What: Shares of Cliffs Natural Resources have plunged more than 16% today on the news that it had terminated a supply contract with steel manufacturer Essar Algoma.
So what: For the past several months, the relationship between Cliffs and Essar has been turning sour. The large flare-up started back in January, when Cliffs filed a complaint with a local district court that Essar had failed to receive and pay for several shipments of iron ore in breach of a supply contract. The two companies have gone back and forth quite a bit since then, but this time it really looks as if there is a real rift between the two companies. After announcing the termination of sale, Essar issued a restraining order on Cliffs. How a restraining order can be applied to a company is your best guess.
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Currently, Cliffs supplies about 3 million tons of iron ore pellets to Essar, which was a little less than all of Cliffs' nameplate capacity for U.S. iron ore. Cliffs has agreed to continue sales with Essar under just-in-time shipments, but the lack of a consistent supply agreement could really eat into the company's already-slipping revenue.
Now what: Cliffs is still in a very deep hole that will take a while to get out of, and the chances of getting out of it at today's iron ore prices aren't great. Probably the last thing the company needs is one of its major customers to go away. In all honesty, it's hard to say who is right about this one. Cliffs' two largest customers, ArcelorMittal and AK Steel, have not issued such complaints about supply issues, so it's possible that Cliffs is in the right here.
Although the market has not received the news well, there is a small silver lining to this. Cliffs has almost exclusively sold its iron ore pellets to blast furnace factories, but a larger and larger percentage of U.S. steel manufacturing is using direct reduced iron. If Cliffs can free up some of its mine capacity to retool its pellets to be used in the more profitable direct reduced iron plants, it could help the company move into a part of the steel market that has fared much better than blast furnaces lately.
From an investor's perspective, though, it may take a quarter or two to see what this means for Cliffs' bottom line, so it's probably best to remain in a holding pattern until that happens.
The article Cliffs Natural Resources Stock Is Falling Hard Today -- Here's Why originally appeared on Fool.com.
Tyler Crowe owns shares of Cliffs Natural Resources.You can follow him at Fool.comor on Twitter@TylerCroweFool.The Motley Fool owns shares of Cliffs Natural Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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