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What Challenges Could AK Steel Face in 4Q17?

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Challenges

As noted previously, US steel prices look stable in the near term. Any support from the Section 232 imports investigation could be another positive trigger for US steel prices. Having said that, steel companies also face some challenges. In this article, we’ll see what challenges AK Steel (AKS) could face in 4Q17.

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Coal prices

Coal prices have been strong recently. AK Steel buys coal under annual contract pricing, which is the norm in US steel markets (CLF) (NUE). U.S. Steel (X) and ArcelorMittal (MT) also buy coal under annual contracts in their US operations. U.S. Steel buys coal under quarterly contracts in Europe.

This year, AK Steel managed to dodge 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% for 2017. As of now, there is no publicly available information about AK Steel’s 2018 coal contracts. If we see a spike in the company’s 2018 coal costs, it could negatively impact its earnings.

Automotive contracts

As noted previously, AK Steel sells most of its steel to automotive customers under annual contracts. Now, as US car sales have been weak, automotive customers might try to push their suppliers including steel companies for more competitive offers. A less-than-expected increase in average selling prices could be another tailwind for AK Steel next year.

In the next and final article, we’ll see how markets are valuing AK Steel given the current headwinds and tailwinds.

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