Steel Mills

Production Disruptions Temper Q2 Results for AK Steel

July 31, 2018

AK Steel earnings slipped a bit in the second quarter due to production disruptions at two of its facilities. Net income totaled $56 million, down from $77.2 million a year ago. Results were impacted by $11.5 million in operational costs associated with a power outage at Butler Works and a fire at the temper mill at Middletown Works. AK Steel estimates the loss of 60,000 tons of production as a result of the two incidents.

The fire at Middletown Works spread from the temper mill to operating stations causing extensive damage to wiring. The temper mill is still under repair and is expected to resume operation in late September. AK Steel has been using its other temper mills to provide cold roll and electrogalvanized substrate to its customers.

The outage at Butler was due to a lightning strike at its power supplier, which caused a week’s loss of production at the melt shop and some missed opportunities in the spot market, the company said.

Net sales for the quarter increased to $1.74 billion, compared with $1.55 billion a year ago, due to higher selling prices and the addition of sales from the Precision Partners acquisition. Higher steel prices more than offset cost increases during the quarter for raw materials and supplies, including higher costs for graphite electrodes and higher trucking freight rates.

AK Steel’s average price for flat rolled steel was $1,101 per ton. Flat rolled shipments totaled 1.44 million tons compared to 1.431 million tons in the first quarter, and 1.434 million tons in second-quarter 2017.

About 75 percent of AK Steel’s automotive contracts will be up for renegotiation in the second half of 2018. The company expects a positive benefit from higher steel prices and will adjust contracts for higher freight costs.

AK Steel management expects steel demand to continue strong in the third quarter. Flat rolled shipments are expected to increase by 5.0 percent overall. Automotive shipments are expected to be flat in the third quarter despite seasonal auto plant shutdowns and higher carbon steel shipments to the distributors and converters markets. Annual automotive tons for 2019 are expected to be similar to 2018 in the range of 3.5 million to 3.6 million tons.

Average selling price is forecast to increase to $1,105 per flat-rolled ton. Planned outages for the third quarter will total approximately $8 million.

The recent acquisition of Precision Partners is proving to be a strong asset for AK Steel, generating about $85 million in sales. Sales at Precision Partners are robust in all but one of its eight facilities. AK Steel is eliminating unprofitable components at the facility and getting operating rates stabilized, the company said.

AK Tube and Precision Partners are expected to generate sales in the range of $140 million to $150 million in the third quarter. AK Tube is moving forward with third-generation advanced high-strength steels for automotive parts.

Electrical steel products are benefiting from a strong NAFTA market, increased housing starts and the effect of quotas reducing imports from Korea. Chief Operating Officer Kirk Reich said the quotas will give AK Steel more opportunities as the year progresses. Internationally, the market is oversupplied. Trade cases initiated in India and minimum import pricing in Europe is making business difficult, he said.

Commented CEO Roger Newport, “The electrical steel side is both a global issue and a NAFTA issue. And the government is working on addressing the trade issues that are out there and circumvention that we see occur. We see material coming in through Canada and Mexico, for example. So, it’s really critical that we have a comprehensive resolution to all the trade negotiations going on and especially when you look at the downstream products to make sure that’s included from the electrical steel side. Otherwise, it will just be another avenue to circumvent our trade laws.”

Trade issues are having a limited impact on Precision Partners’ facilities located in Canada due to “Duty Drawback.”

“You have to actually end up following the supply chain, if you will,” said Reich. “And depending on who the importer of record is and depending on who consumes those components, components that are produced there that are then brought back to the States are exempted from those duties. It’s called a Duty Drawback Program.”

The duty drawback is also minimizing impact from Canadian and Mexican carbon steel retaliatory tariffs.

The restart of AK Steel Ashland remains on hold. The mill has been idle for the past two-and-a-half years and will not be returned to operation unless AK Steel is sure it can maximize the return to its shareholders, said Reich.

“If you remember when we had that asset running back in 2015, we were losing money,” said Reich.” We got out of the non-profitable business. We recognize this is a cyclical business, has been and always will be, and we’re looking at the long-term supply/demand situation. Based in reality, there is major global overcapacity primarily related to China, and we’re keeping that in our views.”

In his prepared remarks, Newport reiterated the company’s stance on Section 232. “We remain steadfast in our belief that the Section 232 relief must be extended to the downstream products in the electrical transformer supply chain in order to prevent circumvention and to protect our nation’s critical electrical infrastructures and national security. We will continue to work with the administration to ensure that the desired results of Section 232 action are achieved. This includes ensuring that American producers are competing against foreign producers on a level playing field and stemming efforts by those producers who circumvent U.S. trade laws.

“We believe other countries with whom the U.S. is negotiating must take similar decisive actions in order to ultimately address the problem of China’s global steel overcapacity. This problem is more significant than ever before, as China continues to set monthly record production levels and is on pace to manufacture well over 900 million tons of steel products this year. That is about nine times the level that is produced in the United States.”