Cleveland-Cliffs' Tariff Optimism Doesn't Impress Analyst

A leading domestic steel supplier, Cleveland-Cliffs Inc CLF, published a preliminary report expecting 2024 to be one of the worst years in over a decade. The report characterized 2024 by muted demand from the automotive sector — the company’s largest customer base — and broader economic headwinds.

"We expect 2025 to be a year of recovery. We have already seen improvements in our order book, both automotive and non-automotive, and are confident that the manufacturing-friendly items on President Trump's agenda will have an outsized benefit on Cleveland-Cliffs," CEO Lourenco Goncalves said.

Still, tariffs have been a double-edged sword for the U.S. steel industry. While they aim to protect domestic manufacturers from foreign competition, they often lead to higher prices for imported and domestic steel.

Canada and Mexico, the largest suppliers of steel to the U.S., accounted for 35% of all steel imports in 2024, according to the American Iron and Steel Institute. The reimposition of tariffs on these countries has sparked concerns about retaliatory measures and potential supply chain disruptions.

"The issue with tariffs is everybody raises their prices, even the domestics. We're all going to get a price increase," Ralph Hardt, owner of Belleville International, a Pennsylvania-based manufacturer, said for the Wall Street Journal.

Morgan Stanley's 2025 outlook for the steel sector agrees with those concerns, predicting higher steel prices due to tariffs but tempered by limited demand growth. The firm forecasts a modest 1.6% increase in U.S. steel consumption in 2025, driven by gains in construction and infrastructure projects. However, continued weakness in the automotive sector, which accounts for 19% of steel demand, could offset these gains.

Morgan Stanley also notes the influx of new domestic steel capacity, spurred by earlier tariffs, could lead to oversupply and price pressures in the medium term.

Cleveland-Cliffs’ outlook is mixed. While the company stands to benefit from reduced competition due to tariffs, its financial leverage remains a concern following the Stelco acquisition. In addition, the company has just issued an additional $750 million bond sale to boost its finances.

Citing weaker-than-expected auto demand and stable steel prices as factors that could weigh on free cash flow generation, Morgan Stanley maintains its Equal Weight rating but lowers its price target for Cleveland-Cliffs from $13 to $11 per share.

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Photo: Courtesy Cleveland-Cliffs