AK Steel Slashes 3Q Guidance

Shares of steel maker AK Steel Holding Corporation (AKS) slipped 5.71% or 83 cents and closed at $13.70 on September 15, 2010 after the company forecasted operating losses in the third quarter of 2010. AK Steel foresees operating losses of $20 per ton in the third quarter in contrast to its previous guidance of $15 per ton of operating profits. The Zacks Consensus Estimate for the third quarter is pegged at a loss of 2 cents.

AK Steel attributed the estimated loss primarily to the cost related with the planned maintenance shutdown of the Ashland facility in Kentucky. The blast furnace in Kentucky was scheduled to be under maintenance in the first half of 2011. However, bad furnace conditions forced AK steel to prepone the maintenance. The company plans an 11 day production outage at the facility starting from September 20, 2010. Besides, AK Steel expects soaring iron-ore prices, the key raw material for steel production, to further increase to the company’s operating losses in the third quarter.

Earlier, in its second quarter 2010 earnings release, AK Steel had forecasted a 65% year over year increase in iron prices in 2010. Although the company remains uncertain about the raw material prices, it expects increasing demand in China and other foreign markets to push iron prices to an exorbitant level. AK Steel stated that an every 5% increase in iron price above 65% would affect results by $11 million or $7 per ton.

In last couple of days, two other steel makers, Nucor Corporation (NUE) and Steel Dynamics (STLD) slashed their third quarter 2010 guidance citing global economic uncertainty.

Nucor, the nations largest scrap recycler stated that rising demand in emerging economies, especially China has triggered the scrap costs to rise above expected level. The company is also facing a weak domestic demand environment that partially offsets the benefits of increasing international demand. The steel maker projects third quarter 2010 earnings within $0.05 to $0.10 per share significantly down from 29 cents and 10 cents in the second quarter and first quarter of 2010, respectively. The projected third quarter earnings are substantially below the Zacks Consensus Estimate of 31 cents with a downside potential of 9.68%.

Similarly, Steel Dynamics, one of the leading steel producers in the US forecasts a bleak third quarter 2010 due to a subdued performance in the Steel segment. It foresees net earnings of a meager 5 cents to 10 cents per share. Lower selling prices particularly in the sheet and structural steel operations would reduce net earnings substantially from last year’s net earnings of 30 cents. Projected third quarter results would be a significant 54% decline from the second quarter 2010 earnings of 22 cents and would underperform the Zacks Consensus as well.
We believe third quarter 2010 could be depressing for the steel industry as a whole with already three steel producers slashing guidance. Things would surface better with further outlook updates from other major steel makers including United States Steel (X) and Arcelor Mittal (MT).

AK STEEL HLDG (AKS): Free Stock Analysis Report

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