AK Steel’s 2017 outlook
Higher input costs
AK Steel (AKS) sources all of its iron ore and ~85% of its coal requirements from third parties. AK Steel seems to have dodged the big spike in coking coal prices by negotiating its coal contracts early. During the company’s 4Q16 earnings call, AK Steel noted that its coal costs rose only ~5% this year.
However, AK Steel is still exposed to iron ore prices (CLF) (NUE). Although the company hedges most of its iron ore needs, higher iron ore prices would still increase its unit production costs. Although hedging would help the company escape day-to-day price volatility, higher iron ore prices would still impact the company’s unit production costs. AK Steel expects a LIFO[1. last in, first out] expense of $25 million in 1Q17 on rising input costs.
Along with higher input costs, AK Steel (AKS) is also expected to incur higher maintenance expenses in fiscal 2017. According to its management, the company could face planned outage charges of $90 million this year compared to $62 million in 2016.
While AK Steel’s costs could spike in 2017, its guidance on average selling prices also disappointed markets. We’ll discuss this more in the next article.