“That party is over.”
Cleveland-Cliffs Inc. Chairman, President and CEO Lourenco Goncalves was in fine fettle April 25, speaking to analysts about the supply-and-demand dynamic between auto manufacturers and the firms supplying them steel. The spot market, he said, has been “taken out of the picture in automotive” and Cleveland-Cliffs and the major OEMs it sells to are now in “a true relationship type of thing.”
In short, Goncalves had proven right about his hunch late last year that he would have leverage in contract talks with auto players, which account for about one-third of Cleveland-Cliffs’ revenues. At the time, he said early negotiations suggested the supplier would be able to lift its prices nicely for 2023 as it looked to decouple from steel indices and as OEMs look to meet continued strong consumer demand.
So far, so good for Cleveland-Cliffs: After securing average contract price increases of $115 per ton, first-quarter direct sales to the auto sector totaled $1.9 billion, up from about $1.7 billion in the fourth quarter and $1.6 billion in 2022’s Q1. That helped Cleveland-Cliffs limit its quarterly loss to $42 million (versus a profit of $814 million a year earlier) even though its average net selling price was 22% lower than in early 2022. Total sales slipped 11% to $5.3 billion.
The contract gains will further benefit Cleveland-Cliffs’ bottom line in the second quarter, when they will be joined by better pricing for spot-based business: CFO Celso Goncalves told analysts the company’s average selling price should rise $120 per ton from Q1. On top of that, lower-than-of-late capital spending this year and next will help create a sizable jump in profits and, added Celso Goncalves, a “massive amount of free cash flow coming in.”
The flip side of Cleveland-Cliffs’ progress showed up General Motors Corp.’s first-quarter report in a few hours before the father-and-son Goncalves team addressed analysts: GM CFO Paul Jacobson said his team have nudged up their 2023 forecast for commodity and logistics costs, “primarily due to higher steel prices.” Rather than the previous slight benefit to this year’s bottom line, that cost category will now be essentially flat, Jacobson said.
Looking ahead, Goncalves is confident but not about to overplay his hand. Asked how he’s thinking about the next round of price talks in October, he returned the language of partnership. The car makers want to make their next generation of vehicles and Cleveland-Cliffs will do its part—while getting rewarded.
“We need to get paid. They understood that through the last two cycles of negotiation,” Goncalves said of the OEMs. “So when October comes, we'll talk again. It's too early. I'll get my shoes off when I get to the river.”
Shares of Cleveland-Cliffs (Ticker: CLF) closed at $14.84 April 26, about 8% lower than where they traded before the company reported its Q1 48 hours earlier. Over the past six months, they are still up about 6%, which has grown the company’s market capitalization to about $7.6 billion.
