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AK Steel: Does the Rally Have Any Steam Left?

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AK Steel

AK Steel (AKS) has gained more than 15% from its 2018 lows. However, AK Steel is still down 17.3% YTD (year-to-date). U.S. Steel Corporation (X) has lost 15.3% YTD. Nucor (NUE) and Cleveland-Cliffs (CLF) have gained 2.3% and 69.2% YTD, respectively, based on the closing prices on September 18. In this part, we’ll discuss some of AK Steel’s near-term drivers.

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Contract sales

AK Steel’s earnings should benefit from higher steel prices in the fourth quarter and beyond. Most of AK Steel’s automotive business focuses on contract sales. In 2018, most of the contracts rolled over before the spike in spot steel prices (MT). In response to an analyst’s question during the second-quarter earnings call, Kirk Reich, AK Steel’s president and COO, said, “As far as the resets, about 20-plus percent, almost 1/4 of our business, will reset at the end of the third quarter of this year. And then another 50-a-little-more-than-that percent resets at the end of the year and then the balance either at the end of the first quarter or kind of throughout the year.”

Steel prices

Now, US steel prices have been holding steady, which should enable AK Steel to get better contract pricing for 2019. Higher contract pricing would support AK Steel’s 2019 ASP (average selling prices) and boost its earnings. Notably, the company’s ASP lagged other steel companies in 2018.

After the restart of U.S. Steel Corporation’s Granite City facility, the company might go after the automotive business to fill its 2019 orderbooks. Nucor has also been targeting the auto sheet business. Despite increased competition, AK Steel should still manage to seal the 2019 automotive contracts at higher prices, which should support its earnings next year.

Visit Market Realist’s Basic Materials page for ongoing updates on US steel companies.

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