Why Cleveland-Cliffs Stock Plunged Despite Trump's Tariffs

Cleveland-Cliffs, a leading North American steel producer, has seen its stock price plummet despite President Trump's recent tariff changes aimed at bolstering the domestic steel industry. The tariffs, which reinstate a 25% duty on steel imports and increase the tariff on aluminum imports to 25%, were intended to protect American steelmakers from unfair trade practices and global excess capacity. However, the market's reaction to these tariffs has been less than enthusiastic, with Cleveland-Cliffs' stock price falling sharply.

The recent decline in Cleveland-Cliffs' stock price can be attributed to several key factors. Firstly, the company's financial performance has been underwhelming. For instance, the third-quarter 2024 consolidated revenues were $4.6 billion, a decrease from $5.1 billion in the second quarter of 2024. Additionally, the third-quarter 2024 Adjusted EBITDA was $124 million, significantly lower than $323 million in the second quarter of 2024. This decline in revenues and earnings is a stark contrast to the company's historical performance, where it reported $5.6 billion in revenues and $614 million in Adjusted EBITDA for the third quarter of 2023.

Secondly, the company's stock price has been volatile. The current share price is US$6.96, with a 52-week high of US$22.67 and a 52-week low of US$7.25. The stock has seen a 1-month change of -30.68%, a 3-month change of -26.74%, and a 1-year change of -68.72%. This volatility is higher than the US market average, indicating that investors are uncertain about the company's future prospects.

Thirdly, the company's debt levels are a concern. The materials mention that "debt is not well covered by operating cash flow," which suggests that the company may struggle to meet its debt obligations. This is a significant risk factor for investors, as it could lead to a downgrade in the company's credit rating or even default.

Finally, the company's acquisition of Stelco Holdings Inc. for CAD 3.9 billion has been met with mixed reactions. While some analysts see it as a strategic move to enhance the company's position in the Canadian market, others are concerned about the potential dilution of earnings and the additional debt burden. This acquisition has also led to a downgrade in consensus EPS estimates, which has contributed to the decline in the stock price.

In comparison to the company's historical performance, these factors indicate a significant shift in the company's fortunes. Cleveland-Cliffs has traditionally been a stable performer in the steel industry, with a strong focus on value-added sheet products and a vertically integrated business model. However, the recent decline in financial performance, stock price volatility, high debt levels, and mixed reactions to the Stelco acquisition suggest that the company is facing significant challenges.

The recent tariff changes by President Trump, which reinstate a 25% tariff on steel imports and increase the tariff on aluminum imports to 25%, are expected to have a significant impact on Cleveland-Cliffs' financial performance. These tariffs aim to protect the American steel industry from unfair trade practices and global excess capacity, which have been detrimental to domestic production. For instance, the tariffs led to a wave of investment across the United States, with more than $10 billion committed to build new mills, and bolstered the local economy in states like Minnesota.

Cleveland-Cliffs, being a leading North America-based steel producer, is likely to benefit from these tariffs. The company's vertically integrated operations, from mining iron ore to producing steel products, position it well to capitalize on the increased demand for domestically produced steel. The tariffs are expected to support the program’s original objective of revitalizing the domestic steel and aluminum industries and achieving sustainable capacity utilization of at least 80%.

However, the potential long-term effects on Cleveland-Cliffs' stock price are mixed. On one hand, the tariffs could lead to higher revenues and profits for the company due to increased demand and reduced competition from imported steel. On the other hand, the tariffs could also lead to higher input costs for Cleveland-Cliffs' customers, potentially reducing demand for steel products. Additionally, the tariffs could lead to retaliatory measures from other countries, which could negatively impact Cleveland-Cliffs' exports.

The stock price of Cleveland-Cliffs has been volatile in recent months, with a 30.68% decrease in the past month and a 68.72% decrease in the past year. The company's earnings and revenues have also missed analyst expectations in recent quarters, which could be a concern for investors. However, the company's strong position in the North American steel market and its vertically integrated operations could provide a buffer against these challenges.

In conclusion, while the recent tariff changes by President Trump could provide short-term benefits to Cleveland-Cliffs' financial performance, the long-term effects on the company's stock price are uncertain and depend on various factors, including the company's ability to navigate the changing trade landscape and the potential impact of retaliatory measures from other countries.