U.S. Steel or AKS: Which Is a Better Play on Spot Steel Prices?

Steel companies sell their products at spot steel prices or under long-term supply agreements. Contract sales either have firm prices or are linked to benchmarks such as raw materials prices or spot steel prices.

Companies with higher shares of contract sales mixes stand to benefit if spot steel prices are falling, as they have already locked in their selling prices to some extent. However, the reverse is also true: In a rising spot steel pricing environment, companies with higher spot exposures could benefit.

Almost 60% of U.S. Steel’s flat steel sales in the United States are either spot or have monthly or quarterly resets. These sales would enjoy the benefits of higher spot steel prices. Spot flat rolled steel prices have risen sharply this year, as we can see in the graph above.

On the other hand, AK Steel (AKS) has deliberately reduced its spot exposure. Contract sales accounted for 90% of AK Steel’s 1Q16 steel shipments. AK Steel may not fully enjoy the benefits of higher spot steel prices compared to U.S. Steel, as many of its contracts may have already rolled over at lower prices earlier this year.

It’s important to note that U.S. Steel has also reduced its spot exposure, though its exposure is still high compared to AK Steel’s. Nucor (NUE) and Steel Dynamics (STLD) have taken the lion’s share of incremental spot steel demand.

Meanwhile, though the stage is set for U.S. Steel’s earnings to improve considerably, the company still needs to deliver. We’ll discuss this more in the next part of the series.

You can consider the Materials Select Sector SPDR ETF (XLB) to get diversified exposure to the materials sector. Metal producers currently form ~12% of XLB’s portfolio.