Jefferies lowers Cleveland-Cliffs rating on high exposure to steel price changes

Published 29/05/2025, 14:42
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Investing.com -- Jefferies downgraded Cleveland-Cliffs (NYSE:CLF) to Hold from Buy, citing growing risks tied to steel price volatility and an increasingly uncertain outlook for the U.S. steel market following Nippon Steel’s (TYO:5401) $14 billion investment commitment into United States Steel Corporation (NYSE:X).

The brokerage firm also cut its price target on the stock to $6 from $10, just 1% above recent trading levels.

Jefferies said the green-lighted deal between Nippon and U.S. Steel, more investment from Nippon into the industry than initially anticipated, and the prospect of foreign producers expanding U.S. capacity to gain tariff-free access could weaken the steel market outlook.

In this environment, Cleveland-Cliffs stands out due to its high exposure to finished steel prices. “Cliffs is most leveraged to changes in finished steel prices,” Jefferies analyst Christopher LaFemina emphasized.

The company operates high fixed cost blast furnace assets and holds nearly $8 billion in net debt, which amplifies its sensitivity to price shifts.

While current spot prices allow for free cash flow generation and debt reduction, LaFemina noted that “the risk is just too high to justify a Buy rating at present.”

The analyst warned that the surge in Nippon’s capital spending—expected to total $14 billion over just 14 months—could significantly impact medium-term steel fundamentals by increasing volumes and lowering production costs.

That, combined with already subdued infrastructure-driven demand and growing supply, puts downward pressure on steel price forecasts.

Despite these concerns, LaFemina acknowledged potential upside from political developments or a sustained rebound in steel prices, stating that “this leverage is a double-edged sword.”

He also adjusted its estimates to reflect a more prolonged impact of tariffs on Stelco (TSX:STLC) sales, a factor further clouding Cliffs’ near-term outlook.

Jefferies had initially expected a more modest $3 billion investment from Nippon into aging blast furnaces. The revised plan, which now includes building a new steel mill, suggests a more aggressive capacity expansion that could shift the supply landscape.

The expected $14 billion investment "would leave ~$10bn to be invested in U.S. Steel’s current operations, which would likely negatively affect medium-term steel market fundamentals as it could lead to higher volumes and lower costs,” LaFemina continued.

Tariffs may offer some near-term support, but the longer-term pricing outlook now tilts slightly to the downside, he added.

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