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How AK Steel’s Strategy Differs from Other Steel Companies’

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AK Steel

In the previous article, we noted that US steel companies had announced several growth projects in the last year. U.S. Steel Corporation (X), Cleveland-Cliffs (CLF), Nucor (NUE), and Steel Dynamics (STLD) also announced buybacks last year.

However, AK Steel’s (AKS) capital allocation has been different than its peers’. Let’s discuss this difference in perspective.

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Debt reduction

While AK Steel has been making some small investments, such as upgrades to its Dearborn blast furnaces and investments in advanced high-strength steel products, the company’s main objective has been debt reduction and the de-risking of its balance sheet. Last year, AK Steel lowered its net debt by $126 million. AK Steel’s leverage ratios, which were among the highest in this space, swelled further after it financed its Precision Partners acquisition via debt. This year, AK Steel expects its capex to be between $170 million and $190 million compared to $152 million last year.

Plant closure

From a strategic standpoint, AK Steel has been focusing on downstream and value-added products. The company has also lowered its exposure to commodity-grade steel products, and it announced the permanent closure of its Ashland Works facility during its fourth-quarter earnings release. The company put the blame on global steel overcapacity and new capacity additions in the United States, which it said “will create more competition in the commodity steels markets in the United States.”

While other steel companies benefited from higher spot steel prices in 2018, AK Steel couldn’t really reap the benefits, as it had sealed its 2018 automotive supply contracts before the spike in spot steel prices.

In the next and final article, we’ll see how AK Steel and U.S. Steel changed their guidance methodologies in 2019.

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