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Why AK Steel Expects Its Profits to Fall in 3Q17

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AK Steel

In the previous part of this series, we looked at steel companies’ 2Q17 ASPs (average selling prices). In this part, we’ll look at AK Steel’s 3Q17 ASP guidance. It’s worth noting that generally, steel companies don’t provide ASP guidance during their quarterly earnings calls. However, Nucor (NUE) and Steel Dynamics (STLD) provide some color on their ASPs during their earnings guidance, which is typically 15 days before the quarter ends.

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Steel prices

There’s nothing surprising about steel companies not giving ASP guidance in advance. To be sure, steel prices are determined by market factors that include the demand-supply equation as well as raw material prices (CLF). Since spot steel prices tend to be quite volatile, providing ASP guidance might not be feasible for steel companies (X).

However, AK Steel’s (AKS) business model is different from some of its peer. It has a high contract exposure compared to most other steel companies. Also, a high percentage of AK Steel’s contracts have fixed pricing, which basically means that the price is settled in advance and not affected by market factors. However, some of AK Steel’s contracts as well as its spot sales are linked to some underlying index. Having a high contract exposure provides AK Steel with more ASP visibility than most other steel companies.

3Q17 guidance

During its 2Q17 earnings call, AK Steel said it expects its 3Q17 ASP to be “marginally lower” than 2Q17. It listed fewer automotive shipments and a lower raw material surcharge as the key drivers of lower ASP.

Lower ASP could also impact AK Steel’s 3Q17 margins. We’ll look at steel companies’ profit margins in later parts of this series. But before that, let’s compare steel companies’ 2Q17 EBITDA (earnings before interest, tax, depreciation, and amortization).

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