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Cleveland-Cliffs Stock Slumps On Q4 Earnings Miss, Auto Sector Demand Uncertainty

Cleveland-Cliffs sees higher average selling prices for steel this year, but questions over the pace of auto sector demand continue to cloud its near-term outlook.

Updated at 10:05 am EST

Cleveland-Cliffs  (CLF)  shares slumped lower Friday after the steelmaker posted weaker-than-expected fourth quarter earnings amid a slowdown in demand from the automotive sector.

Cleveland-Cliffs, the biggest U.S. steel supplier to carmakers such as Ford  (F)  and General Motors  (GM) , said adjusted earnings for the three months ending in December came in at $1.456 billion, a huge increase from last year but well shy of analysts' estimates of $1.76 billion. 

Group revenues were also light, at $5.3 billion, even as external sales volumes rose 82.1% from last year to 3.384 billion net tons.

"During Q3 of last year we realized that our automotive clients would not be able to resolve their supply chain issues in Q4, and therefore demand pull from the sector would be weak," said CEO Lourenco Goncalves, who also unveiled a $1 billion share buyback plan. "As such, we elected not to chase weak demand, and instead accelerated maintenance forward to Q4 at several of our steel production and finishing facilities. These actions had a short-term impact on our unit costs in Q4, but should benefit our 2022 results."  

"With demand on the rebound, particularly in automotive, 2022 is set to be another phenomenal year for profitability at Cleveland-Cliffs," he added. "Even at the steel futures curve as of today, we would expect to see higher average selling prices for our steel in 2022 than in 2021."

Cleveland-Cliffs shares were marked 2% lower in early Friday trading to change hands at $20.50 each, a move that would extend the stock's six-month decline to around 21%.

The group says it expects average selling prices for steel to increase by 3.2% from last year, to around $1,225 per ton, but announced slowdowns in production from Ford and GM, in part linked to a shortage in global semiconductors, could further blunt demand over the coming months.

Year-on-year steel volume comparisons are likely to be challenging for the first stages of 2022," said KeyBanc Capital Markets analyst Philip Gibbs. "On the cost side, we believe Cliffs is also likely to experience higher base wage inflation (excluding profit sharing), higher coal/coke costs following annual resets with domestic miners, higher consumable costs (i.e., alloys, electrodes), and higher y/y natural gas prices."

Late last month, U.S. Steel stronger-than-expected fourth quarter sales of just under $5.62 billion and boosted its buyback plan by $500 million.

Both U.S. Steel and Cleveland-Cliffs are also looking to benefit from the President Joe Biden's "once in a generation" infrastructure bill, which was passed in early November, that will direct billions of investments into roads, rail and public transportation.

Included in the bill, which the Senate passed the plan on August 10, are plans for around $66 billion in spending for rail and Amtrak, $110 billion for new roads and bridges, $39 billion for transit and around $73 billion for power grid upgrades.