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What: AK Steel Holding shares rose an impressive 44% last month. That caps a year-to-date gain of 87% for this U.S. steel giant.
So what: There's two big stories behind AK Steel's price advance last month (and, frankly, for the entire year). But they have to be couched in another tale that goes back far further. AK Steel has been around for a long time and uses older blast furnace technology. It tends to be more expensive than more modern electric arc furnace mini mills that populate the production of newer entrants like Steel Dynamics . The upshot of this is that low steel prices tend to hurt AK Steel more than some of its competitors.
For example, amid low steel prices since the 2008 to 2009recession, AK Steel has bled red ink in seven out of the last 10 years. Steel Dynamics has lost money twice in the last decade. Big difference. But now that you have that background, AK Steel's swift advance will make more sense.
The first bit of news that's been helping AK Steel all year long has been trade case wins over "illegal" imports. For example, the U.S. recently imposed tariffs on a number of nations for subsidizing their steel production, which then gets sold below cost in the United States. China, the largest steel exporter, got hit with tariffs of 265% on flat rolled steel. That said, the bigger issue for AK Steel stock recently has been generally increasing steel prices, which helps make its operations more profitable.
So, AK Steel has seen wins on two fronts. But these things also help Steel Dynamics and other competitors, so why was Steel Dynamics only up 24% last month? That goes back to the fact that AK Steel's cost structure is higher, so rising prices are simply a bigger benefit. Add in a heavy debt load at AK Steel, and investors have plenty of reason to cheer rising steel prices and increasing protections from low-priced imports.
Now what: The thing is, low steel prices and the import influx are symptoms of yet another, bigger, issue: oversupply. And that has yet to go away. So the current reprieve is nice for AK Steel, but it doesn't mean the problems that have led to a nearly 75% share price price decline over the past five years are over. Investors interested in the moribund steel space should strongly consider a lower-cost operators, like Steel Dynamics, unless you are a contrarian looking for a high-risk turnaround play.
The article Why AK Steel Holding Stock Shot Up 44.4% in March originally appeared on Fool.com.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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