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Strong Automotive Demand Could Support AK Steel

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Strong automotive demand

Vehicle sales in the United States have been strong in 2015. According to WardsAuto, US auto sales reached a seasonally adjusted annual rate (or SAAR) of 18.1 million units in November. Companies such as Ford (F) and General Motors (GM) are posting record earnings on the back of a strong North American automobile industry.

Automotive shipments

AK Steel (AKS) is the only steel company in our coverage universe that reported higher steel shipments in 3Q15 compared to the previous quarter. The company attributed higher sales to rising automotive shipments.

James L. Wainscott, AK Steel’s CEO (chief executive officer), said during the company’s 3Q15 earnings call that “while no market is perfectly nor permanently insulated from import pressures, safe to say that the automotive sector has historically been served by domestic producers.”

It’s important to note that timely delivery and quality are important to automotive companies. This is why automobile companies tend to mainly order from domestic steel producers. Allegheny Technologies (ATI) is another leading supplier to the automotive industry. Currently, ATI forms 2.0% of the First Trust Materials AlphaDEX ETF (FXZ).

A note of caution

Strong automotive demand should help AK Steel in the coming quarters. Automotive companies generally buy steel under supply contracts from various steel companies. However, Wainscott gave a note of caution. During the company’s 3Q15 earnings call, he said, “On the heels of the substantial decline in carbon steel spot market prices the latest challenge we’re facing is that our contract customers now want to pay lower prices for their steel as well. They want to benefit from the reduction in our steelmaking input costs and all of the actions that we’ve pursued internally to remain healthy in the face of what we believe is unfair trade.”

Nonetheless, the automotive business could continue to remain a lucrative product line for steel companies in the coming quarters. In the next part, we’ll see how AK Steel could benefit from falling raw material prices.

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