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Reliance Steels For Price Plunge

Capitalizing on a global boom in steel prices and its strategy of relentless acquisitions, Reliance Steel & Aluminum Co. has built itself into a powerhouse.

In fact, the Los Angeles company’s share price several weeks ago hit an all-time high of $68.41 up from penny-stock status in the mid ’90s and less than $10 just four years ago.

“The market is starting to realize our growth,” said Chief Executive David Hannah.

But already there are concerns that the steel boom may be slowing, raising the question: Has Reliance’s growth strategy put the company in position to weather a slowdown in the steel industry?

The company has been able to ride the steel wave by maintaining high gross margins often exceeding 25 percent over the past decade. And as steel prices have risen, so have its profits.

But in the last two months, two of six Wall Street analysts who cover the company downgraded its shares to neutral status, although others have maintained “buy” ratings.

Bob Richards, an analyst with Longbow Research, said that Reliance is a top-tier steel service center and is among the best at maintaining its margins, though the likely slowdown can’t be ignored.

“Reliance is a great company and one of the better service centers out there,” said Richards, who downgraded the stock from “neutral” and does not maintain a target price. “(But) for my money, the rate of increase of prices has come down.”

Driven largely by increasing demand in developing countries such as China and India, steel prices increased steadily for several years and then accelerated so much in recent months that builders worldwide have been forced to slow or temporarily halt major construction projects.

With a limited supply of scrap metal and iron ore, composite prices for carbon-steel products rose nearly 40 percent to near $1,000 per metric ton since the beginning of the year, according to MEPS International Ltd., a steel industry research firm.

Aditya Mittal, chief financial officer of ArcelorMittal, the world’s largest steel producer, said in a recent conference call with analysts that the rate of growth in the current market has been “unprecedented.”

But now that the slowing U.S. economy is threatening global growth, even Reliance is getting cautious about the near future and a possible bust in prices.

During their first quarter earnings release in April, the company trimmed its outlook for the second quarter, citing the unpredictability of demand in an uncertain economy.

However, Hannah maintained in an interview with the Business Journal that the company’s series of acquisitions should leave it in a better position to resist an industry slowdown.

Unlike many of its competitors that roll up smaller companies and brand them in their corporate image, Reliance uses its acquisitions to expand its capabilities and broaden its product lines. The company now operates more than 180 facilities and offers more than 100,000 different products. By incorporating diversification into its growth strategy, the company should remain stable even if prices do ultimately come down, Hannah said.

And its many acquisitions all over the map help broaden the company’s base, he said.

“We have worked very diligently to improve our geographic footprint so we have different exposure to different regional areas across the country,” he said. “We touch a lot of different industries. We have a lot of products. We think that can make us less volatile.”


The middleman

As a metals service business, Reliance does not operate mines or mills. Rather, the company buys large, unwieldy amounts of steel in bulk often rolled in coils from metal mills and then cuts, stretches, bends and shapes the metal into smaller quantities to be delivered to manufacturers, builders and other customers.

Reliance sells to more than 125,000 customers in a variety of industries, including aerospace, nonresidential construction, heavy equipment manufacturing and energy.

A walk through the company’s 40-year-old carbon steel processing facility in Vernon one of its flagship plants reveals hundreds of small, carefully arranged bundles of steel sheets, bars and tubes ready to be shipped out, often within hours. Reliance prides itself on quick turnaround. Oftentimes, executives say, orders that come in at 4 p.m. are shipped out the next morning.

The company’s business model is based on small orders processed and delivered quickly. Last year, despite sales of $7.3 billion, the average order was just $1,350. Unlike some other service centers, Reliance has very few contract customers, meaning its prices fluctuate with steel producer prices.

The company deals in a wide variety of metals, including aluminum and brass, but carbon steel accounts for almost half of its business. The steel is used in aircraft parts, appliances, heavy machinery and countless other industrial and consumer products.

Another aspect that helps, Hannah said, is that the company does not have a strong presence in some of the industries being hurt most in the current economy.

“If you were selling a lot of metal into the auto industry or residential housing, you might be singing a different song than I’m singing,” Hannah said.

Since going public in 1994, Reliance has bought more than 40 competitors. Most recently, the company in April purchased Dynamic Metals International, a Bristol, Conn.-based metals distributor. As a result of the acquisitions, revenue has grown to more than $7 billion last year from about $400 million in 1994. Net income was up 15 percent last year to $408 million.

Indeed, the worldwide steel boom has prompted consolidation not only among service centers, but also among major steel producers.

The world’s largest steel producer, ArcelorMittal, was formed in 2006 when Arcelor and Mittal Steel then two of the largest steel companies in the world merged in a $38 billion deal. The company, which has more than 300,000 employees worldwide, recorded $105 billion in 2007 sales.

Now, ArcelorMittal, along with Pittsburg, Penn.-based United States Steel Corp. and Charlotte, NC-based Nucor Corp., produces two-thirds of the world’s steel.

Hannah believes that consolidation should be able to help service centers like his if the economy slows, with producers limiting supply.

“There’s been some real structural change in the steelmaking industry,” Hannah said. “There’s more discipline in the operations of the steel mills, and I think that pricing is going to remain at elevated levels for quite some time.”

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