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All eyes on the price: in their fourth-quarter and year-end financial reports to analysts and investors, service center executives discuss the effects--both positive and negative--of sharply rising prices and tight supplies of steel.

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Metals USA

Inventory Position 'Beautiful' in 2008

Metals USA took a divergent path from other service centers in the fourth quarter of 2007, setting the company up for a profitable 2008, according to President and CEO Lorenco Goncalves.

"During the fourth quarter, Metals USA focused on building an inventory position ahead of the price curve by increasing our purchases from select mills and selected products. Such initiative helped us to position our inventories to take advantage of the improving pricing trends in 2008," Goncalves said during the company's fourth-quarter conference call.

In addition to mill orders, the Houston-based company also found another source of material during the quarter--other distributors. "If other service centers have a need to sell steel below replacement costs, Metals USA will always be there to help them accomplish their goals," he said.

He believes the company's inventory is "beautifully" positioned heading into 2008, where steel prices are on an upward trajectory. "A beautiful inventory is one with average costs way below replacement costs and selling prices way above replacements costs," Goncalves said. "I disagree with the approach that the only thing to be done with inventories is to take them down. One of the core attributes of a successful service center is to be able to manage inventory, and managing inventory is not just reducing stocks all the time."

Goncalves was critical of some players in the industry for their continued destocking through December. "They've got to be naked."

During the fourth quarter, Metals USA reported a decrease in sales but a jump in income compared to the same quarter of 2006. Fourth-quarter sales totaled $432.2 million, down slightly from the $437.5 million during the same period in 2006. Net income jumped 27.4 percent to $7.6 million during the final three months of 2007.

Those trends were reversed for the company's full-year results. Net sales in 2007 were $1.85 billion, a 45.3 percent increase from the $1.81 billion in 2006. Full-year net income dropped from $39.5 million to $36.6 million, a 7.9 percent decrease.

With the unusual conditions facing the steel industry in 2008, including high demand and prices in other parts of the world and the weak U.S. dollar, which are inhibiting imports, steel is in tight supply. But Metals USA's strong inventory position and growing relationships with suppliers such as AK Steel should insulate the company from availability issues, Goncalves said. "We have our alliances in the marketplace. We are absolutely comfortable"

While prices have spiked considerably in the first quarter, Goncalves does not believe the increases are over. In fact, he wouldn't be surprised to see hot-rolled steel eclipse $1,000 per ton in the future.

"Hot-rolled coil could get to $1,000 in 2008," Goncalves...

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