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WIKI ANALYSIS
AK Steel Holding Corporation (NYSE:AKS) is a fully-integrated manufacturer of steel, including flat-rolled carbon, tubular products, and electrical and stainless steels. AK Steel Holding has seven steelmaking and finishing facilities in Indiana, Pennsylvania, Kentucky, and Ohio, while AK Tube LLC, a subsidiary, has operations in Indiana and Ohio[1]. AK Steel's operations also include European trading companies that buy and sell steel products.
The largest share of the AK Steel's 2006 sales (41%) came from the Automotive sector[2]; the company's single largest client in 2006 was General Motors (GM) which accounted for 9% of AK Steel's sales[3]. Its dependence on a turbulent U.S. car-maker environment leaves the company in a vulnerable position. Despite this pressure, AK Steel's revenues reached a company record of $6.1 billion in 2006, a 7.5% increase from 2005[4]. Shipments for the year totaled 6.2 million tons[5]. These results can be attributed in large part to an increased demand from burgeoning economies such as China, which has bolstered worldwide steel prices.
Business Financials
As seen in the graph below, yearly revenue for AK Steel decreased in 2003 but has been steadily increasing since then. However, the company had trouble turning a profit until 2005 when the operating income moved into positive territory. This was largely due to improved contracts with customers and labor groups in addition to cost-reduction measures undertaken by the management team[6]. Pension and other post-retirement obligations have successfully been renegotiated to the benefit of the company.
AK Steel has been working to diversify their production portfolio in recent years. This has resulted in a gradual but continuous decrease in the percentage of the company's products focused on the automotive sector and an increase in concentration in the appliance, industrial machinery and equipment, and construction markets. This may provide some protection against a weakening domestic automotive market.
| 2004 | 2005 | 2006 | ||
|---|---|---|---|---|
| Automotive | 48% | 45% | 41% | |
| Appliance, Industrial Machinery and Equipment, and Construction | 20% | 25% | 29% | |
| Distributors, Service Centers and Converters | 32% | 30% | 30% |
Key Trends & Forces
Steel Industry’s Cyclical Nature: The U.S. Steel industry is traditionally very cyclical and closely connected to the overall state of the general U.S. economy. A significant downturn in the U.S. economy may lead to a noteworthy decline in the demand of steel products; in light of this, the subprime lending crisis in 2007 must be considered as a potential catalyst for a larger economic downturn[11].
Contract v Spot Pricing: Sales in the steel industry usually fall within two categories: fixed price contracts typically renegotiated once a year, or spot market transactions. Depending on a collection of different variables that affect the state of the steel industry (steel prices, prices for raw materials, supply and demand, etc.), both can be beneficial or detrimental to the company that uses them.
It is estimated that 70-80% of AK Steel’s revenues are based on fixed price contracts (the company does not publish exact information). This is advantageous when spot market prices decline over the duration of the contract, and contracts have been negotiated in the company’s favor, as was the case in 2006. However, because AK Steel typically renegotiates its contracts on January 1 of each year, the recently decreasing spot market prices will make the negotiation for AK Steel’s 2008 contracts more challenging.
Prices of Essential Raw Materials The profitability of the steel sector is closely tied to the prices of necessary raw materials. Considering the steel industry, these materials include (but are not limited to) iron ore, coal, coke, oxygen, chrome, nickel, silicon, molybdenum, zinc, limestone, carbon, stainless steel scrap, etc. Depending on the holdings of each firm, drastic changes in the prices of these raw materials can have profound effects on revenues and profits[12]. .
Exposure to Other Industries: The U.S. steel industry is gradually becoming further specialized in certain markets within the general steel market. As a result, steel producers are becoming increasingly reliant on the state of their specialized markets.
AK Steel focuses much of its production towards the U.S. automotive sector (41% of 2006 revenues) and the stainless and electrical steel markets. In recent years, the U.S. automotive industry has been experiencing multiple challenging years, while the stainless steel market has lately been undergoing significant pressures[13]. .
Globalization of the Steel Industry: The U.S. steel industry is increasingly being forced to compete with foreign companies, particularly China. China is expected to become a net exporter of steel in the very near future, placing further pressure on domestic producers. The American Iron and Steel Institute (AISI) has reported that applications for the import of steel has been continually increasing. Compared to 2005 levels, finished steel imports are 8 percent higher in 2007 through October[14].
Market Share
| Manufacturer | Crude Steel Production (Thousands of Tons) | Market Share[15] | YOY % Change in Production |
| US Steel[16] | 3,023 | .96% | -60% |
| Nucor[17] | 2,808 | .89% | -53% |
| SCHN[18] | 1,037 | .33% | -19% |
| Steel Dynamics[19] | 886 | 0.28% | -45% |
| AK Steel[20] | 740 | 0.23% | -57% |
| CMC[21] | 435 | 0.14% | -42% |
Competition
AK Steel's operations are focused in the United States whereas some of its larger competitors have a larger international presence. When compared to its closest competitors, AK Steel has significantly more fixed price contracts versus spot market sales. This can either work to the company's advantage or disadvantage given certain changing variables such as steel prices. Furthermore, AK Steel’s sales productions are focused towards the U.S. automotive and stainless steel markets, making its success related to the success of those industries. AKS is in a relatively less favorable position concerning the acquisition of raw materials because its closest integrated steel competitor, US Steel (X), has significant self-sufficiency concerning iron ore and metallurgical coal; on the other hand, AK Steel does not have the same level of these materials [22]. Also, AKS has more significant pension obligations and post-retirement liabilities than its competitors, although the company has successfully been working to decrease them.
The company's most significant competitors are:
- US Steel (X)
- Nucor (NUE)
- Steel Dynamics (STLD)
- Allegheny Technologies (ATI)
- Carpenter Technology (CRS)
References
- ↑ AKS 2006 10K, Item 1, pg. 1
- ↑ AKS 2006 10K, Item 1, pg. 1
- ↑ AKS 2006 10K, Item 1, pg. 2
- ↑ http://www.aksteel.com/investor_information/chairman.asp
- ↑ http://www.aksteel.com/investor_information/chairman.asp
- ↑ AKS 2006 10K, Item 7, pg. 19
- ↑ AKS 2006 10K, Item 6, pg. 17
- ↑ AKS 2006 10K, Item 8, pg. 61
- ↑ AKS 2006 10K
- ↑ AKS 2006 10K
- ↑ AKS 2006 10K, Item 1a, pg. 6
- ↑ AKS 2006 10K, Item 1a, pg. 7
- ↑ AKS 2006 10K, Item 1a, pg. 6-7
- ↑ http://www.steel.org
- ↑ Steel on the Net - World Steel Review, August 2009
- ↑ X, Q2 2009, 10-Q, Item 4, Page 58
- ↑ NUE, Q2 2009, 10-Q, Item 2, Page 19
- ↑ SCHN, Q3 2009, 10-Q, Item 2, Page 30
- ↑ AKS, Q2 2009, Quarterly Earnings Release
- ↑ AKS, Q2 2009, 10-Q, Item 2, Page 27
- ↑ CMC, Q2 2009, 10-Q, Item 2, Page 25
- ↑ AKS 2006 10K
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