Reliance Steel sees weak demand for 1H

Friday, Mar 13, 2009
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NEW YORK (Reuters) - Reliance Steel & Aluminum Co (RS.N: Quote, Profile, Research, Stock Buzz), North America's largest metal service center, sees demand for steel and aluminum products remaining weak at least through the first half of 2009, with customers holding off their buying until they believe prices have hit bottom. Speaking to Reuters Global Mining and Steel Summit on Thursday, Chairman and Chief Executive David Hannah said, "Not until mills give confidence that prices have hit bottom, will anyone do any significant buying." With many steel and most aluminum producers operating below their cash costs, Hannah said, however, he thinks those metal prices are probably very near their bottom. "If they are not at the bottom, then they are very close to it," the executive said. But, he added that prices are unlikely to rise much until demand improves. "We don't see it getting much worse, but we don't see anything out there that says it's going to take off," he said. With demand slow, he said, Reliance needs to lower its inventories, despite its focus on destocking since November amid a sharp drop-off in demand. "Our inventory is a little too high and I have said we need to take off $200 to $300 million of value," Hannah said. At the end of 2008, the U.S. metal processor and distributor's inventories stood at $1.67 billion. In the fourth quarter, the company's sales volumes fell about 7 percent on a same-store basis, though even in a robust market many of its customers, mostly metal fabricators and small manufacturers, work off inventory toward year end. Since then, Hannah said Reliance's sales volumes rose slightly in January, fell a bit in February, and so far in March have been about flat, a trend he expects to continue. He said January shipping volumes have fallen about 35 percent from a year earlier, and described the current environment as day-to-day, with customers calling in the afternoon wanting delivery of specific products the next day. Though many markets into which Reliance sells show little outlook of an intermediate-term pick up, Hannah said there has still been consistent activity and the company expects to report a profit for the first quarter. First-quarter earnings should be lower than the fourth quarter, with strong sales booked in October, but some sectors Reliance serves have held up into the first quarter. Los Angeles-based Reliance, a service center that buys steel and aluminum from manufacturers and processes it for specific customers, was still seeing "pretty good" demand from the aerospace and energy industries, the executive said.Later in the year, depending on oil prices, he said he thought the energy sector may become tougher, but would remain "reasonably good," at least through the first half. Aerospace demand may even increase for the year. Hannah said he thought some competitors' practice of selling products below replacement costs was probably prolonging the slowdown, encouraging customers to delay purchases in anticipation of further price declines. Despite the global credit freeze, Hannah said he had not seen a big impact on the businesses Reliance serves. "There have been a few bankruptcies, more than usual, but not as many as you'd expect," he said, noting that many of his customers make products for a wide variety of industries ranging from gas stations to appliance manufacturers. Asked if Reliance was seeking buyouts of competitors in the current depressed environment Hannah said, "No, we're not looking to do more right now if it means execution. If it means are we thinking to do more in the future, yes." Reliance continues to digest debt from its purchase of PNA Holding last August, and "right now there is nobody out there looking to sell their business." The longer the slowdown lasts, however, the more likely some companies look for a buyer as they struggle to meet debt criteria, he said.

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