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Game-changers ahead for AK Steel in 2014

May 15, 2014  |  AK Steel
AK Steel

Journal News

An improving economy, higher steel prices and lower raw material costs could be the potent combination in 2014 to return AK Steel to profitability.

A profit this year would be the company’s first since 2008, and analysts and investors are predicting better results in 2015.

That’s if several factors affecting the cost of steelmaking supplies and steel demand play out the way industry analysts are expecting.

This time a year ago, the Butler County steelmaker’s performance and concerns about its competitiveness caused the stock price to trade at a new low in April 2013 of $2.76 per share. More than a year later, the stock closed Tuesday at $6.91 per share.

Some things have changed since a year ago in AK Steel’s favor, said Phil Gibbs, equity research analyst covering the metals and mining industry for KeyBanc Capital Markets Inc. For example, because of higher stock market returns in 2013, AK Steel is paying less cash to fund its pension, Gibbs said. The company this year will wind down spending on investments to open coal mining and iron ore manufacturing operations, he said.

“I’m expecting them to be profitable this year. Steel prices have been healthier than we expected, and they haven’t had the benefits of lower coal, scrap or iron prices,” Gibbs said.

After a malfunction at AK Steel plant Middletown Works in June 2013, the industry saw steel prices hit bottom, hovering around $580 a ton. Even though the steelmaking disruption cost AK Steel thousands to fix, a feared shortage of steel supply also led prices to rebound in the second half of last year, Gibbs said.

And an improving economy at the end of 2013, leading to more demand for cars, washing machines and new homes, meant an uptick in the demand for steel.

Now steel prices are higher than they were projected to be a year ago, hovering around $700 a ton, Gibbs said, which could benefit AK Steel’s revenues.

Add to that plans by AK Steel later this year to open a new iron ore concentrate plant in Reynolds, Ind. The concentrate will be used to make iron ore pellets, a key raw material for making steel. Production of the concentrate could start this fall and full production should start in 2015 of 3 million tons of pellets a year, James Wainscott, AK Steel chairman, president and chief executive officer, told investors in April while discussing quarterly earnings.

Once fully operational, the iron ore pellets will meet about half of AK Steel’s needs for the material. That lowers costs to purchase iron ore at more volatile prices from third party suppliers.

“I think investors at this point are focused on their backward integration initiatives. That’s largely their Magnetation joint venture (for iron ore) and how quickly that will come to be a benefit for the company,” Gibbs said. “Depending on where global iron ore prices are, it could be a meaningful cost savings for them.”

These are among the top issues to watch at AK Steel in 2014. Negative earnings in 2013 of $46.8 million, following a $1 billion net loss in 2012, marked five consecutive years of financial losses for the company.

The Fortune 500 company is headquartered in West Chester Twp. Between operations in West Chester and the Middletown Works steel plant, AK Steel employs approximately 2,400 full-time workers in Butler County, making it the county’s third-largest employer. AK Steel facilities in Ohio, Kentucky, Indiana, Pennsylvania and Minnesota employ more than 6,000 altogether and produce flat-rolled carbon, electrical and stainless steels used by the automotive, appliance, construction and manufacturing markets.

Here’s more about what’s coming in the year ahead for AK Steel:

Middletown labor negotiations

AK Steel’s labor agreement with Local 1943 of the International Association of Machinists and Aerospace Workers in Middletown expires on September 15.

The union represents more than 1,600 hourly workers of Middletown Works, AK Steel’s largest of seven steel plants.

“We are hopeful of reaching an early agreement with the IAM well in advance of the scheduled expiration date,” Wainscott says.

Talks have not yet started, said Neil Douglas, union president. Douglas declined to discuss key issues on the table in discussions with the company this year.

Raw material investments

To hedge against the up and down market prices of raw materials, AK Steel made a pair of multimillion acquisitions in coal and iron ore interests in October 2011.

Plans are for AK Steel’s coal and iron ore supply chains to be 50 percent vertically integrated by 2015 — so AK Steel will buy half its steelmaking materials and produce the other half itself.

Subsidiary AK Coal Resources is now running a mine in Somerset County in southwestern Pennsylvania. However, since mining started, merchant coal prices have fallen substantially, Wainscott said. AK Coal has postponed the opening of additional mines. It will continue to proceed with permitting activities, but the timing to open additional mines will depend on future market conditions, Wainscott said.

At the same time AK Steel announced its 2011 investment to buy a coal company, the steelmaker also said it formed a joint venture with Minnesota company Magnetation Inc. to produce iron ore concentrate. The joint venture, called Magnetation LLC, started construction in 2013 on the Indiana plant to make pellets from the concentrate.

Construction on the pellet plant is on time and ahead of schedule, Wainscott said.

“Upon completion and full operation of the pellet plant, we will have achieved our goal of 50 percent self-sufficiency on this key steelmaking input, and we will have created a natural hedge that will help stabilize our total iron ore costs whether iron ore prices rise or fall. The start-up of the pellet plant is a real game-changer for AK Steel,” he said.

Foreign competition

A new report released Tuesday by the Economic Policy Institute and law firm Stewart and Stewart finds half a million U.S. jobs are at risk due to surging imports from foreign steel producers. In Ohio, 33,900 jobs are at risk.

Following the Great Recession, steelmakers from other countries subsidized by their governments have added capacity to make more steel than what’s demanded globally, according to the report. The steel is sold at unfair prices in the U.S., which threatens the domestic industry’s ability to recover from the economic downturn, the report’s authors say.