Time is approaching for AK Steel Holding Corporation (NYSE:AKS) and peers who sell to automotive manufacturing sector to negotiate prices for 2017 contracts. This is because for automakers sign annual contracts for steel supplies. Contract negotiations for the coming year typically begin in 4Q of the preceding year, though sometimes the negotiations could begin a bit early or late.
Eyes on automotive contracts
The tepid demand for steel in construction sector has meant that automotive contracts have become a crucial source of revenue for steelmakers such as AK Steel, ArcelorMittal SA (ADR) (NYSE:MT), United States Steel Corporation (NYSE:X) and Nucor Corporation (NYSE:NUE). What will influence 2017 automotive contracts for steelmakers?
Raw materials for making steel
The costs of iron ore and coking coal will greatly influence how AK Steel and is peers negotiate contract prices with automotive manufacturers. When prices of these raw materials are high, steelmakers can a reason to press for higher contract prices. However, 2016 has been characterized by weak prices of steel scrap. On the other hand, prices of coking coal have been trending upward this year.
Spot steel prices
Spot steel prices will also weigh on 2017 contract prices with automakers. So far spot steel prices are up compared to where they were at the same time last year. Nevertheless, spot prices have trended down in the recent months.
Market sentiment
Market sentiment is also expected to influence 2017 steel contract prices. Although sentiments have seemed to weaken in the recent months, the situation looks better than a corresponding period last year.
Automotive sales
Looking on the side of automakers, soft automotive sales could see the manufacturers press prices for more favorable contract prices in 2017. The last two months have seen the U.S. automotive sales show signs of stagnation.
What does Wall Street think about AK Steel?
Wall Street is divided on what awaits steelmakers such as AK Steel. While KeyBanc Capital Markets recently upgraded its rating on the stock, Jefferies on its part cut its price target on AKS stock. KeyBanc upgraded AKS to sector weight from underweight. Jefferies cut price target on AKS stock to $4.50 from $5.55.
AK Steel stock fell 1.85% in the last session to close at $4.77. The stock eased a further 0.63% in afterhours trading.
