AK Steel says higher raw material, maintenance costs will lead to 3rd-qtr operating loss

Wednesday, September 15, 2010

AK Steel says higher costs will lead to 3Q op loss

NEW YORK — AK Steel said Wednesday it expects to post an operating loss in the third quarter because of higher-than-expected maintenance costs and raw materials prices being supported by surging demand in China and other emerging markets.

The steelmaker, based in West Chester, Ohio, said it expects an operating loss of $20 per ton for the third quarter. It previously predicted an operating profit of $15 per ton.

Shares fell 83 cents, or 5.7 percent, to $13.70 Wednesday.

Accelerated maintenance work at AK’s Ashland, Ky., blast furnace, as well as higher iron ore and operating costs will contribute to the loss.

Iron ore prices have skyrocketed on demand from emerging markets, especially China. AK Steel now thinks iron ore prices this year will be up more than the 65 percent jump it originally predicted.

Iron ore is one of the company’s principal raw materials, and the price AK Steel pays for iron ore under the contracts with its three major iron ore suppliers is based upon an annual global iron ore benchmark price. That benchmark still hasn’t been set for this year.

Every 5 percentage points in variation from that 65 percent increase mark would hurt third quarter results by $11 million, or $7 per ton.

Another steelmaker, Nucor Corp., said Tuesday its third-quarter earnings will decline from the second quarter as continuing growth in China and other emerging markets has driven up the cost of scrap metal — the base of all its products.

But weak U.S. demand is compounding that problem. Overseas growth is increasing demand for steelmakers’ products, but it’s making it more expensive for U.S. companies like automakers and appliance manufacturers as they try to recover from the recession.

Nucor said the “overall economy has entered into a new period of uncertainty.”

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