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AK Steel Holding Corp. (AKS - Analyst Report) increased its surcharge for all electrical steel products shipped in July 2011 from $435 per ton to $440 per ton. The increase in surcharge was driven by the rising costs of energy and raw materials. The higher prices have stifled demand from end-users, leading manufacturers to reduce their pace of expansion this spring.

The surcharge is calculated based on reported prices for raw materials and energy used to manufacture products coupled with the May 2011 purchase cost.

For second-quarter 2011, management expects shipments to be in the range of 1,500,000 and 1,550,000 tons, indicating a substantial increase over the first-quarter shipments. The company also anticipates its average per-ton selling price to be 7% higher compared with the first quarter. The operating profit is expected to be approximately $65 per ton for the second quarter of fiscal 2011.

We believe AK Steel is uniquely positioned to focus on products with high margins. Electrical steel continues to be the company’s strongest product line, with demand recovering in the U.S. and abroad, though at a slower rate. AK Steel is operating its plants at above 80% capacity and is well positioned to serve the end markets when the demand rebounds.

However, higher input costs, particularly iron ore, is eroding margins of the company. Iron ore pricing concerns have led to a negative outlook for steel manufacturers. A K Steel currently retains a Zacks #1 Rank (short-term Strong Buy rating).

Ohio-based AK Steel Holding Corporation is a leading producer of flat-rolled carbon, stainless, electrical steel and tubular products. It operates 7 steel-making and finishing plants in Ohio, Pennsylvania, Indiana and Kentucky.

The basic raw materials required for the steel manufacturing are iron ore, coal, coke, chrome, nickel, silicon, manganese, zinc, limestone, and carbon and stainless steel scrap. Natural gas, electricity and oxygen are the sources of power for steel manufacturing operations. The company competes with companies like Nucor Corporation (NUE - Analyst Report) and Steel Dynamics Inc. (STLD - Snapshot Report).

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