CORPORATE FOCUS
Reliance Steels for Growth as Lifting of Tariffs Drives Shares

By RiSHAWN BIDDLE
Staff Reporter

A collapse in new orders and the inability to pass on tariffs to customers sent shares of Reliance Steel & Aluminum Co. as low as $13.48 each last March, from over $30 a share in 2002.

But with the tariffs lifted and the economy improving, so, too have prospects for L.A.-based Reliance, a steel industry middleman of sorts. Reliance purchases raw metals and cuts them into smaller pieces for manufacturers that include Boeing Co. and Intel Corp. With steel prices rising again, Reliance shares hit a 52-week high of $35 on Dec. 29, an increase of 68 percent year to date.

Driving the recent gains has been a boost in Reliance's gross margins, the difference between revenues and the cost of raw materials. Net income for the third quarter ended Sept. 30 fell 13 percent, to $24.3 million, compared with the like period a year ago. But gross margins rose to 28 percent from 27.6 percent as average selling prices rose by 3 percent.

Steel products, which make up more than half of Reliance's sales, have been a major factor. The price of hot-rolled carbon steel, which is used in most of Reliance's steel products, has risen in the last year to $380 per ton from $280, said Chief Executive David Hannah.

Most of Reliance's steel inventory had been purchased months before the recent price hikes. But because it passes on costs as soon as raw materials prices spike up, the company takes advantage of the spread.

"If there is a $20 increase in a ton of hot-rolled on Nov. 30, our salespeople try to get customers to bite on a similar increase the next day," Hannah said.

Rising demand

Another plus: customer orders that began rising in September, thanks to construction-related customers and semiconductor fabricators, who buy polished steel plates for use in polishing silicon wafers.

In an industry that is so cyclical, the question is whether all the good news can be sustainable. The past may be a guide.

Steel sales rose 8 percent during the first six months of 2002, thanks in part to a spurt in demand, which along with an inventory of low-cost steel, helped improve margins.

But orders collapsed late in the year, leading to a decline in sales. Exacerbating matters was a rise in steel prices spurred by tariffs on imported steel that were imposed by the U.S. government earlier that year.

President Bush had instituted steep tariffs on imported steel in early 2002, in what was largely seen as a political move to protect U.S. steel manufacturers. But the strategy appeared to backfire when large U.S. steel buyers, such as automobile manufacturers, complained about the high prices. Bush rescinded the tariffs on Dec. 4, claiming they had helped U.S. steel makers restructure and become more competitive.

In the meantime, Reliance was squeezed when it couldn't pass on the cost of higher-priced steel it purchased to replace inventory at three of its plants. Gross margins suffered.

With the tariffs lifted, Reliance is betting that the recovery will have some staying power. It has extended its reach in the semiconductor sector by offering a line of plastic tubing products, and expanding in aviation by opening an aluminum processing plant outside Brussels to gain business from Boeing rival Airbus S.A.S and its suppliers.

But many of its markets still face challenges. The aviation market, for example, has suffered due to the recession and the collapse of air travel after the 2001 terrorist attacks. A recovery isn't expected until at least 2005.

If the increase in new orders can't be sustained, it will make it difficult for Reliance to work down its inventory, which is now filling up with costlier steel.

"Should the company not be able to pass through these price increases, we could see margin contraction again," wrote CIBC World Markets analyst Yvonne Varano in a report.

With sales unlikely to increase in the near-term, Reliance is expected to continue to grow through acquisitions.

It acquired a reputation as an aggressive buyer during the 1960s when William Gimbel, nephew of the company's founder, began snapping up troubled rivals. Its buying spree accelerated after it went public in 1994, and the company has purchased about 30 others over the last nine years.

The acquisition of metals processor Precision Strip, which was completed in June, is an example. According to CIBC's Varano, it contributed nearly all of the company's 7.9 percent increase in revenues for the year.

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