Contracts don't overcome economics.

Throughout this commodity down cycle, investors have often relied on contracts to justify otherwise un-economic investments:

Example: Cliffs Natural Resources (CLF) in 2014 (and earlier)

"...the company's core U.S. iron ore business has long-term supply contracts and therefore is not exposed to the volatile spot prices."

...except actual results show something different:

CLF's contracts do index worldwide iron ore prices, even if indirectly. Even if they didn't, how would their customers compete on the open market if their costs are extremely higher? They don't:

"For its part, Cliffs has responded in filings in Delaware that Essar Algoma is seeking to gain a windfall by persuading the Ontario Superior Court to force Cliffs to supply the ore on the terms the steel maker wants"

Contracts are meant to reduce swings, not a sustained trend in one direction. Customers have to try to negotiate, whether through changing terms or bankruptcy.


Now that iron ore, oil down, liquefied natural gas prices have fallen by 50%+ don't think "long-term" contracts are nearly as helpful as investors believe.


Disclosure: short LNG.