Why AK Steel Is a Buying Opportunity

AK Steel (AKS) has been able to absorb the full impact of lower realized prices by keeping a check over operating costs, operating rates and lower costs for carbon scrap, iron ore pellets and coke. The drop in AK Steel's raw material costs can be attributed to lower oil prices along with other raw materials such as iron ore.

AK Steel reduced its raw material costs by 19%, while reducing its finished and semi-finished goods costs by 3% as compared to 2014 levels.

An important consequence of this was a significant reduction in inventory costs. The LIFO credit for the last reported quarter was $44.8 million, compared to a LIFO credit of $10.9 million for the third quarter of 2014 and $34.8 million for the second quarter of 2015. This proves to be an important factor contributing towards widening the gross margins of a steel manufacturing industry.

The reduction in raw material costs is an external tailwind for AK Steel. In addition, AK Steel will also benefit from sustainable cost savings in the form of production synergies.
Why AK Steel Is a Buying Opportunity
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For example, AK Steel has managed to achieve record efficiency improvements by lowering purchasing costs, transportation and overhead costs, and operating expenses owing to the acquisition of Dearborn Works in 2014. AK Steel already achieved approximately $43.1 million in cost-based synergies from Dearborn while it expected only $25 million for the full year. And the iron-ore market outlook for US steel calls for further cost savings.

Market Outlook

The raw material costs for the US based steel industry is going to go down further in the future as China, which is the world's largest importer of iron ore,  is slated to see a decline in production this year. This decline in demand from China will come after a decade of rampant increase in demand due to the blind pace at which the economic superpower had been growing. As a result, the iron-ore prices have dropped below $50 per ton as forecasted by Goldman in August 2015 and are expected to stay low in the near future. Hence, raw material costs are on AK Steel's side for now.

On the other hand, there is support coming from the Department of Commerce in the form of increased import duties on corrosion resistant steel products. As a result, the duties on imported steel from China will be set up to 235.66% and that from India will be up to 7.71%. This is bound to make the imported steel expensive and the domestic steel more competitive. This would also mean lower imports and higher domestic production leading to better utilization rates.


In the long term, there are huge expectations from infrastructural and economic growth of the emerging markets. According to the steel giant ArcelorMittal, vehicle production is expected to grow 42% to 32 million vehicles in China and 93% to 6.9 million vehicles in India till 2022 as compared to 2014. Therefore, from both ends of the supply chain, the prospects of AK Steel look great and that near one-third drop in stock price from the 52-week high must therefore be seen as a buying opportunity.

Published on Sep 13, 2016
By Subhen Mittra

Copyrighted 2016. Content published with author's permission.

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