(AK Steel story updated with further information from its press release, and with analyst commentary.)
WEST CHESTER, Ohio (
warned about a profit shortfall, the third
to tell Wall Street that its business has been worse than expected.
AK's culprit, like
Tuesday: higher raw materials costs.
AK didn't provide quantitative EPS guidance, but said that it would record an operating loss in the third quarter of $20 for every ton of steel produced. Originally, AK had told investors to expect an operating profit of $15 a ton.
In the case of AK Steel, it's the same story that's
. The global price of iron ore has risen sharply amid a drastic change in the way it's priced and sold overseas. Unlike its integrated blast-furnace rivals, AK Steel doesn't control its own iron ore mines. It buys it from three suppliers, including
Cliffs Natural Resources
, and its contract with those companies is based in part on the annual global price of the mineral.
AK also blamed the shortfall on the "acceleration" of scheduled maintenance work at one of its blast furnaces, in Ashland, Kentucky. It will shut the furnace down for 11 days. AK originally planned to perform the work in 2011.
The company provided some detail on how its iron-ore contracts work. Because the annual benchmark system that had governed global pricing for decades was ditched this past spring in favor of a short-term quarterly contract, AK Steel and its suppliers have had to make some guesstimates on what the average iron ore price will be work out to for the whole of 2010. For the purposes of reporting second-quarter numbers and for providing guidance, AK said it had assumed that the average iron ore price this year would be 65% higher than in 2009.
Now it believes that that estimate was too low. By how much? AK said, in effect, that it doesn't know. Further, any tick in iron ore prices above that 65% level will cut into its bottom line even more, AK said, widening its losses even beyond the $20 per ton in red ink it issued as guidance Wednesday.
Here's how the company explained it: "AK Steel has previously said, and reiterates with this revised outlook, that every five percentage points of variation (up or down) from its assumed year-over-year benchmark iron ore price increase of 65% would impact the company's third quarter 2010 results by approximately $11 million, or approximately $7 per ton."
In afternoon trading Wednesday, AK shares were changing hands at $13.66, down 6%, on volume of 8.7 million shares, matching the daily average turnover in the name.
Elsewhere, steel stocks were mostly in the red. Nucor was slipping 0.7% to $39.14 and
was off 1.6% to $46.09. The U.S.-listed shares of
were trading recently at $32.66, up two cents for the session.
Shares of Steel Dynamics, meanwhile, were gaining ground, albeit modestly. The stock was changing hands Wednesday afternoon at $14.61, up two cents.
After the closing bell on Tuesday, the company, which like Nucor uses scrap metal as its primary feedstock, said it would earn between 5 and 10 cents a share for the third quarter (the exact same range, coincidentally, given by Nucor). That's well below the 20 cents a share called for by analysts.
Steel Dynamics' problems were a little different, however. The company blamed its narrower profit margins on a higher-than-expected tax rate. Also, Steel Dynamics had to throw more money than it anticipated to carry on with the start up of a set of innovative new plants in Minnesota's Mesabi Iron Range, which produce a substitute to pig iron, the primary ingredient in the production of flat-rolled steel at mini mills.
Much of Steel Dynamics' long-term hopes rest on the Mesabi Nugget facility, as its called, since the project is meant to transform the company into an integrated steelmaker. That is, it eventually won't need to buy any of its raw materials on the open market.
In a note to clients Wednesday, the metals analyst at Dahlman Rose in New York, Anthony Rizzuto maintined his buy rating on Steel Dynamics' stock, writing, "While guidance was lower than anticipated, management indicated that they are seeing some improvement in order entry for sheet products."
-- Written by Scott Eden in New York
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