uploads/2018/02/part-8-challlenge-auto-sales-1.jpg

Analyzing What Could Be AK Steel’s Biggest Risk

By

Updated

Risk

Almost two-thirds of AK Steel’s (AKS) shipments are to the automotive sector. ArcelorMittal (MT) is the largest global steel supplier to the automotive industry. Notably, the automotive steel market is a lucrative end market for steel companies like U.S. Steel Corporation (X). The margins in the auto steel business are usually higher compared to some of the other end markets. However, AK Steel could face some challenges in its biggest end market.

Article continues below advertisement

Falling car build rates

First, US auto build rates fell last year after they hit a peak in 2016. This year, most market observers see flat to slightly lower production rates. Lower auto build rates lead to lower steel demand from the automotive industry. Although in absolute terms, US auto sales are still high, the industry is still tapering down from the 2016 highs.

Higher competition

Second, and probably more importantly, Nucor (NUE), the largest US-based steel producer (XME), has been expanding its presence in the automotive market. During Nucor’s 4Q17 earnings call, John Ferriola, Nucor’s CEO, said, “Nucor grew its 2017 automotive market shipments by 7% year-over-year to 1.5 million tons of sheet and engineered bar products. That growth was achieved in a year when North American automotive production declined approximately 3%. Nucor’s growth is being fueled by expanding both our customer base and penetration of product platforms.” Nucor is also investing in new capacity to expand its offerings to the automotive sector.

The competition seems to be heating up in the auto steel business, which could have a negative impact on the pricing environment. AK Steel also pointed to growing competition in the auto steel business during the 4Q17 earnings call. Competitive pricing in the auto steel business could be among the biggest risks for AK Steel.

In the next part, we’ll see how markets are valuing AK Steel given its risk-return trade-off.

Advertisement

More From Market Realist