Steel Mills

Reliance Execs Comment on Steel Industry

Written by Sandy Williams

Reliance Steel & Aluminum Co reported record sales for third quarter of $2.71 billion on shipments of 1.5 million tons. Not only did the company have good results to report, the Reliance executives had good commentary to offer in their third quarter conference call.

Reliance noted that their purchase of imported steel has increased from 5 to 10 percent of inventory which created a fair amount of discussion.

Gregg J. Mollins, President and Chief Operating Officer: “We always treat our domestic producers as you know, with a great deal of respect. But they’ve been very busy.

“As far as our strategy is concerned, it’s not necessarily that our strategy has changed, it’s just that the domestics have chosen not to participate as much in certain products, and we’ve gone offshore because we’re not going to lose market position because we’re going to overpay for it. So we’re going to do what we have to do to maintain our competitive situation throughout all of our companies on all products.”

Karla R. Lewis, Executive Vice President and Chief Financial Officer: “But the fact that the mills are busy and pushing us is a positive for Reliance and the service center industry because that means that demand is stronger than it has been previously. So we actually like the fact that the mills are busy.”

Spreads on imports are anywhere from $100 to $150 per ton, said Mollins.

Q: Where do you see improvements in energy?

James Hoffman, Senior Vice President Operations: “Basically across the board. With the technology in drilling right now, you don’t really rely on rig count to be an indicator any longer. It’s more about the feet of drilling and the technology, in the United States anyway, consumes a lot more metal. So I think that’s a trend you’ll continue to see as far as Reliance. So that’s helped tremendously and it’s just strong across the country. If you read the statistics in 2005 the United States was importing about 60% of their oil and gas. This year the latest number I saw was in the middle 20s and they’re predicting by 2018 for us to be a net exporter. So there’s just a lot more activity in the United States and throughout the world. But I would say the technology has really helped Reliance with the amount of product we can sell into that industry.”

David Hannah, Chief Executive Officer and Chairman: “I think we had indicated that energy, while still one of the top performing parts of our business in terms of returns, was producing less net income dollars or net operating profit dollars than it had in the prior year and the first half of 2014. And that flipped around during the quarter so this third quarter that we just had in our energy-related companies was very positive. Pricing I think was positive also. And the profit contribution is now in excess of what it was last year at this time. So we really liked what we saw in the energy side and we think that momentum should continue on through this year and the next.”

Q: What happens do you think if the price of oil remains at these levels? How do you think that might affect your business in energy?

James D. Hoffman: “It’s really difficult to predict energy sector in short term. The price of oil coming down. That was affected by a lot of different things, everything from the strong dollar to geopolitical issues in Libya and Iran and Saudi Arabia, Russia. Some of it’s tied to the lower demand in China and India. So all those are just difficult to predict. So short term, I’m not sure. I mean it’s trending around 80 today, maybe 82, bumped up a little bit. It could, there’s some people that say it could go to 75. But as far as Reliance is concerned, we’ve been through this before. We’ve owned companies like EMJ and Continental Alloy. So we understand it does have peaks and valleys and we’re prepared for it. We just deal with it the way we’ve dealt with it in the past through expense control. And we don’t speculate on inventory so we’re able to react fairly quickly to that. But as far as fourth quarter is concerned, it’s still strong. I mean, there’s discussion out there, depending on who you’re talking to, but they were predicting really big spending in 2015. So if they rein it in a little bit, it’s still a pretty good low. I’m not sure what they’re going to do and like I said, we won’t really know until December, but we’re still staying positive.”

Q: How do see non-residential from a geographical perspective?

Gregg J. Mollins : “The quoting activity has been pretty strong. I’m not going to say out of this world, but it gets stronger and stronger every quarter. From a regional basis, our activity in the northeastern market is very strong; in the California market also; in the Texas market very good. So we’re seeing it pretty much across the board now. We’re participating in some project tons both in the Midwest, West Coast and Northeast.

“The activity that we’re hearing from Steel Dynamics and Nucor and what not, is very positive. Typically we are behind that about six months, so we’re anticipating that some of that business that they’re doing, which is primarily direct business on large projects, that we’ll be seeing benefits of that going forward. We’ve got – there is projects in Minneapolis on arenas. Also a large sports arena in Atlanta, large building projects in New York as well as Chicago. We got all the activity going for campuses in northern California with the Apple and Google operations. All of which are very positive for us, and that’s just to name a few.

“Once this oil – this natural gas, okay, liquid natural gas projects gets going which it has not done so far, at least we haven’t seen it, we expect that that’s going to really bolster the non-residential construction area which we consider that to be as well. So, just all indications are positive.”

David H. Hannah: “And just two things to kind of put some substance behind what Gregg was talking about. We have two big, pretty much pure non-res related, heavy structural type companies one on the East Coast and one on the West Coast. And in sales dollars, the one on the East Coast is actually up 16% over last year through nine months, and the one on the West Coast is up 13% in sales dollars compared to the nine month period last year. So that’s some of the real evidence that we’ve had that things have actually gotten better and we expect the trend to continue.”

Q: Can you comment on MSCI inventories and broader service center inventories.

Gregg J. Mollins: “I think that they’re up a little bit, but if you look at historical standards, they’re still pretty low, okay? And our inventory, we’re certainly looking at our inventory levels closely as we do constantly but even more so towards the end of the year. And I don’t think we’re the only company that looks at it like that. I think most of the people that report to the MSCI take the same position that we do and get their inventories down as low as possible by year end so.”

David H. Hannah: “Yeah. I would say, too, as Gregg said that I think our industry is in pretty darn good shape from an inventory standpoint. We used to have some bubbles and then it would break and then we’d blow them all back up in the industry and it was kind of a mess. But after having gone through 2001, 2002, and 2003, and then again in 2008, 2009, I think that there’s much more discipline out there across the industry. And relative to demand and where we and the industry believe demand is going, I think we’re in pretty good shape. “

Karla R. Lewis: “Especially I think historically with the amount of import coming into the U.S. Someone’s buying that. And just like with us, we’re buying a little more, so it causes your inventory to go up a bit. So the same is true industry-wide. And I think with the level of imports we have, the MSCI numbers are very healthy. “

Q : Flat rolled prices have been under pressure with imports–can you provide some color on flat rolled prices? Is that also having the parallel effect on long products and structural and beams as you see it?

Gregg J. Mollins: “On the carbon side we are seeing the import pricing impact the many mill and lawn products, you know, the beams and whatnot. The pressure is not the extent that it has been on the flat roll side. The mills have reacted a little bit, okay, but I have to give the domestics a lot of credit, okay? They’ve done a very good job in not overreacting where they don’t need to be. And you know what, my hats are off to them because that’s pretty tough because when you’re running at 70%, 75% capacity on some products, which they are, the tendency to want to get up to 80% by lowering your price is certainly there, and they’ve really tried to control themselves and have done a good job and we’ve encouraged them to do that as well. So we’re buying some of that.”

Gregg J. Mollins: “How far can prices fall? I think that right now hot-rolled is like, just to take one product, hot-rolled is somewhere around the $640 mark. I think the mills are trying to really keep it from, keep it right in that range, $640 a ton or above. So I don’t look for the prices to be falling substantially going forward. I think they’re pretty much, they might dip a little bit more but I think they’re going to pretty much be relatively stable.”

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