Will AK Steel Gain if Iron Ore Prices Fall Further?
Iron Ore Prices Lose Steam: How Will It Affect Steel Companies?
AK Steel’s unit production costs
AK Steel (AKS) is not as vertically integrated as other steel companies. The company produces only about a quarter of its coal requirements from captive mines. In iron ore, AK Steel had a joint venture (or JV) with Magnetation that linked the pellet pricing to IODEX (iron ore index). This helped AK Steel procure iron ore at lower costs. However, selling pellets at such depressed prices pushed the Magnetation JV into financial difficulties. This prompted AK Steel to write off its entire investment in Magnetation last year.
AK Steel is not alone in writing off investments in raw material ventures. Nucor (NUE) and Steel Dynamics (STLD) also took a charge on their respective earnings last year as they reduced the carrying value of investments in the raw material segment. With its 3.3% dividend yield, NUE forms 2.3% of the ProShares S&P 500 Dividend Aristocrats ETF (NOBL).
Market priced
AK Steel has said on previous occasions that the IODEX is a key driver of its iron ore costs. The company has been a big beneficiary of falling iron ore prices over the last few quarters. AK Steel delivered an adjusted EBITDA of $168 million in 4Q15, which represents a YoY (year-over-year) increase of almost 52%. Apparently, this is the highest quarterly EBITDA that AK Steel has generated since the third quarter of 2008. Interestingly, other major steel companies including U.S. Steel (X), Nucor, and Steel Dynamics reported a steep fall in their 4Q15 earnings.
Lower unit production costs were a major factor that helped AK Steel’s earnings in the last few quarters. If iron ore prices fall further, AK Steel will get a breather. Note that AK Steel has fallen steeply in the last few trading sessions as the market started to factor in higher input costs on the company’s earnings.
Meanwhile, could higher iron ore prices help steel pricing as well? We’ll explore this in the next part of this series.
Browse this series on Market Realist: