AK Steel Business Model Calls for Less Spot More Value Added

Net sales were $1.54 billion on shipments of 1,655,800 tons, compared to net sales of $2.00 billion on shipments of 2,010,200 tons for Q4 2014 and net sales of $1.71 billion on shipments of 1,871,200 tons in Q3 2013. Shipments declined in Q4 due to increased focus on sales of higher margin, value-added products and reduced sales to the carbon steel spot market.

“We achieved solid operational improvements during the fourth quarter as a direct result of focusing on the things that we can control,” said Roger K. Newport, AK Steel’s Chief Executive Officer. “We intentionally reduced our exposure to the spot markets as part of our margin enhancement initiatives. These initiatives include investing resources where value is realized, reflecting our margin enhancement focus.”

A stronger mix of higher value steels to the automotive market and improved selling prices for electrical steels resulted in an average selling at $929 per ton, a 2 percent increase from third quarter but 6 percent lower than the fourth quarter of 2014.

Cost of products sold on a per ton basis in the fourth quarter of 2015 benefited from focus on cutting costs and a decline in raw material prices. Planned outages in fourth quarter incurred costs of $7.0 million.

The company ended fourth quarter of 2015 with total liquidity of $700.2 million, consisting of cash and cash equivalents and $652.3 million of availability under the company’s revolving credit facility.

Full-Year 2015 Results

For 2015, the company reported a net loss of $510.7 million and an adjusted net loss of $53.5 million. Sales for 2015 were $6.69 billion compared to sales of $6.51 billion in 2014. Shipments for 2015 were 7,089,200 tons compared to 6,132,700 tons in 2014. The increases are primarily the result of the September 2014 acquisition of Dearborn Works and continued strength in the automotive market, offset by lower sales to the carbon steel spot market.

The average selling price for 2015 fell 11 percent year over year to $942 per ton due too significantly lower carbon steel selling prices impacted by low-priced steel imports and lower raw material prices. Results were also affected by planned outages ($50.6 million) and unplanned costs ($41.2 million) at Ashland Works blast furnace.

AK Steel confirmed that Ashland Works is scheduled to be idled through the remainder of 2016 but emphasized that decision will be reviewed on an ongoing basis. Operations will be resumed whenever production is able to support profitability. The company is working with raw material providers to adjust contract commitments.

AK Steel doesn’t expect any priced increases in raw materials in the near term due to “plenty of capacity and plenty of supply.”

Newport commented on declining spot prices during the company’s conference call:

“The significant decline in spot market prices over the past 18 months has been well publicized throughout the industry. Unfortunately, as we have indicated before, contract business is not immune to these pricing pressures. At AK Steel, one of the reasons that we focus on the automotive contract business is that over time the pricing is not nearly as volatile as in the spot market. So, while directionally, contract in spot prices tend to move in unison. The pricing peaks and valleys experienced over the course of a cycle are significantly reduced on the contract side.”

Jaime Vasquez, CFO, said reducing spot market sales will help offset marginal reduction in shipments in the first quarter. “Additionally, we estimate our average selling prices to be about the same as the recent fourth quarter. “

“On the trade case front, the steel industry has made some progress in recent months, but not to the level we have anticipated,” said Newport. “For example, in a corrosion-resistant trade case, the preliminary duties levied against China were quite in line with industry’s expectation. Yet, the preliminary anti-dumping duties for other countries were rather disappointing.”

“We believe it’s been very effective for China. As you’ve seen, you put the two duties together, the countervailing duties and anti-dumping, those are now totaling over 400%. But they haven’t been as effective for some of the other countries being more in the single-digit to low-double-digit percentages. A challenge that we’re having and we’re focused on is what I’ll call the whack-a-mole, which is monitoring where the import is coming from and make sure we’re seeking all available remedies out there to ensure that we have a level playing field. Because the issue is not so much imports coming in, they have and always will be part of our market. It’s really what is the pricing of that material and are they being subsidized or are they selling it at unfair levels.”

“We’ll also look at any other options that remain out there on the table and addressing imports as they come in because we can’t sit still and let imports destroy the steel industry and other related industries.”