High-flying AK Steel stock lands at half its ’08 peak
Business Courier of Cincinnati - by Jon Newberry Staff Reporter
AK Steel’s soaring stock price has plunged back toward earth, retracing every bit of its rapid ascent to $73 amid takeover speculation in May from its 2008 low of $34 in January.
The stock closed at $35.23 on Sept. 10, more than 50 percent off its peak and lower than it has been since it slipped below $33 last August. That dip followed a steady rise from less than $10 at the beginning of 2006 to $41 last July.
The culprit appears to be investor fears of slowing global demand that’s expected to dampen steel prices for the remainder of the year and into 2009. AK Steel might have contributed to those fears when it reported Sept. 3 that its surcharges on electrical steel delivered in October would be $100 less per ton – $940 versus $1,040 – than surcharges in September. The surcharges, which are based on its costs for raw materials and energy, had been rising steadily for months.
AK Steel officials at its West Chester headquarters did not respond to requests for comment.
The underlying question is how much will an economic slowdown hurt steel prices. Wall Street analysts at Standard & Poor’s, Morningstar and Citigroup recently have reiterated “buy” recommendations on other steel stocks, suggesting fears of falling steel prices have been overblown and that prices are likely to remain high, albeit below recent peak levels of more than $1,000 per ton.
Still higher than 2007
“Steel equities have been punished amid the China slowdown and crude-induced exodus from commodities. As has been the case all year, the equities have been more skittish and U.S.-centric than underlying steel markets, which remain solid,” said Citigroup analyst John Hill in a Sept. 3 report on Nucor Corp.
Steel prices might have retreated from their summer highs, he said, but they are still substantially higher than 2007 levels, and “the probability of full-scale steel price collapse is low.”
Hill said steel stocks have been “roiled” by reports that U.S. mills have rescinded a $40 per ton September price hike, and that ArcelorMittal, the world’s largest steel producer, had dropped prices in South Africa by 8 percent. But steel mills were still selling at contract prices that were $300-$400 below spot market prices in the second quarter, which almost guarantees higher prices into early 2009 as contracts roll over, he said.
Leo Larkin, an analyst at Standard & Poor’s who has a “hold” recommendation on AK Steel, said it might be “a little more exposed” to the U.S. auto industry than other steel companies, but it also has decreased that exposure. “So there may be a little more additional anxiety,” compared to other steel producers, he said.
The latest sell-off in steel stocks seemed to gain momentum after Goldman Sachs & Co. downgraded the U.S. steel sector on Sept. 4, citing the rising value of the dollar – which reduces the cost of imported steel – and the plummeting price of steel scrap that some steel producers, such as Nucor, melt down to make new steel.
Falling scrap prices are being interpreted as a sign that the global economy is winding down, but Larkin said he thought that already had been factored in.
“I think that added a little fuel to the fire,” he said of the Goldman Sachs report.
AK Steel is an integrated producer that makes its steel from iron ore rather than scrap, and it exports relatively little of its output, but anything that causes its competitors to cut their prices will impact AK’s own. Press reports attributed the steep decline in AK Steel’s stock price in early September to the sale of shares by its largest institutional shareholder, although shares of other large steel producers such as U.S. Steel and Nucor have been falling pretty much in tandem with it.
Harbinger move
Harbinger Capital Partners and affiliates disclosed Sept. 9 in a regulatory filing that they had reduced their stake in AK Steel from 11 million shares, or 10 percent, to less than 4.5 million as of Sept. 5. Since Harbinger no longer has an obligation to report further sales, having dropped below the 5 percent disclosure threshold, it’s not clear how many shares, if any, it owns now.
S&P’s Larkin said he was surprised at Harbinger’s move because it had led the company’s management to believe that it was an investor, implying a longer-term holding, rather than merely a trader looking for a quick profit. Its sales combined with a general market rotation out of the commodities sector probably accounted for the recent decline, he said.
He also guessed that a double-digit decline in both AK Steel and U.S. Steel’s stock prices on Sept. 9 might have been triggered by a trade publication article that steel service centers were reporting demand from customers had dried up and by other reports that steel companies planned to reduce output to counter oversupply concerns.
When AK Steel reported its second-quarter results on July 22 – including operating profits of $238 million, average price per ton of $1,287, and operating profit per ton of $137, all records – it said it expected to do even better in the current third quarter, with operating profit per ton surging to between $170 and $175. It has not changed that guidance since then.
AK Steel shares were as high as $66 as of late July on renewed reports, unconfirmed by AK Steel officials, of takeover talks.
jnewberry@bizjournals.com | (513) 337-9433
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