2008 Editorial

Quarterly financial results continued to defy economic trends, as publicly held companies reported near-record sales and earnings for first-quarter 2008—the product of shockingly high metals prices that are masking the market’s weaknesses. Such positive reports from the industry’s largest service centers may suggest that conditions are better than expected for all distributors, but that is not necessarily the case. Thousand-dollar-per-ton steel, $3,000 aluminum and $8,000 copper have raised the stakes and enlarged the advantage held by the industry’s biggest players.

At Metals USA, President Lourenço Gonçalves reported a first-quarter shipment increase of 2.4 percent and sales revenues 5.7 percent higher than in the same period last year. “Our customer base has demonstrated a resiliency that appears contrary to the economic news of the day,” he commented.

Not all distributors are sharing equally in this good fortune. Sky-high metals prices make it considerably more difficult for small and midsize distributors to finance their inventories. According to the latest MSCI figures, inventory levels industry wide have declined to 12.1 million tons—18.6 percent lower than at the end of March a year ago and equal to just a 2.8 month supply—because service centers are either unable or unwilling to stock up and take on the inflated inventory risk.

“Service centers clearly are not immune to the pressures of escalating prices for the steel they buy. We are beginning to hear chatter in the market about liquidity squeezes occurring with some fairly large service centers. Some seasoned management teams are finding the current environment challenging,” Gonçalves noted.

Reliance Steel & Aluminum rode rising metal prices to record sales during the first quarter, taking in $1.91 billion. Its $107.4 million in net earnings was just shy of the $111.7 million record posted in the first quarter last year. “In general, the first quarter turned out a bit better than we anticipated,” said Chairman and CEO David Hannah. “Prices have continued upward since February faster and higher than we expected, and that contributed to our strong first-quarter results.”

The key to capitalizing on the price trend is to “pass the increases on to our customers as fast or faster than we receive the higher-priced materials,” Hannah said. While all service centers are in the same boat, in terms of navigating today’s treacherous market, “it may be more critical for [other companies] to get those increases passed through, since they are smaller and need to turn their cash,” he added.

Large players like Reliance have an advantage over smaller competitors in terms of sourcing material, as well. “The market now for metal is tight. There may be some opportunities for us, because of the size of the company, to acquire metal from producers that some others can’t get their hands on,” Hannah acknowledged.

Historically high metal prices tend to expand other risks, too, especially in an economy where some sectors are struggling. With more customers paying late, or not at all, bad debt is taxing small service centers’ cash flow at a time they can least afford it.

Clearly these are prosperous times for big mills and big distributors. Unfortunately, that prosperity has not filtered down through the distribution channel, where so many small service centers have watched their disadvantages magnify along with the cost of steel, aluminum and copper.