Metals USA: Inventory Position 'Beautiful’ in 2008
Metals USA took a divergent path from other service centers in the fourth quarter of 2007, setting the company up for a profitable 2008, according to President and CEO Lorenço Goncalves.

“During the fourth quarter, Metals USA focused on building an inventory position ahead of the price curve by increasing our purchases from select mills and selected products. Such initiative helped us to position our inventories to take advantage of the improving pricing trends in 2008,” Goncalves said during the company’s fourth-quarter conference call.

In addition to mill orders, the Houston-based company also found another source of material during the quarter—other distributors. “If other service centers have a need to sell steel below replacement costs, Metals USA will always be there to help them accomplish their goals,” he said.

He believes the company’s inventory is “beautifully” positioned heading into 2008, where steel prices are on an upward trajectory. “A beautiful inventory is one with average costs way below replacement costs and selling prices way above replacements costs,” Goncalves said. “I disagree with the approach that the only thing to be done with inventories is to take them down. One of the core attributes of a successful service center is to be able to manage inventory, and managing inventory is not just reducing stocks all the time.”

Goncalves was critical of some players in the industry for their continued destocking through December. “They’ve got to be naked.”

During the fourth quarter, Metals USA reported a decrease in sales but a jump in income compared to the same quarter of 2006. Fourth-quarter sales totaled $432.2 million, down slightly from the $437.5 million during the same period in 2006. Net income jumped 27.4 percent to $7.6 million during the final three months of 2007.

Those trends were reversed for the company’s full-year results. Net sales in 2007 were $1.85 billion, a 45.3 percent increase from the $1.81 billion in 2006. Full-year net income dropped from $39.5 million to $36.6 million, a 7.9 percent decrease.

With the unusual conditions facing the steel industry in 2008, including high demand and prices in other parts of the world and the weak U.S. dollar, which are inhibiting imports, steel is in tight supply. But Metals USA’s strong inventory position and growing relationships with suppliers such as AK Steel should insulate the company from availability issues, Goncalves said. “We have our alliances in the marketplace. We are absolutely comfortable.”

While prices have spiked considerably in the first quarter, Goncalves does not believe the increases are over. In fact, he wouldn’t be surprised to see hot-rolled steel eclipse $1,000 per ton in the future.

“Hot-rolled coil could get to $1,000 in 2008,” Goncalves said. “Steel today, at $700 for March orders of hot-roll, may look a little expensive. But keep in mind, five years ago if somebody had said hot-band would cost $500, that person would have been called crazy. Today, $500 is completely out of consideration. It’s not going to go back.” 

On the acquisitions front, Metals USA will look at potential targets in 2008, but is also comfortable with the status quo. Unlike some industry executives, Goncalves does not believe further consolidation in the steel distribution industry is required for a healthy market.

“We don’t need consolidation in the service center industry because service centers are basically local businesses. If we have consolidation with the right consolidators like with the steel mills, it could be great for the entire economy. But to have consolidation with the wrong consolidators, it could be even worse,” he said.

Olympic Steel
Tops $1 Billion Mark, Sees Opportunity
in Rising Prices, Tight Credit
The rising cost of steel and the credit crunch throughout the United States will leave the steel industry in a precarious position in 2008. And Olympic Steel executives believe the Cleveland-based company is in a strong position to capitalize on such an environment.

“The rapid and steep escalation of prices, combined with the banking, credit and cash flow challenges in the marketplace, will present a tremendous stress on many in the steel chain,” Chairman and CEO Michael Siegal told investors and analysts. “Those who are not financially strong may not be able to weather the extraordinary pull on working capital that faces the industry as we enter 2008. Olympic Steel’s strong balance sheet, $110 million of credit availability and proven working capital management principles provide us with the unique opportunity to fully participate in this steel market while simultaneously investing in more facilities, equipment and technology in 2008.”

Coming off its first $1 billion sales year in company history, Olympic Steel announced aggressive capital spending plans in 2008. Olympic plans to spend $40 million in 2008, up from a cap ex budget of $12.5 million in 2007.

“While the credit crisis and dramatic escalation in steel prices will constrain many in the service center industry this year, we are positioned very well to take advantage of investment opportunities in 2008,” said David Wolfort, president and chief operating officer. “We are planning one of our largest capital spending plans in recent company history, judiciously and strategically focused toward value-added processing and additional equipment, gross margin expansion, and location penetration in additional geographies.”

Spending plans for 2008 include the completion of a new stretcher-leveling cut-to-length line at Olympic’s Minneapolis facility in May, construction of a third temper mill and the addition of laser and plasma cutters and machining centers at various locations.

Additionally, the company is moving toward the construction of “two or three new greenfield value-add locations in the Southeast and Midwest,” Wolfort said. “Hopefully, we’ll announce one in the next month or two. These sites will be located within close proximity of certain key customers that require multiple just-in-time shipments per day of highly engineered parts.”

In 2007, Olympic Steel reported net sales of $1.03 billion, a 4.9 percent increase from the $981 million posted in 2006. Net income, however, was down 18.4 percent to $25.3 million. Tons sold in 2007 fell from 1.27 million to 1.25 million.

“The annual shipment decline of 1.4 percent compares favorably to the 6.8 percent drop seen in industry-wide service center shipments in 2007,” Siegal said. “And our 2007 decline was entirely in the toll processing area due to lower demand in Detroit and Georgia.”

The company’s fourth quarter sales totaled $236.1 million, a 4.4 percent increase from the same period in 2006. Net income in the fourth quarter increased 18.4 percent to $4.5 million.

Mill price increases thus far in 2008 have not caught Olympic off guard. “In the fourth quarter, there were still a lot of skeptics about the price increases. We were not one of them. We were out in front of raising our prices to replacement cost because we felt we needed to do that to fund these escalating prices,” Siegal said.

In a rising market, imports would ordinarily fill the void, but foreign prices still remain above domestic ones. “Almost every market is a net importer, other than Asia. As China pulls back, the big question is, if everyone is a net importer and very few are net exporters, where is the steel going to come from?” Siegal asked. “There is some genuine concern that overall global demand is outstripping supply right now.”

Reliance Steel & Aluminum
Net Sales Crack $7 Billion Mark
Service center giant Reliance Steel & Aluminum Co. reported net sales of $7.26 billion in 2007, a 26 percent jump over the record $5.74 billion posted in 2006.

Net income also reached new heights for the Los Angeles-based company. Net income totaled $408.0 million in 2007, a 15 percent increase over the $354.5 million during the previous year.

For the fourth quarter, net income amounted to $79.9 million, up 7 percent compared with net income of $74.6 million for the same period in 2006. Sales for the 2007 fourth quarter were $1.71 billion, an increase of 9 percent compared with 2006 fourth quarter sales of $1.57 billion.

“We are very pleased to report our record results for 2007, especially in light of the volatile market conditions throughout the year,” Chairman and CEO David H. Hannah told investors and analysts. “Gross profit management was our most difficult task and we handled it well, finishing the year down only slightly from the 2006 level. For the 2007 year, both our volume and average prices were up compared to 2006, driven mostly by our 2006 and 2007 acquisitions.”

Reliance completed five acquisitions during 2007, including Encore Group Limited, Crest Steel Corp., Industrial Metals and Surplus Inc., Clayton Metals Inc. and Metalweb Ltd. Additionally, 2007 marked the first full year of operating results from the 2006 acquisitions of Earle M. Jorgensen Co. and Yarde Metals.

Further growth on the acquisition front is almost a given. “There are still opportunities on the acquisition side. We’re going to be very selective, as we have been in the past. All of the acquisitions we’ve done are bigger and better companies today than they were when we acquired them. I’d be very surprised if we don’t continue to do acquisitions in ‘08,” Hannah said.

The year started, however, with Reliance shedding part of a recent acquisition, the Encore Coils division of Encore Group Ltd., to Canada’s Samuel, Son & Co., Limited. “The Encore Coils business did not fit well for us because we did not have any similar facilities nearby that could help support this relatively small business,” said Hannah.

Looking forward, he said, the uptrend in carbon steel prices creates “a pricing environment that is much more favorable than the last two quarters.”

Demand, in contrast, is harder to predict, with uncertainty in many sectors of the economy. Fortunately for Reliance, the most uncertain segments are areas where the company has the least exposure.

“The widespread doom and gloom attitude portrayed in the media confuses us, because we still see some strength in the markets we serve. We have high expectations in energy, oil and gas, and aerospace industries. Additionally, non-residential construction is still good for us, though not at ‘06 and ‘07 levels,” Hannah said.

While the rising steel prices are welcomed by Reliance, they do come with certain risks attached.

“If we get too high, will imports come in?” Hannah asked. “But it seems that with every increase that is announced here, there are increases announced elsewhere in the world that are higher than the U.S., so the spread is still pretty good.”

Reliance officials are concerned about how high prices and tight credit will affect their customers, most of whom are small fabricators and job shops.

“With the credit market like it is, and with prices rising like they are, we keep an eye is what’s going on at our customer level. For customers to buy the same amount of steel in April is going to cost considerably more than it did last December,” Chief Operating Officer Gregg Mollins said.

Russel Metals: Income Drops 30%; Optimistic about ’08
Russel Metals Inc., Mississauga, Ont., reported 2007 net earnings of $111.2 million, a decrease of 30 percent vs. fiscal 2006. Net earnings for fourth-quarter 2007 totaled $25.3 million, down 22.5 percent from the same period the previous year. For the year, Russel’s sales dipped 4.9 percent to $2.60 billion.

Though news reports are discouraging, Russel President and CEO Bud Siegel said there is reason for optimism as 2008 unfolds.  “This year will be a stronger year than the press would have us believe,” Siegel told investors and analysts. “A lot of the news flow is generally oriented toward the auto sector. We’re more of an indicator of the general-line business, non-residential construction, general fabrication—which is not all bad.”

Siegel said the company forecasts a stable year for its service center division and improved activity on the steel distribution side of the business. Russel will enjoy a full year’s performance from late-2007 acquisition JMS Metal Service, now operating as JMS Russel Metals. “As the JMS units do not overlap with any of our other operating units, no rationalization of operations is needed. The operations will be transitioned to our metals service center central computer systems in the first half of 2008,” Siegel said.

In the energy tubular products division, a record-year from the company’s Comco Pipe operation helped to offset the decline in volume of Russel’s other Western Canadian operations. Those operations distribute pipe primarily to customers involved in drilling for gas. The forecast for 2008 is somewhat mixed, with results dependent on whether some Western Canada projects are restarted in the second half of 2008.

Already in 2008, Russel has raised its prices in response to escalating steel prices from North American mills. The company is also starting to see some tightening on availability. “We’re being very careful how we sell our product in the industry because we don’t want to waste it. We’re seeing some tightening on lead times. It’s just a planning process to make sure we have the availability when we need it, and more importantly, not to waste it when we sell it,” Siegel said.

Though prices are rising, the spread between North American pricing and the rest of the world’s is continuing to inhibit imports. And imports will remain a non-entity until that situation is reversed. “Once the North Americans get their price up, imports will come back in on a normal pattern,” Siegel said. “Or once the U.S. dollar strengthens. Or once the ocean freight rates come down. It’s all a function of price, it’s not a function of taking market share.”

Fourth-Quarter Report & Outlook: Mills

ArcelorMittal: Record Earnings for Industry Giant
Global steel giant ArcelorMittal announced “excellent” results for 2007, including EBITDA of $19.4 billion, up 27 percent, and a net income of $10.4 billion, up 30 percent year-on-year.

“We are announcing record earnings...and strong cash flow from operations,” said Lakshmi N. Mittal, president and CEO. “This reflects the strength of the ArcelorMittal business model, which enables us to benefit from a healthy global demand for steel in both the high-quality developed and fast-growth developing economies.”

2007 was the first full year following the merger of Arcelor and Mittal Steel to create the world’s largest steel company. “I am very proud of the way the two companies have integrated so successfully, building a steel company that is focused on leading the transformation of our industry towards a sustainable future,” Mittal said.

ArcelorMittal announced a total of 35 acquisitions worldwide in 2007, including facilities in Argentina, Brazil, China, Costa Rica, Egypt, Mexico and Poland. The transactions have helped the company diversify its product line in pipes and tubes, galvanizing, stainless steel and wire. The company has also identified 20 million metric tons of organic growth potential, Mittal added.

Looking forward, he expects performance in the first quarter of 2008 to be comparable to fourth-quarter 2007 levels.

Kaiser: Operating Income Jumps,
Fabricated Products Strong
Kaiser Aluminum Corp., Foothill Ranch, Calif., reported net income of $101 million on net sales of $1.504 billion for full-year 2007, an 11 percent increase from the $1.357 billion in the prior year. The increase primarily reflects higher shipments, favorable product mix and improved value-added pricing.

“We continue to deliver excellent results as we capitalize on strong demand for aerospace and defense-related products,” said Jack A. Hockema, president, CEO and chairman of Kaiser Aluminum.

Net sales for the fourth quarter of 2007 increased 7 percent to $361 million, compared to $336 million for the fourth quarter of 2006. Net income for the quarter totaled $24 million, up from a net income of $12 million for fourth-quarter 2006.

Operating income on a consolidated basis for the fourth quarter was $43 million, up 62 percent over the prior period. For full-year 2007, operating income hit $182 million, up 81 percent over the prior year. Both periods benefited from strong results in both the fabricated products and primary aluminum segments.

“The record results in operating income for fabricated products reflect a step-change over the prior year as we realized the full impact from the first phase of our heat-treat plate expansion,” said Hockema. “Robust demand for heat-treat plate products continues, although the ramp-up is slower than anticipated. Strong armor plate demand has cushioned this impact.

“Service center rod and bar inventories hit historic lows in the third quarter and restocking has begun. Additionally, export opportunities and newly introduced growth programs will soften the impact of weak demand in ground transportation, which we expect to continue through the first half of 2008,” he added.

The company recently announced $14 million in additional investments, increasing the total organic growth program to $244 million. The recently announced investment improves Kaiser Select capabilities, particularly for automotive products, and upgrades Trentwood’s casting productivity. The company reported that its $139 million expansion of heat-treat capacity and capabilities remains on schedule and its $91 million program to improve efficiencies in rod, bar and tube production continues as planned.

“Our organic growth program has momentum and is delivering results,” said Hockema. “We have significant financial capacity and flexibility to pursue additional growth initiatives.”