Standard & Poor's Ratings Services downgraded AK Steel Holding Corp. (NYSE:AKS) one notch further into junk territory, citing difficult competitive conditions that it expects to affect the company's already weak financial metrics.
AK Steel this month forecast disappointing earnings for its second quarter amid recent deterioration in spot market pricing and increased uncertainty tied to near-term economic conditions in the U.S.
In April the company swung to a first-quarter loss as a drop in volume offset higher pricing.
S&P now rates the steelmaker at B-plus, four steps below investment-grade territory. Its outlook is stable, reflecting the firm's expectations that AK Steel's operating performance will gradually improve alongside the economy and meet credit metrics consistent with its rating by the end of 2013.
S&P said AK Steel's competitive environment is plagued by uneven demand, excess capacity, declining prices and relatively high raw material costs. The firm also said weakening global markets, especially in Europe and China, could limit the growth of the U.S. economy and pressure steel prices.
S&P said it still predicts improvement in 2013 from 2012 for AK Steel, though expectations for the coming year are lower amid continued sluggish demand.
The firm said AK Steel, though somewhat more cost-competitive compared with its peers, is still disadvantaged because of its lack of backward integration, which exposes the company to higher procurement costs because it doesn't own or control any iron ore or metallurgical coal.
Still, S&P said AK Steel's results will likely improve along with the economy as pricing edges up and raw material costs moderate.
Further downgrades are possible if industry conditions or the company's financial performance weaken during the next few quarters. Ratings could be raised if markets and pricing significantly improve, or if AK Steel makes investments in iron ore and metallurgical coal.
Shares edged up 1.6% to $6.20 in recent trading. The stock is off 60% in the last 12 months.