As we’ve discussed, AK Steel (AKS) has been strong this year but faces several medium-to-long-term headwinds. Conversely, the company could see cost benefits from its Ashland Works closure in the next few quarters, and its downstream business is expected to contribute more to its earnings in future years. AK Steel has said that its automotive contracts, sealed at higher prices this year, could be margin accretive. However, lower spot steel prices could be a headwind for the company.
Steel companies are facing across-the-board cost inflation for raw materials such as coke and electrodes. Iron ore prices have skyrocketed this year after issues at Vale (VALE). Although AK Steel hedges its iron ore requirements, the company could still be impacted by the higher prices. As AK Steel CFO Jaime Vasquez said during the company’s fourth-quarter earnings release, “We had very good protection last year. But, as you know, on our hedging program, you kind of average into this. I mean, if costs are continuing to move up, you’re averaging into a higher-cost scenario.”
AK Steel expects adjusted EBITDA of $515 million–$535 million this year, assuming average hot rolled coil prices of $720 per ton. The company posted adjusted EBITDA of $563 million last year and $528 million in 2017. Next, we’ll conclude this series by looking at whether AK Steel’s risk-return profile aligns with its valuation.