Steel is one of the most cyclical businesses in the market, and profits can swing dramatically when prices move. But those same swings create opportunities when a company emerges from a downturn with improving demand and stronger customer contracts.
One major American steel producer just delivered its best quarter in three years and unveiled a 2027 earnings outlook that caught Wall Street by surprise.
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What Just Happened
Cleveland-Cliffs Inc. (NYSE: CLF) reported third-quarter revenue of $5.6 billion, up from $5.2 billion in Q2. Adjusted EBITDA more than doubled sequentially to $612 million, while adjusted EPS swung from a $0.20 loss to a $0.28 profit. Management had previously guided for approximately $575 million of quarterly EBITDA.
The biggest surprise came from the outlook. Cleveland-Cliffs expects fourth-quarter adjusted EBITDA of approximately $715 million, followed by more than $4 billion in 2027. That longer-term figure is dramatically higher than the roughly $2.5 billion analysts had been expecting.
The improvement reflects higher selling prices, rising shipments, lower operating costs, and more favorable customer contracts. The stock rallied sharply following the announcement, but the bigger question is whether management can deliver on such an aggressive forecast.
Steel Prices Are Finally Working In Its Favor
Cleveland-Cliffs is one of North America's largest integrated steel producers. It controls operations spanning iron ore mining, steel production, processing, and finishing, with particularly strong exposure to the automotive industry.
That integration provides operational advantages, but it also makes the company sensitive to changes in steel prices and industrial demand.
The third quarter showed how quickly profitability can improve when conditions turn. Steel shipments reached 4.15 million net tons, up from 4.03 million in Q2. Average selling prices increased to $1,177 per ton from $1,124, while cash costs improved.
Those changes may look modest, but steelmaking involves enormous fixed costs. When production increases and selling prices rise, much of the improvement can flow directly into margins.
The company's steelmaking cash margin nearly doubled sequentially to $685 million. That helped produce its strongest quarterly EBITDA performance in three years.
The Contract Reset Could Be The Bigger Catalyst
The most interesting development is happening in negotiations for 2027 customer contracts.
Cleveland-Cliffs sells substantial volumes through annual agreements with service centers, manufacturers, and other industrial customers. Many of those contracts reset at the beginning of each year.
Management says the latest negotiations have been unusually favorable. Customers are agreeing to higher prices, smaller discounts, and stronger minimum-volume commitments.
The company is also introducing take-or-pay terms, meaning customers must pay for a contracted minimum volume even if they ultimately purchase less steel. Management reported that more than half of customers involved in the latest negotiations had already accepted the new structure.
The company expects the contract improvements alone to generate more than $1 billion of additional annual EBITDA, before considering further changes in underlying steel-price indexes.
That creates some visibility into next year's earnings, although the contracts do not eliminate exposure to commodity prices or customer demand.
Trade Policy Is Supporting Domestic Producers
Another major factor is the current U.S. trade environment.
Higher tariffs and tighter enforcement have reduced foreign steel imports, giving domestic producers greater pricing power. Cleveland-Cliffs says imports remain approximately 35% to 40% below levels preceding the current 50% Section 232 steel tariffs.
Less import competition allows domestic producers to negotiate more favorable contracts, particularly when customers prioritize reliable supply over the lowest quoted price.
The company is also benefiting from stronger demand tied to infrastructure, manufacturing, and industrial investment. Automotive remains especially important, accounting for 28% of steelmaking revenue during Q3.
However, this creates a policy-dependent element to the investment case. Changes in tariffs, trade agreements, or import volumes could weaken pricing conditions.
You therefore need to view the 2027 forecast partly as a bet that the current industry environment remains supportive.
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Debt Reduction Is The Next Major Test
Cleveland-Cliffs carries substantial debt, making its improving cash generation especially important.
The company ended September with approximately $7.6 billion of long-term debt and $3.2 billion of available liquidity. That liquidity includes borrowing capacity, not simply cash sitting in the bank.
Third-quarter operating cash flow reached $224 million, compared with a $143 million outflow a year earlier. After $152 million in capital expenditures, the company generated about $72 million in free cash flow.
That is progress, but the first nine months of 2026 still produced approximately $332 million of negative free cash flow after capital expenditures.
Management expects stronger cash generation and proceeds from property sales to accelerate debt reduction during Q4. Its goal is to bring net leverage below 2.5 times EBITDA by mid-2027.
That target matters because debt magnifies both the upside and downside of a cyclical recovery. Falling leverage would reduce financial risk and allow more future cash flow to benefit shareholders.
The Valuation Depends On 2027 Delivering
At a market capitalization of roughly $8 billion and enterprise value near $16 billion, Cleveland-Cliffs looks inexpensive relative to management's ambitious 2027 forecast.
If adjusted EBITDA exceeds $4 billion, the business would trade at approximately four times that earnings measure using its recent enterprise value.
But that calculation has an important limitation: it assumes management delivers the forecast.
Steel companies frequently appear inexpensive near cyclical profit peaks, just before earnings start declining again. An attractive multiple based on unusually strong commodity prices can disappear quickly if those prices reverse.
The more convincing valuation argument will come from sustained free cash flow, lower debt, and evidence that improved customer contracts support profitability through a weaker industrial environment.
What Could Trip It Up
Steel prices remain the biggest risk. Management's 2027 outlook depends partly on prevailing price forecasts, so a decline in domestic steel prices could significantly reduce expected earnings.
Heavy debt adds financial risk, while automotive exposure leaves Cleveland-Cliffs sensitive to vehicle production and manufacturing demand. Trade-policy changes could also bring renewed import competition.
Finally, its Canadian Stelco operation continues to face problems in galvanized steel, prompting management to idle certain production lines. Not every part of the business is benefiting equally from the recovery.
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My Take
Buy on pullbacks, with a higher-risk position size. Cleveland-Cliffs has delivered a convincing operational improvement, while stronger customer contracts and a favorable domestic pricing environment create a credible path toward much higher earnings.
If management approaches its 2027 EBITDA target while reducing debt, shareholders could benefit substantially.
The key risk is the steel cycle. The stock has already reacted strongly to the new outlook, and much of the investment case depends on continued favorable pricing.
I would avoid chasing the earnings rally and focus on debt reduction, free cash flow, and confirmation that 2027 contracts support the expected profitability.
Action Recap
🏭 Looking to buy? Buy on pullbacks rather than chasing the post-earnings rally.
📈 Already own it? Hold while steel margins improve and debt reduction accelerates.
⚠️ Main risk to respect: A reversal in steel prices could undermine the ambitious 2027 earnings forecast.
That’s all for today. Thank you for reading. If you have any feedback, please reply to this email.
Best Regards,
— Adam Garcia
Elite Trade Club
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