Cleveland-Cliffs' Strategic Shift: Navigating Contract Losses and Building Resilience in Steel

Cleveland-Cliffs (CLF) has entered a pivotal phase in its history, as the termination of an unprofitable slab contract with ArcelorMittal/Nippon Steel Calvert by late 2025 marks the end of a costly chapter. The company's ability to pivot from this loss—while addressing broader supply chain and client dependency challenges—will determine its trajectory in a volatile steel market. Here's why investors should take note.

The Contract Crisis and Its Ripple Effects

The five-year slab contract, which accounted for nearly 10% of Cleveland-Cliffs' shipments (1.5 million tons annually), became a financial albatross due to its pricing structure. Linked to Brazilian slab prices, the agreement diverged sharply from rising U.S. hot-rolled coil (HRC) prices as tariffs disrupted market correlations. This misalignment forced Cleveland-Cliffs to sell slabs at prices below sustainable levels, contributing to an adjusted net loss of $456 million in Q1 2025 and an $174 million EBITDA loss for the quarter.

The contract's termination by December 2025 will eliminate this drag, unlocking an estimated $500 million annual EBITDA benefit by 2026. This move is a cornerstone of the company's strategy to shed non-core operations and focus on higher-margin markets.

Supply Chain Resilience: A Strategic Overhaul

Cleveland-Cliffs' response to the contract loss reflects a broader effort to insulate itself from supply chain and client risks:
1. Facility Rationalization: The idling of six underperforming facilities—including mines and mills—will save over $300 million annually while consolidating operations. This reduces exposure to volatile raw material costs and inefficient assets.
2. Core Market Focus: Automotive steel, now 29% of revenue, is the priority. The Trump administration's support for U.S. steel and automotive industries has bolstered Cleveland-Cliffs' partnerships with OEMs, securing higher volume commitments.
3. Liquidity Fortification: With $3.0 billion in cash and strong debt capacity, the company can weather near-term headwinds without diluting equity.

This chart will show the projected rebound in EBITDA post-2025, highlighting the contract's termination as a turning point.

Risks and Uncertainties

While the path forward is clear, risks linger:
- Market Volatility: Global oversupply and trade disputes could depress U.S. steel prices, undermining the projected EBITDA gains.
- Client Concentration: Overreliance on automotive OEMs could expose the company to sector-specific downturns.
- Operational Execution: Smooth transitions post-contract termination and facility idling are critical to avoid disruptions.

Investment Implications

Cleveland-Cliffs' actions position it for a 2026 turnaround, but investors must weigh near-term pain against long-term gains. The stock's current valuation, trading at ~5x 2026E EBITDA estimates, reflects pessimism about near-term losses but offers a margin of safety if the EBITDA rebound materializes.

This comparison will illustrate CLF's underperformance during the contract's peak impact, with potential for outperformance if 2026E targets are met.

Final Take

Cleveland-Cliffs has shown resilience by confronting its contractual missteps and reorienting toward profitable markets. The exit from the ArcelorMittal/Nippon Steel contract is not just a cost-saving move but a strategic realignment to reduce dependency on volatile client relationships and supply chain dynamics. While risks remain, the company's liquidity, operational discipline, and focus on core markets suggest it is well-prepared to capitalize on a rebound in U.S. steel demand. For investors willing to look past 2025's losses, Cleveland-Cliffs could offer a compelling recovery story in the years ahead.

Investment Thesis: Buy with a 12–18 month horizon, targeting the EBITDA turnaround in 2026. Monitor Q4 2025 results for early signs of improvement.