What Could Drive AK Steel’s 1Q18 Performance?

As we noted previously, AK Steel’s (AKS) 1Q18 ASP (average selling price) guidance annoyed analysts. In this part, we’ll discuss the explanation that AK Steel’s gave for its lower-than-expected 1Q18 ASP guidance.

Looking at the spot market, although spot flat steel prices have increased in the last month, AK Steel pointed to the lag impact. According to the company, the lag impact “could be a month or it could be as much as 3 months.” Other steel companies like Steel Dynamics (STLD), Nucor (NUE), and ArcelorMittal (MT) also have a lag impact in their spot sales.

AK Steel pointed to the challenging pricing environment in the electrical steel business. Notably, AK Steel is the only US-based electrical steel producer. The electrical steel market was hit by a steep rise in imports last year, which dented the pricing environment.

AK Steel also noted that there’s a lag impact in its contract sales. Roughly half of AK Steel’s annual contracts roll over with new pricing on January 1. The remaining contracts would be rolled over throughout the course of the year. Only half of AK Steel’s 1Q18 contact sales would reflect the higher prices that the company negotiated when annual contract roll over.

AK Steel pointed to higher coal costs in 2018—compared to the previous year. For the contracts in 2017, AK Steel negotiated its coal contracts early in 2016. As a result, its 2017 coal costs didn’t rise as much as some of the other steel companies. Steel companies entered into negotiations after the spike in coal costs in 2016. While AK Steel expects its coal costs to rise this year, U.S. Steel Corporation (X) expects its 2018 coal costs to be similar to the levels in 2017.

Next, we’ll discuss AK Steel’s long-term plans.