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The last time I checked in with steelmaker AK Steel (NYSE: AKS ) , I requested a sneak peak to determine when the metalsmiths would regain profitability. Thankfully, the third quarter presented a sufficient stabilization from the horrid conditions of previous quarters to give resilient companies a fighting chance at a profit.
AK Steel eked out a modest profit of $6.2 million -- a noteworthy $53.4 million improvement from the $47.2 million loss recorded for the second quarter. Despite beating analysts' expectations, the result is 97% below the earnings posted a year earlier, and a discouraging outlook from larger competitor U.S. Steel (NYSE: X ) may have contributed to the sharp sell-off in AK Steel shares Tuesday.
AK Steel's management wants you to look at the bright side: "While the results may pale in comparison to the year-ago records, in many respects the performance is even more remarkable, given that third-quarter 2009 revenues fell by more than half from the year-ago period." It's true, achieving profitability under these conditions is laudable, and AK Steel's expectation of a further 24% increase in volumes shipped in the fourth quarter helps the steelmaker stand out from the pack.
Big things come in smaller packages
At this stage in the domestic steel industry's process of adapting to a new, reduced baseline of demand, the smaller operators appear to have the upper hand. Domestic giants Nucor (NYSE: NUE ) and U.S. Steel both turned in third-quarter losses, despite Nucor's observation that industrywide capacity utilization improved dramatically to 69% in the third quarter from 46% in the second quarter. Meanwhile, Steel Dynamics (Nasdaq: STLD ) -- plus relative pipsqueaks Schnitzer Steel (Nasdaq: SCHN ) and AK Steel -- logged profitable quarters on the strength of this inventory restocking phenomenon.
For its part, Schnitzer Steel managed a pint-sized profit of $10 million alongside a revenue slide of 58% year over year to just $556 million. While unfavorable scrap metal prices dogged results, the company noted substantial strength in export demand from Asia as scrap sales volumes approached record levels.
After expanding its self-service auto-parts franchise to enhance vertical integration near key scrap-processing facilities, Schnitzer Steel looks well-positioned to benefit from a shift to thrift if a broader domestic recovery is elusive, while global scrap metal demand provides welcome exposure to industrial growth abroad. While I continue to view the prospects of profitability for Asian steelmakers like POSCO (NYSE: PKX ) far more favorably, AK Steel and Schnitzer Steel vie to steal the domestic show.