Five countries, including China, India, Italy, South Korea and Taiwan, significantly pushed up its export of corrosion-resistant steel to the U.S. market from 1.5 million tons in 2012 to 2.75 million tons in 2014. AK Steel’s (AKS, Financial) corrosion-resistant steel shipments accounted for 46% of total shipments from the steelmaker in 2014.
AK Steel joined other domestic steelmakers to file anti-dumping and countervailing duty petitions with the U.S. Department of Commerce and the U.S. International Trade Commission against these five countries.
The impact of lower-cost imported steel is negatively affecting the domestic steel producers, and AK Steel’s first-quarter fiscal 2015 results were no exception. Adjusted EBITDA declined sequentially from $117 million to $57 million in the first-quarter fiscal 2015, and net adjusted loss came in at $0.28 per share.
The positives
The company announced a new research and innovation center on February 23 at a cost of $36 million to be located in Middletown, Ohio. This center will focus on developing innovative products such as third-generation advanced high strength steels for automotive customers, high efficiency electrical steels for electricity grids, and a new stainless steel that offers superior corrosion resistance for a broad range of applications. The facility is expected to be completed by the fourth quarter of fiscal 2016.
The automotive market growth continues to be a good tailwind for AK Steel. NAFTA light-vehicle production is projected to be 17.4 million units, up about 2.5% compared to 2014. The steelmaker's shipments to the automotive sector have been growing at a faster rate than the overall automotive market growth. During the quarter, AK Steel shipped more tons to the automotive industry than it has in a decade, since the first quarter of 2005. This, of course, included the shipments from the recently acquired Dearborn facility in Michigan.
According to Moody’s projections for 2015, U.S. light vehicle sales will grow to 2.8% from its previous projection of 1.5% in December. Also, the rating agency expects U.S. auto sales to climb 2.4% in 2016. This is a good tailwind for AK Steel, which already is gaining automotive market share faster than the market growth.
During the first quarter of fiscal 2015, the total shipments for NAFTA and Grain-Oriented Electrical Steel, or GOES, improved 4% year-over-year on the back of housing market recovery in the U.S. The export of GOES product increased quarter-over-quarter by double-digit percentage, despite slower recovery of the European economy. The steelmaker’s GOES product could once again compete in China, thanks to the termination of anti-dumping and anti-subsidy measures on imports of GOES products from U. S. producers.
According to Jacobson survey for the first quarter of 2015, AK Steel retained its number one spot among domestic carbon steel producers, on the basis of quality, service, on-time delivery and overall customer satisfaction. It was also rated number one in the special steel segment in the same survey.Ă‚
AK Steel recently announced plans to produce one of the first commercially available Next-Generation Advanced High Strength Steels in the world at a project outlay of $29 million. This will go a long way in further strengthening its position in the automotive market as the product shipments begin in 2017. James L. Wainscott, Chairman, President and CEO of AK Steel, said:
“These new process and product technologies will enable us to introduce a family of steels that have improved formability, and give automakers greater flexibility and improved safety performance to lightweight their vehicles. By working closely with our customers, we are taking this strategic step forward to design and produce outstanding products to help them meet Corporate Average Fuel Economy (CAFE) standards,”
The headwinds
- The import of cheaper steel still stands at staggering levels, despite a fall of 4% year-over-year in the month of April. Total and finished steel imports have increased 13% and 27% year over year, respectively, for the first four months of this year. Estimated share of imported finished steel products in April remained at 33%, higher than 28% for the full year in 2014. This is going to be a headwind for all domestic steel producers.
- Slower recovery of the European economy and economic slowdown in China.
- The stronger U.S. dollar which makes it lucrative for overseas exporters to export steel to the U.S.
- The slow growth of world steel consumption. According to The World Steel Association, the growth of steel consumption in 2015 will be 0.5% year-over-year, and the same is expected to be 1.4% in 2016. In the short-term, the growth in demand won't be picking up at a brisk pace.
Wrapping up
World steel consumption will see a muted growth in the short term. Import of cheaper steel from other countries is adding to woes of domestic steel producers. However, the growth of the automobile and housing sector has come in as a respite, and AK Steel’s market share in the automotive market is growing at a higher pace than the automobile market growth. Magnetation LLC bankruptcy has resulted in an impairment charge of $256.3 million for AK Steel. However, the shareholders of AK Steel are free from any further liability on this account.
AK Steel is investing in research and development and is coming up with a new grade of steel for the automotive segment in 2017. Therefore, the stock can certainly rebound, and may be a good stock to buy for long-term gains.Ă‚
