AK Steel Shows Surprise Adjusted Profit

A net loss of 17.1 million was reported for Q2 as compared to a net loss of $40.4 million in Q2 2013. Liquidity at end of second quarter was $539 million.

The company incurred costs of $15 million due to higher transportation costs, and reduced production due to delays in supply of iron ore. Planned outages in the second quarter incurred $2.5 million in costs.

“We experienced meaningful improvements in virtually every aspect of our business in the second quarter as compared to the first quarter of 2014,” said James L. Wainscott, Chairman, President and CEO of AK Steel. “Despite facing some significant challenges in the second quarter, on an adjusted basis, we earned net income and we are well-positioned for a much better third quarter and second-half of 2014.”

Dearborn Acquisition

As expected, conference call questions touched on the acquisition of Severstal Dearborn. Wainscott said all the facilities are in good shape and running well although they expect to improve efficiencies and optimize operations to get maximum production. Wainscott emphasized that the acquisition will not cause anything to be shut down at AK Steel or Dearborn.

Information will be submitted to the Department of Justice for antitrust clearance this week or next. The regulatory review is expected to take 30 days. Upon completion of the review, AK Steel plans to move ahead immediately with capital market transactions to finance the acquisition. Currently the financing is expected to be 60 percent of debt securities and 40 percent equitable securities. “We are buying it at a good price, hence it is an attractive investment opportunity for AK Steel,” said Wainscott.

Magnetation and Iron Ore

Construction on AK Steel’s joint partnership in iron ore pellet plant Magnetation Inc. is ahead of schedule and is expected to be in operation in August or September of this year. The Reynoldsberg, Indiana plant will provide iron ore pellets to the blast furnaces at Ashland Works and Middletown Works.

Currently AK Steel is buying 100 percent of its iron ore pellets in the open market and the steep decline in iron prices is expected to lower input costs and enhance margins. Magnetation is expected to produce 3,000,000 tons of pellets annually and provide 50 percent of AK Steel’s needs with the rest supplied by Cliffs and other companies. The facility is expected to begin production in Fall 2015. The discounted price that the 50 percent ownership will provide as well as the lower transportation costs will benefit AK Steel. “We think being at 50 percent self sufficiency is a very good position to be in if prices go up or down,” said Wainscott.

Iron ore inventories are still playing catch up from the winter and many have underestimated the effect, said Wainscott. “In our case I probably cost us 75,000 tons of production in quarter simply because we had to throttle our blast furnaces back. I don’t know if I could give you specific numbers other than to say we are in better shape today, we are not down to single days, we are into weeks in terms of our own inventories. I suspect that is similar for most because there are only so many cargo ships that can deliver the product. The world is still catching up and we are in that world.”

“Imagine how much better we would have been better off this year 2014, how much more we would have been able to produce and sell this year if Magnetation had been up a year ago. So we are delighted they are a year ahead of schedule, but it can’t happen fast enough in terms of our long term strategy to take us out of the really ‘eggs in one basket’ with the northern facilities. Hopefully we will never see another winter like we did, first time in 40 years, but one never knows.”

Maintenance at Ashland Works

There continues to be issues with the blast furnace at Ashland. Ashland experienced a “chill hearth” event last week, explained as excess water in the furnace. AK Steel is assessing the possible need and timing for a larger maintenance job at that furnace. No impact to customers is expected as Middletown and Butler can cover customer needs.

Steel vs. Aluminum

Wainscott spoke at length about the steel vs. aluminum challenge. “As automakers continue to search for new ways to enhance fuel efficiency, I strongly believe steel is, and will remain, the material of choice,” he said. There are three things to keep in mind when considering aluminum over steel said Wainscott: cost, safety, and environment. Steel is less expensive than aluminum for producers and consumers, requires no retooling and is less costly to repair than aluminum. Steel is perceived as the safest choice by consumers. Steel is nearly 100 recyclable and produces less emission over the course of a vehicle’s life cycle.”

Wainscott also commented on the growing demand for electrical steel for high efficiency engines for hybrid and electric vehicles.