Despite the fact that steel is one of the most important products in modern civilization, this year has been tough for steel makers as steel prices have remained low. AK Steel Holding Corporation (NYSE:AKS), which is down 25% this year, recently reported its quarterly earnings. The company beat analysts’ estimates, but the difficult period is far from over. Here’s why.
AK Steel Holding Corporation (NYSE:AKS) reported a net loss of $40.4 million. The biggest part of the loss was $22 million in planned outage costs on one of the company’s facilities. Another $6 million of unplanned outage costs added to the loss. Revenue was up 3% from the previous quarter.
The main factor — the price of steel — remained almost unchanged. While the average selling price per ton of steel was $1,062 in the first quarter, it was $1,061 in the second quarter. AK Steel Holding Corporation (NYSE:AKS) has stated that continuing strength in the automotive market supports the price. However, it has not led to a rise in price. The automotive sector contributed to 50% of revenue in the first half of the year.
AK Steel Holding Corporation (NYSE:AKS) finished the quarter with $58.4 million of cash on hand, down 70% from $191.8 million at the end of the first quarter. Debt and pension obligations continue to be a significant problem for the company. They are the main reasons why stockholder equity is negative.
Steel prices under pressure
AK Steel Holding Corporation (NYSE:AKS) gave relatively little comment on steel prices during the earnings call. This was not the case for Nucor Corporation (NYSE:NUE), which blamed imports for the low prices. The company has stated that imports continue to put pressure on margins. The dumped prices disrupt the marketplace. Nucor said that China had over 200 million tons of estimated excess steel production capacity. This fact puts additional pressure on prices, which so far have been under pressure.
Nucor Corporation (NYSE:NUE) is the only steel producer in U.S. to enjoy an investment grade credit rating. Others, like United States Steel Corporation (NYSE:X), are not so lucky. The company would be reporting its earnings at the very end of July. So far, the stock is down 21% this year. The company is estimated to lose $0.79 per share in the second quarter. Just three months ago, analysts were expecting a $0.23 profit. This is a vivid example of how fast the estimates change when things go wrong. The steel prices did not rebound at all, and in this business, price is the most important factor.
What’s in the future?
Steel manufacturers continue to be pressured by the low price levels. This is not something they could change. This fact brings significant uncertainty to the investment process. At the same time, it’s worth noticing that the $468 million capitalization of AK Steel Holding Corporation (NYSE:AKS) is less than $677 million of inventory that was on books at the end of the second quarter. It’s the debt and pension obligations that spoil the picture.