In the last part of this series, we saw the raw material strategies for ArcelorMittal (MT) and U.S. Steel Corp. (X). Now, we’ll analyze why AK Steel (AKS) could benefit from lower iron ore and coal prices. Please be aware that these companies form the investment universe for the SPDR S&P Metals and Mining ETF (XME).
AK Steel’s raw material strategy
The above chart shows steel plays’ raw material self-sufficiency. As you can see, ArcelorMittal produces more than 60% of its iron ore through captive mines. The ratio is 80% for U.S. Steel. However, AK Steel is targeting 50% self-sufficiency in iron ore through its joint venture, or JV, with Magnetation.
Magnetation joint venture
The plant would be in the startup mode until the first half of 2015. After that, AK Steel expects to meet almost one-third of its iron ore requirements through this JV. The plant could face financial difficulties if iron ore prices stay at low levels. AK Steel completed its share of capital contribution to this JV. As a result, it doesn’t have any financial obligations. In contrast, U.S. Steel and ArcelorMittal’s mining assets are part of their core operations.
AK Steel is less vertically integrated—compared to other steelmakers. This will give AK Steel a competitive advantage in the current market scenario.
Some of AK Steel’s contracts with Cliffs Natural Resources (CLF) could be coming up for renegotiation in 2015. This should benefit AK Steel.
AK Steel was targeting a 50% self-sufficiency in coal. Looking at the current market scenario, it’s only producing a quarter of its coal requirements through captive mines. It has been able to source coal from third parties at competitive rates.
Global macro factors are the biggest concern for US steel plays. We’ll discuss these in more detail in the next part of this series.