This excerpt taken from the AKS 10-K filed Mar 2, 2006.
The principal raw materials required for the Companys steel manufacturing operations are iron ore, coal, coke, oxygen, chrome, nickel, silicon, molybdenum, zinc, limestone, carbon and stainless steel scrap. The Company also uses large volumes of natural gas and electricity in its steel manufacturing operations. In addition, the Company routinely purchases between 10% and 15% of its carbon steel slab requirements from other steel producers to supplement the production from its own steelmaking facilities. Most purchases of coal, iron ore,
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(dollars in millions, except per share amounts)
coke and limestone are made at negotiated prices under annual and multi-year agreements. Purchases of carbon steel slabs, carbon and stainless steel scrap, natural gas and other raw materials are made at prevailing market prices, which are subject to price fluctuations in accordance with supply and demand. The Company enters into financial instruments designated as hedges of the purchases of natural gas and certain raw materials, the prices of which may be subject to volatile fluctuations from year to year. The Company believes that it currently has adequate sources of supply for its raw material and energy requirements for 2006. The Company has secured adequate sources of supply of most of these materials for subsequent years and continues to seek to secure the remainder of its needs. In 2005, there were shortages in the marketplace of certain key raw materials such as ferro-nickel, ferro-chrome, ferro-silicon, ferro-manganese, coal, coke and iron ore which increased the costs of these raw materials. The Company continues to reduce the risk of supply shortages by entering into multi-year supply contracts such as noted above and by evaluating alternative sources and substitute materials. The potential exists, however, for production disruptions due to shortages of raw materials in the future. If such a disruption were to occur, it could have a material impact on the Companys financial condition, operations and cash flow.
In December 2004, the Company reached an agreement with Shenango Incorporated for the supply of all of the Companys anticipated coke purchases through the end of 2009. The supply agreement extends and modifies an existing contract that was set to expire at the end of 2005.
In October 2005, the Company entered into a 10-year take-or-pay agreement with Quebec Cartier Mining Company (QCM) for the purchase of iron ore pellets. This contract provides for the purchase of a significant portion of the Companys iron ore needs from QCM. The purchase price of the pellets is adjustable annually based on the market price. Due to the fluctuations in the market price of iron ore pellets, the future expenditures for these iron ore pellets are not determinable.
The Company has entered into derivative transactions to hedge the price of natural gas and certain raw materials. As of December 31, 2005, the consolidated balance sheets included current assets of $2.4 for the fair value of these derivatives. The effect on cash of settling these amounts is expected to be offset by differences in the prices paid for the commodities being hedged.
At December 31, 2005, commitments for future capital investments totaled approximately $10.3, all of which will be funded in 2006.