Steel Soars
By
Rich Smith
October 4, 2004
|
Monday is looking to be very kind to America's steelmakers, as their stock prices get bid up across the board. So far, little Ohio steelmaker AK Steel (NYSE: AKS) is leading the pack, with gains of well more than 10% for the day. But it's being followed closely by US Steel (NYSE: X), up 6%, Steel Technologies, up 5.5%, International Steel Group (NYSE: ISG) and Nucor (NYSE: NUE), both up 4.5%, Steel Dynamics (Nasdaq: STLD), up 3%, and Reliance Steel (NYSE: RS), up 1.5%.
For AK Steel's part, the jump in prices can be attributed largely to an endorsement by JPMorgan Chase (NYSE: JPM), which believes that the company will be able to negotiate some very sweet deals with its automaker buyers in Japan this year. As a result of the company's anticipated renegotiations on steel supply prices, JPMorgan has raised its outlook for AK Steel's 2005 earnings from $1.70 to $2.10 per share.
That move seems justified, given that AK Steel relies on long-term supply contracts for the bulk of its sales to customers. If concluded some time ago, those contracts would have been based on lower prices per ton, and the continued strong demand for steel on world markets would have raised the company's ability to demand higher prices if the contracts are renegotiated. However, AK Steel is apparently not even waiting around for the negotiations. Two weeks ago, the company announced that it would be increasing its surcharges on steel shipments -- surcharges that get added on top of the already-negotiated supply prices embodied in its contracts.
If AK Steel -- which is far from the healthiest of America's steel makers, balance sheet-wise -- can wield this kind of pricing power over its customers, then that would explain the surge in share prices among the other members of the steelmakers' club listed above. Still, Fools would be well-advised to take JPMorgan's optimism with a grain of salt. Remember that the steelmakers' record of winning lawsuits against these surcharges is far from enviable (read more about this here) -- and the legal battle on this score has just begun. Should the surcharges have to be rolled back, so too will AK Steel's -- and its brother steelmakers' -- profits.
I've been pretty down on AK Steel in recent months, yet all the while, the company's stock has been rising. Who's right on this debate, banking titan JPMorgan or the Fool from Virginia? Read the other articles in this series and judge for yourself:
Fool contributor
Rich Smith
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