Canada’s Russel Metals reported “an exceptionally strong third quarter built on the back of a really strong Q2.” Company executives on Friday’s earnings call pointed to the various moves the company has made in the past two years to position it to take advantage of the prevailing market conditions.
Most recent was this week’s announcement of Russel’s $110 million acquisition of Boyd Metals, which operates five service centers in the U.S. Southwest (see related article in this issue). Mergers and acquisitions are a key component of Russel’s growth strategy, said Russel President and CEO John Reid. “We see lots of activity out there in the M&A pipeline for the next 12-24 months.”
Also notable to the company’s success is last year’s deal with Marubeni-Itochu Tubulars America, which created a new joint venture called TriMark Tubulars and reduced Russel’s exposure to the volatile OCTG/line pipe market. Russel realized $3 million in EBITDA from the TriMark joint venture in Q3 as it benefited from strong demand and product pricing.
Commenting on market conditions, Russel executives noted that steel prices continued to rise in the 2021 third quarter. Service centers experienced an increase in selling price per ton of 87% compared to the 2020 third quarter and 19% compared to the 2021 second quarter. Tons shipped increased 1% versus the same period in 2020, but decreased by 12% from the prior quarter due to the seasonally slow summer months and the Quebec construction holiday. Steel distributors experienced an increase in demand and selling price per ton due to continued low inventory levels in the supply chain and product shortages. Demand in the energy products segment continues to recover.
Each of Russel’s business segments continued to generate strong operating profit in the third quarter. Its service centers reported near record operating profits and returns as this segment continued to maximize margin opportunities from the strong market conditions and realized the benefits from its value-added processing initiatives. The steel distributors segment continued to benefit from strong demand, higher steel prices and low inventories in the supply chain and reported growth in both revenues and operating profit. In the energy products segment, the continued recovery of oil and natural gas prices led to improved revenues from Russel’s field stores and supported the profitable liquidation of the U.S. OCTG/line pipe inventory as the company exited this segment of the industry.
The result was net earnings of $131.6 million in the third quarter on sales of $1.1 billion, up from earnings of $18.2 million on sales of $615 million in the same quarter last year. For the first three quarters of 2021, Russel’s earnings increased tenfold, from $33 million in pandemic-plagued 2020 to $333 million so far this year.
Looking forward, the company reported that steel availability has improved modestly and inventory in the supply chain has increased early in the fourth quarter as steel mills return from their maintenance outage period. Demand is expected to remain strong for the remainder of 2021 and result in a favorable supply-demand balance. Margins are expected to retreat modestly in the fourth quarter as a result of higher average cost of inventories. Energy sector activity is expected to continue to improve as a result of the recovery in oil and natural gas prices.
“We feel pretty good about what we are seeing demand-wise through Q4 and into Q1 from what we are hearing from customers. In regard to pricing and margins, there could be a little pressure along the way, but I don’t see any reason for a big change in either direction,” Reid said.
Toronto-based Russel carries on business in three segments: service centers, steel distributors and energy products. It operates 46 Canadian locations and 17 U.S. locations. It was ranked No. 6 in the latest Metal Center News Service Center Top 50 with annual revenues last year around $2 billion.
By Tim Triplett, Tim@SteelMarketUpdate.com
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