March 11, 2010 / 3:09 AM / in 8 years

Reliance Steel sees orders improve, no restocking

NEW YORK (Reuters) - Reliance Steel & Aluminum Co (RS.N) said its metal service centers and others in the industry and their manufacturer customers are no longer destocking inventory, but neither are they restocking, as orders for processed metal have increased in only some areas.

David Hannah, chief executive officer of the largest metal service center in North America told Reuters Mining and Steel Summit on Wednesday: “We’re buying metal at about the same rate we’re shipping it. Buying that is going on now by our customers in all the different industries we service, and our buying from the (steel) mills, is not to restock the shelves.”

From mill to service center to end users like metal fabricators and manufacturers of everything from electronics to farm equipment, all are operating with lean inventories.

“Still, relative to demand levels,” he added, “I think inventories are where they need to be. They are not too lean.”

Hannah also said he expects Reliance to easily show a profit this year. He is looking for possible takeover targets, though he does not expect to find any that are suitable until the second half of 2010 or into next year.

“We’ll certainly be profitable, we’re not concerned about that. What we’d like to have is more demand so we could ship more metal,” he said.

Because no one wants to carry extra inventory, about half of Reliance’s orders are put in by customers looking for next-day delivery. And U.S. steel mills are operating at only 70 percent of capacity, he said.

Tight inventories of products like flat-rolled carbon steel used in the auto industry have led to longer lead times.

Although roughly a third of its business goes into the depressed nonresidential construction sector, Reliance sees demand improving overall.

Specifically, Hannah said nonferrous orders from aerospace remain stable and one of its most profitable and consistent segments, with oil and gas related products shaping up as a close second, in terms of profitability.

Aluminum plate sold to semiconductor and electronics equipment businesses has picked up more than any other of its customer sectors, he said, adding that “it’s probably the hottest area of our business right now.”

Farm equipment and heavy industrial capital goods orders are both somewhat better, he said.

At its plants that process metal bound for auto makers, Reliance has seen substantial increase in volumes.

“We’re very busy in our processing facilities. The amount of tons we’re processing is up substantially from a year ago.”

As a result, lead times have been extended in most metal products there and mill lead times have also lengthened.

As a result, about 6 million to 8 million tons of capacity is expected to come on line in the United States over the next few months.

    “There is a concern that it might cause some excess on the supply side, mainly in carbon flat roll,” said Hannah.

    But demand for heavy structural products, beams and rebar from nonresidential construction remains weak and should weaken further before turning around.

    As new homes get bought, strip malls, gas stations and doctors’ offices are built to service them. This is an area Reliance would participate in once that business returns.

    “But there are just not that many projects out there. Maybe next year things will start to improve in a meaningful way.”

    Next year, too, Hannah thinks Reliance will be more likely to find a suitable target to acquire with its near $1.0 billion of available credit.

    “We’re well positioned. We think we know how to do acquisitions, we’ve done 45 of them since our IPO. Right now, there aren’t any deals out there in our industry except distressed companies,” he said.

    Most service centers still do not even have one quarter of positive earnings to show right now, and will likely wait until their financial performance improves before going up for sale.

    “I think we should see more opportunities develop in the second half of this year and even more next year,” he said.

    Reporting by Carole Vaporean; Editing by Gary Hill

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