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Is an Automotive Slowdown Looming over AK Steel?

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Feb. 9 2017, Updated 10:36 a.m. ET

Automotive slowdown

AK Steel (AKS) earns most of its revenues from the automotive sector (F). ArcelorMittal (MT) is the leading global supplier to the automotive sector. Nucor (NUE) has also been working to increase its footprint in the auto steel market.

Almost two-thirds of AK Steel’s steel shipments are to the automotive sector. The company’s reliance on the sector has increased over the last year, as it has cut its exposure to the commodity-grade spot steel products.

US auto sales have risen on a yearly basis for the past seven years. However, most observers expect that auto sales probably plateaued in 2016, at least for the near term. Further, automakers are looking to rationalize their inventory levels in some brands.

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Average selling prices

As a result of these stalled inventory levels, we could see lower auto build rates in 2017. Plus, higher interest rates and gasoline prices don’t bode well for auto demand. In addition to the expected moderation in the auto sector’s steel demand, AK Steel’s lower-than-expected ASP (average selling price) guidance subdued markets. Most auto companies buy steel under annual contract pricing.

Markets were expecting AK Steel’s 1Q17 ASP contract pricing to improve significantly compared to 2016. However, AK Steel said that it expects its 1Q17 ASP to be slightly higher than 4Q16 compared to 1Q16.

Although there are other moving parts that could impact AK Steel’s 1Q17 ASP, the impact of lower-than-expected auto contract pricing could also be a driver.

In the next article, we’ll see how analysts are rating Steel Dynamics (STLD) after its 4Q16 earnings release.

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