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What AK Steel’s New Strategy Could Bring for Investors This Year

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AK Steel’s (AKS) 1Q16 steel shipments declined by 5% as compared to the corresponding quarter last year. U.S. Steel’s (X) 1Q16 flat-rolled steel shipments also fell by a similar quantum in the quarter. However, Nucor (NUE) reported a sharp increase in its 1Q16 steel shipments.

We should note here that steel companies’ shipments generally depend on end-user demand as well as on import penetration. However, 1Q16 steel shipments show a change in AK Steel’s product strategy. AK Steel’s steel shipments have not fallen on a lack of demand. Apparently, flat-rolled steel demand has been quite strong in 1Q16, largely due to the trade actions that have also helped steel mills raise their base selling prices several times this year.

What AK Steel's New Strategy Could Bring for Investors This Year

Reduced spot exposure

AK Steel has deliberately reduced its exposure to the commodity (RJI) (GCC) grade spot steel shipments. The company’s spot steel shipments declined by 34% YoY (year-over-year) to 421,000 metric tons in 1Q16. However, the impact of fewer spot shipments was somewhat compensated by higher shipments to the automotive customers. You can see the trend in AK Steel’s shipments in the above graph.

Higher automotive shipments

The company’s consolidated shipments to the automotive sector, which includes both carbon steel and stainless steel, jumped by 13% YoY in 1Q16. AK Steel also managed to gain market share in the automotive market as Allegheny Technology (ATI) has closed some of its operations.

By reducing its spot exposure and increasing shipments to the automotive markets, AK Steel has achieved two objectives. First, contract sales now account for almost 90% of its total shipments. Second, automotive shipments accounted for 63% of AK Steel’s 1Q16 steel shipments. Historically, automotive shipments have accounted for ~50% of AK Steel’s shipments.

In the next part, we’ll explore what could this new strategy could mean for AK Steel’s investors.

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