Cleveland Cliffs

ISOM 2700 L08 - Group 18 (LAU, Winnie Ying Ling / LEUNG, Kai Fung / WONG, Shek Hay Sebastian / WONG, Tze Wai / YAN, Tsz Fung)

A. Overview

Under the unexpected downturn in its market, Cleveland Cliffs is being unprofitable. Trinidad plant is producing at a cost of $130 per ton of HBI. Yet, the current market price of HBI is $90. For each ton of HBI, loss of $40 is incurred per ton produced. Therefore, the board of Cleveland Cliff is considering whether they should shutter the plant (Proposal 1), switch to "Cold Idle Status" (Proposal 2), or implement the yield improvement project (Proposal 3).

Suggested by HBI pricing forecasts, there is a high likelihood for increase of HBI price that it is highly optimistic for CAL to achieve an increment of future operating profitability. Therefore, after thoughtful analysis, we would recommend Proposal 3 which involves proactive investment in refining the current operations in hopes of capturing the largest profitability when the market rebounds.

B. Evaluation of Proposal 1

By shuttering the plant, the entire workforce would be laid off and any engineering or administrative expenses, would be frozen. As such, the recurring operating losses are eliminated. However, on the other hand, CAL would not be able to seize the favorable opportunities when the market price rebound.

Moreover, the capital investment on the plant and the production technology would be in waste and Cleveland Cliffs would lose an important strategic business unit as the HBI production is one of its important core businesses.

On top of that, the entire workforce will be laid off due to the closure of the plant. This leaves hundreds of industry workers jobless and will cause negative externalities on both social and economic aspects of the community. CAL might be criticized for causing the unemployment which may tarnish the company’s reputation and lower its long term valuation.

C. Evaluation of Proposal 2

The "Cold Idle Status" keeps the plant alert to resume production upon market recovery. This proposal is seemingly the most beneficial option to CAL in the sense that it could minimize loss.

Yet, even under the most optimistic projections, it takes a substantial amount of time for the market price of HBI to return to the long-term average of of $130 per ton in earliest 2004. This option requires CAL to keep a “skeleton” workforce on duty and on the payroll which incurs an annual cash consumption of $6 million per year. The accumulated cost will impose a huge financial burden to CAL which further aggregates its current financial distress.

Meanwhile, this approach fails to tackle the current production inefficiency. The challenges of high yield loss, low flow rate of stationary fluidized bed reactor and low flexibility of production (high interdependence between different process steps) remain unresolved. As a result, Proposal 2 hinders CAL from maximizing its production efficiency, capacity and profitability.

In a nutshell, the approach is more of a “new wine in the old bottle” which fails to increase the company’s long term valuation. Therefore, it is not recommended.