The first-quarter numbers from Cleveland-Cliffs (NYSE:CLF) weren’t much to write home about. CLF stock opened higher on Friday of last week, after they were posted, only to make its way to an intraday loss of 3.5%.

Then something curious happened. Cleveland Cliffs stock fully recovered. It’s held onto that rebound in the meantime.

The stock’s still not above key lines in the sand, to be clear, and is far from kick-starting a fresh, full-blown uptrend.

There’s a reason the largely tacit bulls have kept Cleveland Cliffs stock in the hunt for a breakout move, though.

That is, despite an assumed lack of global economic strength, industry insiders have been hard-pressed to find real evidence that the iron ore pellet business is truly on the defensive.

CLF stock still looks just one nudge away from a wave of bullishness, and the undertow is pushing it in that direction.

The Quarter That Wasn’t

Blame Vale (NYSE:VALE) for the difficulty in pinning down the true strength of current and future iron ore market. The Brazilian behemoth suffered not one but two dam bursts near its mines in recent years, with the most recent one unfolding in January of this year. The latter one claimed a few dozen lives, and forced a shutdown of a major mining operation that has affected the global supply iron ore pellets.

To what degree it’s impacted that supply isn’t clear. All producers like Vale and Cleveland Cliffs throttle their output to adjust for price fluctuations, but with Vale subdued, rivals like Vale and smaller Ferrexpo may have offered lower prices to secure new customers.

Cleveland-Cliffs’ Q1 results, however, don’t quite jibe with the market price of iron ore and the apparent demand for it.

As one would expect with Vale’s partial absence, iron ore priced advanced from $76 per tonne before Vale’s January accident to $93 per tonne now. The advance only extends price growth that started to take shape in 2016 though, and if demand was the driver, one couldn’t tell it from last quarter’s numbers from Clevaland Cliffs. Total volumes of ore pellets sold fell from 1.61 million tonnes for the comparable quarter a year earlier to only 1.55 million tonnes for the three-month stretch ending in March.

Cleveland Cliffs didn’t enjoy much of iron’s price growth either. While volume was down, revenue was as well, falling nearly 13% from $180 million to $157 million.

The Q1 numbers weren’t the problem, though. It was the comparison figures from a year earlier that were unfairly high.

Iron Ore Market to Remain Robust

While consumption of ore pellets isn’t terribly seasonal, the industry’s capacity to ship it is. This is particularly true of Cleveland Cliffs, which relies heavily on access to access to locks and causeways that facilitate deliveries to its customers in the lower Great Lakes. An abnormally cold and lengthy winter season this year shut down water-based shipping in that region for longer than it may normally have been halted.

Cleveland Cliffs was also a victim of unfortunate timing.

CFO Keith Koci explained during the first-quarter conference call: “During last year’s first quarter, because the AMM hot-rolled coil price rose from $653 to $860 per short ton from the beginning to the end of the quarter. We had an enormous favorable revaluation adjustment. With HRC prices remaining relatively flat during this year’s first quarter, we had no such adjustment at this time, explaining the year-over-year decline in revenue rate.”

AK Steel (NYSE:AKS) confirmed the stagnation of hot rolled coiled steel prices with its recently quarterly report, but dialed back its profit outlook on the likelihood that HRC prices will remain suppressed through the end of the year.

Bank of America recently downgraded U.S. Steel (NYSE:X) on a similar concern.

There’s a disconnect between finished steel and iron ore right now. The supply of iron feeding steel mills remains tight enough to lay the groundwork for more strength ahead.

The evidence in plentiful. Case(s) in point: China’s demand for iron ore grew for a fifth straight month in April. A recent World Bank report suggested iron ore prices would rise another 11% this year, fueled by disruptions not just with Vale’s mines, but with mines operated in Australia by BHP Group (NYSE:BHP) and Rio Tinto (NYSE:RIO). And Ferrexpo recently predicted the seaborne ore pellet market would be short of demand this year between five million and ten million tonnes.

Looking Ahead for CLF Stock

It’s this backdrop that quelled the knee-jerk selling to Cleveland Cliffs’ first-quarter report. And, it’s this undertow that’s kept CLF stock on the cusp of a rally that’s been brewing — but on hold — for months. Few traders are willing to the ones to stick their neck out first, but there are plenty of traders willing to follow someone else’s lead.

Bolstering the bullish case is a forward-looking price-to-earnings ratio of 7.1 — a valuation that suggests investors have priced in a worst-case scenario, and then some. An ongoing tariff battle is at least partially to blame for the pessimism.

Even if those tariffs remain in place in perpetuity, though, there’s room and reason for gains. The trick is just getting enough traders to give Cleveland Cliffs stock the right nudge. Breaking above the upper boundary of the channel that’s been in place 2016 is the key, though there’s room for a decent gain between here and there.

— James Brumley

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Source: Investor Place