Cleveland-Cliffs' Earnings Inflection: Reshoring, Auto Share, and the Leverage Escape
Q2 EBITDA tripled sequentially and guided Q3 EBITDA of ~$575M is the strongest in three years
CLF · Earnings Call · 2026-07-23
A Long-Awaited Inflection
After several quarters of promising but unfulfilled earnings power, Cleveland-Cliffs delivered a quarter that finally backed up the rhetoric. Adjusted EBITDA of $286M in Q2 is the best in two years, and free cash flow turned positive for the first time in eight quarters. As Celso Goncalves put it, “Our adjusted EBITDA in the second quarter was $286 million, our best quarter in 2 years.” — Celso Goncalves, Chief Financial Officer · 2026-07-23 Lourenco Goncalves framed it as a shift from promise to proof: “After several quarters of talking about the future earnings power of this company, we can finally point to tangible evidence that the progression we have been forecast is now reality.” — Lourenco Goncalves, Chief Executive Officer · 2026-07-23
The inflection is being driven by three converging forces: auto demand that has returned to 2023 levels, a pricing surge that is flowing through a two-month lag, and cost improvement from operational optimization.
We expect adjusted EBITDA of approximately $575 million in the third quarter, which would be our strongest quarter in 3 years.
Auto Demand, Trade Policy, and the $500M Contract Reset
The company's automotive business is resurging. Automotive shipments hit their highest level in two years during the quarter, and CLF took home top supplier awards from both Toyota and General Motors. Lourenco Goncalves attributes much of this to Section 232 and the broader reshoring push, arguing that "there is no more escape valve" for automakers to source steel from Mexico or import cars from Korea. Automotive demand is now a central pillar of the guide.
The pricing read-through is equally powerful. A large portion of fixed-price contracts are being reset this fall, and management expects those resets to add ~$500M of annualized EBITDA. As Lourenco put it on the call, “So we negotiated last year contracts on the backdrop of a much lower price environment. So without giving any numbers on that, the expectation that these contracts were reset for much higher prices are just a foregone conclusion.” — Lourenco Goncalves, Chief Executive Officer · 2026-07-23 This is consistent with the trajectory of fixed price contract pricing that was negotiated a year ago when U.S. steel prices were roughly 25% lower.
Deleveraging, Asset Sales, and a Deleveraging Path
With free cash flow now positive, CLF has turned its attention to the balance sheet. The company expects $400M in proceeds from property sales during the second half of the year, and has set a target of sub-2.5x leverage within a year. "The bulk of the $400 million proceeds from our property sales are expected to come in the second half of this year," said Celso. The company is also leaning on asset sales to accelerate the balance sheet repair, while using the proceeds to fund the coming Burns Harbor reline and maintain a flexible capital structure.
The Palantir AI partnership is another source of forward-looking margin improvement, as the company upgrades scheduling and maintenance practices to reduce costs per ton. While the absolute FCF run-rate is still suppressed coming out of a two-year downturn, the trajectory is unambiguous.
Cleveland-Cliffs' free cash flow has been consistently negative through 2024-2025 and into Q1 2026, but Q2 marked a return to positive territory, supported by rising prices, lower inventory, and improved operations.
Stelco and the Canadian Wrinkle
Not everything is in the green. Stelco's results improved, but its finishing lines continue to lag, and Lourenco warned that "the future competitiveness of our galvanizing lines in Ramita is at risk" without stronger Canadian trade protection. The company is prepared to shift production toward hot-rolled if Canadian galvanized pricing doesn't recover—a pragmatic, if blunt, approach.
The Canadian slug is a reminder that CLF's earnings power is not yet fully baked. But the guide for Q3 is built on order books and pricing visibility, not hope. And the company's stance on POSCO has softened, with Lourenco noting “We are still engaged, we're still talking. We still like each other... we are a lot less in a hurry now.” — Lourenco Goncalves, Chief Executive Officer · 2026-04-20—a marked shift from earlier quarters when the Korean partnership was a headline priority.
For investors, the thesis is now simple: the steel cycle is up, the auto mix is up, and the balance sheet is being repaired deliberately. The stock remains well below its 2011 peak, but the earnings power is returning faster than the share price reflects.