AK Steel 1Q loss
Previously in this series, we learned that AK Steel (AKS) steel shipments dropped 13% in 1Q 2015 over 4Q 2014. Steel production in the US also fell, as imported steel products took a bigger share of the market. According to AK Steel, imported steel accounted for 34% of US steel consumption in 1Q. Historically, imported steel products account for about a quarter of US steel demand.
Lower steel prices
Surprisingly, the company’s average selling price increased slightly compared to what it was in 4Q, as you can see in the previous chart. AK Steel makes almost 75% of its sales with contracts. Revenue from contract customers is less vulnerable to volatility in the spot market. Also contributing to a better average selling price was a higher proportion of value-added products in the company’s 1Q revenues.
Most other steel companies reported a decline in average selling prices. Nucor (NUE), which reported its earnings on April 23, registered a 38% drop in profits on a year-over-year basis. Steel Dynamics (STLD) also posted lower profits in 1Q.
Steel prices in the United States have corrected over the last couple of years. Compared to 4Q 2014, Nucor’s average selling price dropped by $70 per ton for plate, and by $67 per ton for beams in 1Q 2015.
AK Steel production volumes fell in 1Q 2015. The company produces most of its steel using traditional blast furnaces. Companies using blast furnaces tend to have high fixed-cost structures. As production declines, fixed costs get divided among fewer units, driving up the unit production cost. AK Steel leverage ratios are also quite high relative to its peers.
AK Steel swung to a loss in 1Q, while companies including NUE and STLD remained profitable. These companies use electric arc furnaces to produce steel. Currently, each of these companies form 3.7% of the SPDR S&P Metals and Mining ETF (XME). Carpenter Technology (CRS) forms 3.3% of XME.
Writing off its Magnetation joint venture didn’t help AK Steel’s 1Q earnings. We’ll discuss this in detail in our next part.