The Story. Cliffs Natural Resources Inc (NYSE: CLF) is a company based in Cleveland, Ohio that focuses on the mining of iron ore and other natural resources like coal. The surplus supply of global iron couples with a lowering demand for iron needed for construction – as a result of the slowing down the Chinese economy – will continue to hamper any increase in iron price at least in the immediate and/or near future. Given that Cliffs' profitability depends on the pricing of iron ore, the company will face tough times, at least in the near future. Nevertheless, Cliff is an excellent company and a leader in the industry; the firm will be able to capture significant profits when the industry fundamentals improve in the long run.

More Insight. The iron ores mining business operates in cycles where the pricing of iron index is heavily dependent on the supply of iron in various forms like steel. When there are strong economic growths more steels are purchased for construction, which in turn increases the demand and, consequently, price of iron. Cliffs' core business of mining iron ores is dependent primarily on the Chinese's demands for steelmaking raw materials, which has been moderate. In the first half of 2014, the crude steel production increased by 3 percent in China and only 1 percent in the US compared to the similar period in 2013. China produced roughly 412 million metric tons (MT) or 49 percent of global of crude steel production and the US supplied about 43 million MT comprising of 5 percent of this worldwide market.

According to the company, "The spot price volatility impacts our realized revenue rates, particularly in our Eastern Canadian Iron Ore and Asia Pacific Iron Ore business segments because their contracts correlate heavily to world market spot pricing. However, the impact of this volatility on our U.S. Iron Ore revenues is muted and/or deferred partially because the pricing in our long-term contracts mostly is structured to be based on 12-month averages. Additionally, contracts often are priced partially or completely on other indices instead of world market spot prices."

Source: Cliffs Natural Resources

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