How Will Electric Furnace Damage Impact AK Steel?

Jul. 7.11 | About: AK Steel (AKS)

West Chester, Ohio-based flat-rolled steelmaker, AK Steel Corporation (NYSE:AKS) announced that its #5 electric arc furnace (EAF) at its Butler, Pennsylvania Works was damaged on July 1, 2011, when molten steel inside the furnace breached the furnace shell harming certain components.

Steel production at Butler Works resumed the following day using other electric furnaces at the plant that were not affected by the incident.

The company announced that it did not expect customer shipments to be badly affected by the incident. Examining the root cause being absolutely imperative, the company proposes to carry on with the investigation, while crews begin to repair the furnace and its auxiliary equipment.

In April 2011, AK Steel posted its first-quarter results delivering an EPS of 8 cents compared with 2 cents during the year-ago quarter and striding ahead of the Zacks Consensus Estimate of a loss of a cent.

Net sales as reported by the company were $1,581.1 million versus $ 1,405.7 million in the prior-year quarter. It however, missed the Zacks Estimate of $1,609 million. The improvement in the shipments was mainly attributed to higher pricing, which increased 9% on a year-over-year basis to $1,109 per ton.

For second-quarter 2011, management expects shipments to be in the range of 1,500,000 and 1,550,000 tons, indicating a substantial increase over the first-quarter shipments.

The company also anticipates that its average per-ton selling price would be 7% higher compared with the first quarter. The operating profit is expected to be approximately $65 per ton for the second 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 also favorably placed to serve the end markets when the demand rebounds.

However, higher input costs, particularly iron ore, is eroding margins of the company. Iron ore pricing concerns have led to a negative outlook for steel manufacturers.

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. AK Steel competes with companies like Nucor Corporation (NYSE:NUE) and Steel Dynamics Inc. (NASDAQ:STLD).

Currently, AK Steel has a short-term (1 to 3 months) Zacks #3 Rank (Hold) and a long-term (6+ months) Neutral recommendation.