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AK Steel’s Guidance Spooked Investors

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AK Steel’s guidance

As we noted in the previous part, AK Steel’s (AKS) third-quarter earnings fell short of analysts’ estimates. The company’s shipment and average steel selling price growth, which are key metrics for steel companies, have lagged its peers like Nucor (NUE), Steel Dynamics (STLD), and U.S. Steel Corporation (X). Operational issues and a demand slowdown from the automotive sector had a negative impact on AK Steel’s shipment profile. Lower contract prices have been a headwind for average selling prices. While AK Steel’s earnings miss spooked investors, its guidance also fell short of the expectations. AK Steel’s guidance has spooked investors for the last three quarters.

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Lower margins

AK Steel expects its “fourth quarter flat-rolled steel shipments to be essentially flat compared to the third quarter.” The company expects a sequential fall of 2%–3% in its fourth-quarter average selling prices due to less automotive shipments. The company also expects its fourth-quarter adjusted EBITDA margin to contract by 150 basis points compared to the third quarter. While the fourth quarter is typically seasonally weak for US steel companies in general and AK Steel in particular, the guidance looked dismal. Some of AK Steel’s automotive contracts are scheduled to reset at the beginning of the fourth quarter. ArcelorMittal (MT) is the leading steel supplier to the automotive sector.

While AK Steel hasn’t sealed these contracts yet, which it termed as not “atypical,” the expected increase in contract pricing is part of AK Steel’s fourth-quarter guidance. AK Steel’s remarks on the 2019 outlook added to the gloom, which we’ll discuss in the next part.

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