they point to strong industrial activity. And you really need to look at the supply train, construction is low now, but pent up demand will see a big rebound in the Spring which requires steel production to pick up now.
And yet their US operations is doing very well when you look at their bottom line numbers. You have to ask yourself why? The answer lies within the cost of transporting ore to the US market.
From a Reuter's article this morning:
"This to a large extent reflects a temporary rebound after supply chains and production had been disrupted by severe weather," Chris Williamson, Chief Economist at Markit said in a statement. "While bad weather continued to hamper production at many companies in February, many also reported that weather-related issues were being overcome."
This is exactly what I was trying to say. US demand for steel is still strong.
And here is my problem, most developed economies of the world are doing much better today than they were doing 3 years ago and expanding into the future.
You really need to go back and look at the growth in stock holder equity… And since they paid off their credit line a whole quarter ahead of your schedule, CLF is out in front.
One other point, growing production does not mean your business is growing. Going back to my construction business, I can build 5 houses a year by myself. However, if I decide to build 6 houses, I will make less because of the overhead I need to add to handle the added business. It comes down to that I need to build 8 houses a year to make the same amount I made building 5.
Now if the market can't handle me building 8 houses a year, my best option for growth is to continue with 5 houses and grow through controlling overhead.
Expectations for manufacturing PMI was 50.1, so it was a slight beat. Better yet, it beat the HSBC survey. The reason for that is the HSBC is a survey of small to medium businesses were as the official PMI brings in large and government owned businesses which provides a better view of the Chinese economy. Sometimes I think the HSBC survey has another agenda that benefits their clients.
Mich. State University has a great site that outlines shipping on the Great Lakes and explains how rail shipments deal with waterways that are closed to ice. It is a great source of how iron ore is shipped year around on the Lakes.
"In winter, when the Soo Locks are shut down, taconite pellets move out of the mining region by rail to the port in Escanaba, which is open to shipping year-round."
The current record cold has an impact, but does not stop the flow of iron ore to the mills to meet their demand (which is low due to the season).
Think about it this way, if CLF continues to retire debt at the same rate they did in 2013, they will GROW profits by $30 million a year. Growth like this comes from reducing overhead which is key to maximize profits, even if demand for iron ore remains flat. Also, you need to understand the concept of the marginal cost of increasing production.
The company pretty much laid out their plan.
1. Paid off their revolving credit in 2013 Q4.
2. Plan to grow cash in 2014 by $600 million, which will give them close to $1 billion.
3. Once their cash position is well established they can pay off the first bond that is due in 2018 anytime, then they can once again concentrate on growth. My guess is they will start paying off their long term bonds in 2015 and retire the last bond in 2020.