Zacks_Analysts' Blog : AK Steel Adds Surcharge - Analyst Blog

AK Steel Holding Corporation (AKS) added a surcharge of $460 per ton for a broad range of electrical steel products that it produces. This surcharge will be reflected in the invoices of electrical steel products to be shipped in September 2011.

The surcharge is calculated on the basis of reported prices for raw materials and energy used to manufacture products coupled with the July 2011 purchase cost.

The company stated that previously it told its stainless steel customers that it will change the timing and method of calculation of its stainless steel surcharges, effective with shipments from October 2, 2011.

Recently, the company released its results for the second quarter of 2011. AK Steel posted an EPS of 30 cents compared with 24 cents during the year-ago quarter. However, the EPS was below the Zacks Consensus Estimate of 50 cents per share.

Net sales, as reported by the company, were $1,791.9 million on the shipments of 1,497,000 tons versus $1,596.1 million and 1,449,400 tons in the prior-year quarter. Net sales also missed the Zacks Estimate of $1,804 million. Average selling price for the second quarter of 2011 was $1,185 per ton, up 8% from $1,101 per ton reported in the second quarter of 2010.

Value-added shipments including stainless/electrical, Cold-rolled and Tubular product increased to 245.7, 318.1 and 32.8 tons, respectively, compared with 218.9, 284.7 and 32.6 tons, respectively in the year-earlier quarter. However, shipments of coated products came down to 631.3 tons from 685.2 tons in the year-ago quarter.

Non value-added shipments including Hot-rolled increased to 238.5 tons from 184.1 tons in the year-earlier quarter. On the contrary, non-value-added shipments including secondary products decreased to 30.6 tons from 43.9 tons in the prior-year quarter.

According to management, shipments in the third quarter of fiscal 2011 are expected in the range of 1,400,000 and 1,450,000 tons. The company also anticipates its average per-ton selling price to be about 1% lower and that of raw material costs to be a bit higher compared with the second quarter. The operating profit is expected to be approximately $15 per ton for the third quarter of fiscal 2011.

AK Steel is uniquely positioned to focus on products with high margins. Electrical steel continues to be the company’s strongest product line, with demand recovering in the U.S. and abroad, though at a slower rate. AK Steel is operating its plants at above 80% capacity and is well positioned to serve the end-markets when demand rebounds.

However, higher input costs, particularly iron ore, are eroding margins of the company. Iron ore pricing concerns have led to a negative outlook for steel manufacturers. A K Steel currently retains a Zacks #4 Rank (short-term Sell rating). 

Ohio-based AK Steel Holding Corporation is a leading producer of flat-rolled carbon, stainless, electrical steel and tubular products. It operates 7 steel-making and finishing plants in Ohio, Pennsylvania, Indiana and Kentucky.

The basic raw materials required for steel manufacturing are iron ore, coal, coke, chrome, nickel, silicon, manganese, zinc, limestone and carbon and stainless steel scrap.

Natural gas and electricity are the sources of power for steel manufacturing operations. The company competes with companies like Nucor Corporation (NUE), U.S. Steel Corp. (X) and Steel Dynamics Inc. (STLD).