Though 2006 was another outstanding year for most producers and distributors, with metals prices at unusual heights, the market is bracing for a slowdown. Indeed, anticipation of moderating conditions may have fueled the year’s resurgence of industry consolidation.

Reviewing the headlines of the past 12 months reveals a mergers and acquisitions theme, as mills and service centers alike, flush with cash from a string of successful years, jockeyed for position in various markets.

Among notable deals announced in 2006 on the service center side:

= Reliance Steel & Aluminum Co.’s acquisitions of Earle M. Jorgensen Co. early in the year, and Yarde Metals late in the year, along with a handful of smaller transactions, gave Reliance a size that rivals perennial market leader Ryerson Inc.

= ThyssenKrupp Materials NA expanded its presence in Canada with acquisitions of The Hearn Group and the VPK Metals chain.

= Platinum Equity’s purchase of PNA Group’s Feralloy, Delta Steel and Infra-Metals operations, and later Metals Supply Co. Ltd., signaled outside investment firms’ growing interest in the service center market.

Esmark Inc. continued to make a splash by adding to its distribution holdings, but raised the most eyebrows when it secured board support for its acquisition of Wheeling-Pittsburgh Steel Corp. While it’s certainly unusual for a service center company to acquire a mill, Esmark makes a good case for its goal to become a vertically integrated steel supplier.

Similarly, mega-deals in the steel, aluminum and copper producer segments changed the competitive landscape around the globe:

= After a contentious courtship, Mittal Steel persuaded Arcelor’s board to merge the two steel giants, forming Arcelor Mittal, the largest steel company in the world with a capacity of more than 120 million tons.

= In the pipe and tube sector, Europe’s Tenaris S.A. acquired Maverick Tube Corp. in a $3 billion transaction.

= Following a failed merger attempt between Phelps Dodge Corp., Falconbridge and Inco, Phelps Dodge agreed to merge with Freeport-McMoran Copper & Gold Inc., forming the world’s largest publicly traded copper company.
n Russia’s Rusal and SUAL Group, and Switzerland’s Glencore International AG, agreed to merge their respective assets into United Company Rusal, creating the world’s largest aluminum and alumina producer.

Steel prices rose and fell during the course of the year, but remained well above historical averages. Aluminum and copper prices, in the meantime, hit dizzying heights. Such unusually high metals prices, and margins, enabled the many mergers and no doubt contributed to the urgency behind the dealmaking in 2006.

On the international trade front, friction over China’s economic policies and concern over its buildup of steel production capacity made headlines. While the Chinese government has loosened the peg on its currency, allowing a modest rise in value against the dollar, it still retains a significant cost advantage over competitors in North America. Domestic steel executives on the China Currency Coalition continue to lobby for action by the Bush administration to level the playing field vs. Chinese imports.

China was on track to produce nearly one-third of the world’s steel last year, likely pushing global production well past the billion-ton mark. Steel executives fear that Chinese production may eventually exceed its domestic needs, forcing mills to seek buyers in the United States and other parts of the world.

In fact, China was among the list of countries responsible for a surge in imports in the first half of 2006. “The bulk of the import increases are coming from countries where subsidies are prevalent, currency undervaluation is practiced and capacity increases outstrip domestic demand,” said Andrew G. Sharkey III, AISI president and CEO. “These trade distorting practices have the potential to damage the globally competitive U.S. and North American steel industry, and need to be addressed.”

Availability of cheap imports and moderating demand in the second half led to excess inventories late in the year, which threatened steel prices. Mills were quick to curtail production while service centers worked down their supplies. Most observers expect inventory levels and shipments to return to normal in the first or second quarter of 2007.

A Look Back at 2006
Highlights of industry news events of the past year:

FIRST QUARTER
= The U.S. Senate repealed the controversial “Byrd Amendment,” which provided for antidumping penalties paid by importers to go directly to affected domestic competitors. Foreign trading partners decried the amendment as a violation of international trade rules.
= One month after making a bid for a friendly takeover of Dofasco, Thyssen-Krupp Materials NA, Detroit, made another foray into Canada with the acquisition of The Hearn Group of Windsor, Ontario.
= Industry consolidator Esmark Inc. of Chicago acquired Homewood, Ill.-based North American Steel LLC.
= Edgen Corp., Baton Rouge, La., acquired Murray International Metals Inc., expanding its presence as a supplier of carbon steel pipe, plate and structural sections to the energy industries in North America.
= The China Currency Coalition, an affiliation of North American companies opposed to China’s trade and economic policies, was quick to dispute a Chinese report stating that the Asian giant’s trade surplus had only tripled from $32 billion in 2004 to $102 billion in 2005. The coalition maintains this is a huge understatement and that the surplus is more than $435 billion.
= Shipments of copper and copper alloys in 2005 declined 2.4 percent vs. 2004, according to Copper and Brass Servicenter Association data.
= China drove world crude steel production up 5.9 percent in 2005, to nearly 1.13 billion metric tons, according to the International Iron and Steel Institute. China’s share of the world total increased from 26.3 percent to 30.9 percent.
= Reliance Steel & Aluminum Co., Los Angeles, acquired Earle M. Jorgensen Co., Lynwood, Calif., creating a metals distribution giant to rival the size of perennial market leader Ryerson Inc.
= ThyssenKrupp Materials NA acquired VPK Metal Inc.’s operations in Canada, which now operate as part of its Copper and Brass Sales division.
= Esmark acquired North Aurora, Ill.-based Premier Resource Group LLC, a service center specializing in prepainted steel products.
= Macsteel Service Centers USA, Newport Beach, Calif., acquired Alpha Steel, Hammond, Ind., a processor and distributor of structural steel beams, shapes, plate, sheet, tubing and pipe products.
= Twelve North American steel companies joined together to help rebuild the U.S. Gulf Coast in the aftermath of hurricanes Katrina and Rita, collectively committing $1.1 million to support the Gulf Coast Steel Initiative.
= Europe’s Arcelor purchased 88.4 percent of the shares of Canadian steelmaker Dofasco, then placed control of the company in the hands of the independent Strategic Steel Stichting. Arcelor was subsequently acquired by Mittal Steel, leaving Dofasco’s fate up in the air.
= The Ports of Indiana handled a record $1.53 billion of cargo in 2005, a 2 percent increase from 2004. Indiana’s three ports on Lake Michigan and the Ohio River—Burns Harbor/Portage, Mount Vernon and Jeffersonville—moved 7.7 million tons of cargo. Steel made up 16 percent of the port system’s total tonnage, but more than 40 percent of the total value.
= Precision Strip Inc., a subsidiary of Reliance, agreed to acquire Flat Rock Metal Processing LLC, a Flat Rock, Mich., toll processor.
= Reliance strengthened its foothold in China with the purchase of Everest Metals by its Reliance Pan Pacific Pte. Ltd. subsidiary. Everest is an aluminum service center based in Shanghai.
= O’Neal Steel Inc., Birmingham, Ala., acquired Timberline Steel in Commerce City, Colo. The transaction marked O’Neal’s fifth acquisition since 1997 and brought the company’s total to 68 stocking locations.
= Energy Alloys, Houston, agreed to purchase the U.S. oilfield distribution assets of Ryerson Inc., Chicago. Through the purchase, Energy Alloys gained distribution facilities in Houston; Lafayette, La.; and Tulsa, Okla.
= The SCS partnership between The Material Works Ltd. and Red Bud Industries, both located in Red Bud, Ill., gained momentum as installations grew. The SCS process, patented by The Material Works, uses a brushing system to give hot-rolled black steel a smooth, clean, rust-resistant finish. Red Bud provides the equipment for the SCS processing lines, which offer cost and environmental benefits vs. conventional pickling operations.

SECOND QUARTER
= Steel imports for the year were up sharply, and steel prices were trending down, causing concern among domestic producers.
= Canadian steelmaker Stelco Inc. emerged from 26 months of bankruptcy proceedings, appointing steel veteran Rodney Mott to serve as company president and CEO.
= Nucor Steel, Charlotte, N.C., purchased the bar products mill of Connecticut Steel Corp., Wallingford, Conn.
= Platinum Equity, a California-based investment firm, purchased the PNA Group based in Atlanta. PNA’s holdings included Chicago-based Feralloy, Delta Steel in Houston, and Infra-Metals in Atlanta.
= U.S. steel producers continued to sound the import alarm as Census Bureau data showed a 30 percent increase in finished steel imports, particularly from Taiwan, Turkey, China, South Korea, Brazil and Japan. Imports during the first three months of the year, if annualized, would have set a new all-time record.
= Steel Dynamics Inc., Fort Wayne, Ind., planned to add production capacity at its Columbia City, Ind., minimill allowing the plant to produce a higher volume of rail products and to add lighter structural shapes and merchant bars to its offerings. When in full operation, the mill expansion will add capacity of about 600,000 tons per year and bring Columbia City’s annual finished steel production capacity to about 1.6 million tons.
= Steel Dynamics Inc. completed its acquisition of Roanoke Electric Steel Corp. The combined companies now operate five electric-
furnace minimills with annual production capacity of approximately 5 million tons.
= Steel Technologies Inc., Louisville, Ky., acquired Kasle Steel Corp., Detroit, a major supplier of automotive steel blanks.
= Canadian service center company Encore Group planned to expand its business to the southwestern U.S. with the acquisition of Fox Metals & Alloys of Houston, a specialty metal service center.
= Macsteel Service Centers USA broke ground on a $10 million manufacturing and distribution facility in Tucson, Ariz. The facility will process and distribute an array of steel and nonferrous products to customers in the southwestern U.S. and Mexico.
= Marmon/Keystone Corp., Butler, Pa., opened a satellite service center in Mexico City, joining its branch near Monterrey, Mexico.
= Alro Steel Corp., Jackson, Mich., acquired Block Iron & Supply’s steel service center in Oshkosh, Wis.
= Copper shipments showed significant year-over-year improvement during the first quarter, registering a 12 percent gain, according CBSA.
= In a dramatic move to undermine Mittal Steel’s takeover attempt and claim the title of world’s largest steel producer, Europe’s Arcelor agreed to purchase Severstal, the largest steelmaker in Russia. Shareholders ultimately rejected the deal for the Mittal merger.
= Nucor announced plans to construct its fourth facility to produce metal building systems and components, to be located in the western United States with an annual capacity of approximately 45,000 tons.
= Metals USA Inc., Houston, acquired Port City Metal Services, Tulsa, Okla., a processor of steel plate.

THIRD QUARTER
= Months of contentious courtship by Mittal Steel finally paid off when the Arcelor board accepted Mittal’s revised purchase offer for the company, in what was termed “a merger of equals.” The deal formed Arcelor Mittal, the largest steel company in the world with a capacity of more than 120 million tons.
= In another major merger in the pipe and tube sector, Europe’s Tenaris S.A. acquired Maverick Tube Corp., Chesterfield, Mo., in a $3.18 billion transaction.
= Phelps Dodge Corp., Inco Ltd. and Falconbridge Ltd. announced plans to merge in a $56 billion transaction that would have created one of the world’s largest mining companies. The deal later fell through when Inco’s bid for Falconbridge failed to win over shareholders.
= Nucor planned to construct its fourth sheet steel galvanizing facility, to be located at its existing sheet mill in Decatur, Ala., with an annual capacity of 500,000 tons.
= Gerdau Ameristeel U.S. Inc., Tampa, Fla., acquired Sheffield Steel Corp., Sand Springs, Okla., a minimill producer of long steel products, primarily rebar and merchant bar.
= Following its earlier purchase of PNA Group, Platinum Equity expanded its reach into the service center sector with the acquisition of Metals Supply Co. Ltd. of Houston.
= Total world steel production for the first half of 2006—at 595.7 million tons—was 7.9 percent higher than in the same period of 2005. China was still the largest steel-producing country with production for the first six months of 2006 of 199.5 million tons, 18.3 percent higher than for the first half of 2005. China accounted for over one-third of world crude steel production in the first half of the year.
= For the first half of the year, steel imports remained 32 percent higher than the comparable period in 2005.
= Nucor announced plans to build a new special bar quality mill in the southern U.S., adding an estimated 850,000 tons of capacity to the SBQ market.
= Kaiser Aluminum Corp., Foothill Ranch, Calif., emerged from Chapter 11 bankruptcy “a vastly different company from the one that filed for reorganization in early 2002,” said Jack Hockema, chairman, president and CEO.
= Aleris International Inc., Beachwood, Ohio, completed the purchase of the downstream aluminum business of Corus Group plc.
= PTC Alliance Corp., Wexford, Pa., maker of mechanical steel tubing and tubular shapes, emerged from Chapter 11 bankruptcy protection.
= Kenwal Steel Corp., Dearborn, Mich., announced plans to build a processing and distribution facility next to the SeverCorr mill under construction near Columbus, Miss.
= Reliance solidified its position as the nation’s second largest service center operator with the acquisition of Yarde Metals, Southington, Conn.
= Samuel, Son & Co. Ltd. purchased Form-Tech, a Temperance, Mich., flat-rolled steel distributor.
= Texas Pacific Group, a private investment firm, acquired aluminum maker Aleris International.
= A.M. Castle & Co., Franklin Park, Ill., agreed to acquire Torrance, Calif.-based Transtar Metals, a supplier of high-performance metals to the aerospace and defense industries.
= RathGibson, Janesville, Wis., acquired Greenville Tube Co., a supplier of specialty stainless steel and nickel alloy tubing.
= With the price of copper around $3.30 per pound—three to four times higher than the historical average—end-users were substituting cheaper alternatives. According to London-based CRU, copper substitution losses in 2005 equaled approximately 1 percent of world demand or 225,000 metric tons. With substitutions accelerating in 2006, the copper industry expected to suffer at least another 275,000 to 300,000 tons of lost demand.
= In response to a 42 percent increase in steel imports three-fourths of the way through 2006, the American Iron and Steel Institute appealed to the Bush administration to address the “unprecedented surge in imports and unfair trade from China.”
= As of September, steel inventories at U.S. service centers had risen for the ninth straight month, while aluminum stocks rose for the fifth consecutive month, according MSCI data.

FOURTH QUARTER
= IPSCO Inc., Lisle, Ill., strengthened its position in the energy tubular market with the acquisition of NS Group Inc., Newport, Ky.
= O’Neal Steel purchased Ohio-based Ferguson Metals, a supplier and processor of specialty metals and high-temperature alloys.
= Heidtman Steel, Toledo, Ohio, announced plans to build a 240,000-square-foot processing facility in Columbia, Miss., near the new SeverCorr mill.
= Ryerson expanded its service center business with a joint venture operation in China, VSC Ryerson China Ltd.
= Ryerson acquired Lancaster Steel Service Co. Inc., a service center based in upstate New York.
= Nucor selected Memphis, Tenn., as the site for the company’s new special bar quality products steel mill. The facility will have an estimated annual bar capacity of 850,000 tons.
= Russia’s Rusal and SUAL Group, and Switzerland’s Glencore International AG, agreed to merge their respective aluminum and alumina assets into United Company Rusal. If finalized, the new company will become the world’s largest aluminum producer.
= India’s Tata Steel agreed to acquire Corus Group plc, a transaction that would create the world’s fifth-largest steel producer
= Esmark emerged victorious in its bid to acquire Wheeling-Pittsburgh Steel after shareholders seated a new slate of directors. The previous board had favored a merger with Mexico’s Companhia Siderurgica Nacional.
= Reliance acquired Crest Steel Corp, Carson, Calif., a general-line carbon steel distributor.
= Russia’s Evraz Group agreed to acquire Oregon Steel Mills, Portland, Ore.
= In the wake of its failed merger with Falconbridge and Inco, Phelps Dodge Corp. agreed to merge with Freeport-McMoran Copper & Gold Inc., becoming part of the world’s largest public copper company.
= Like other mills, U.S. Steel Corp. announced plans to curtail production in the fourth quarter as demand waned due to the slowing economy and excess inventories in the supply chain.