Spot steel prices
Previously, we saw how steel prices weakened later in 2014. Spot steel prices corrected by ~10%. However, investors need to understand that volatility in steel prices doesn’t have the same impact on all steel plays.
Spot versus contract sales
Steel companies sell their products on spot steel prices or under long-term supply agreements. Sales made under spot prices are more vulnerable to volatility in steel prices. Basically, this means that a company that has a higher percentage of sales tied to spot market prices is at a greater risk when steel prices are low.
Breakup of revenues
The above chart shows the breakup of revenues for select steel companies. As you can see, AK Steel (AKS) has ~75% of its sales tied to contract customers. Earlier, the ratio was higher at ~80%. As AK Steel (AKS) integrated Dearborn operations, its exposure to contract sales decreased a little. Dearborn had close to two-thirds of sales tied to contract customers.
U.S. Steel Corp. (X) gets ~60% of revenues from sales made under contracts. The contracts have cost-based prices. The prices are based on monthly or quarterly steel prices. Some of its contracts are firm contracts. Firm contracts aren’t exposed to fluctuations in raw material or steel prices.
At the beginning 2014, ~45% of Nucor’s (NUE) steel mill customers had contract pricing. Generally, these terms are non-callable in nature. The prices are fixed. They depend on scrap and other raw materials’ prices. Nucor and Steel Dynamics (STLD) are among the top holdings of the SPDR S&P Metals and Mining ETF (XME).
In the next part of this series, we’ll discuss why raw material costs could come down for steel plays in 2015.