Soaring aluminum prices lift processor reliance sky high.

RISING commercial aircraft orders are the wind beneath the wings of Reliance eel & Aluminum Co.

Throughout 2004, the Los Angeles-based metals processor and distributor was already reaping the rewards of high carbon steel prices amid tight supplies. Then, just as the price of carbon steel started coming back down to earth, demand for aluminum began to surge.

Throughout the first quarter, growing demand spurred by higher spending on commercial jet production in Europe and the U.S.--along with constrained supplies--conspired to send aluminum prices skyward.

That has translated to major growth in sales volume for Reliance, whose L.A.-area customers produce parts that end up in Boeing Co. aircraft.

On April 5, Reliance raised its first-quarter profit guidance, estimating it earned $1.30 to $1.40 per diluted share, compared with the range of $1.05 to $1.15 projected earlier. In the first quarter of 2004, Reliance reported earnings of 92 cents per diluted share.

"Reliance's sales growth has been huge, far beyond that of the rest of the metals industry as a whole, so they must be taking market share away from somebody," said Ivan Feinseth, a stockbroker and managing director of Matrix USA LLC in New York. "Higher demand for travel means more aircraft so it increases demand for aluminum."

As of April 13, Reliance shares had risen 23.2 percent in the past year to $41.66 each, peaking in March at $47.53.

High demand

Boeing and its chief rival, the European consortium Airbus Industrie, are rushing to supply jets to airlines in emerging markets, particularly Asia. Airbus delivered 320 aircraft last year and expects to deliver 360 this year, while Boeing expects to boost its commercial jet deliveries to 385 this year from 285 last year.

The competition is fueled further by tens of billions of dollars of direct and indirect subsidies that the European and U.S. governments have pumped into Airbus and Boeing respectively, helping trigger an 18 percent increase in the price of raw aluminum in the past year.

While demand is rising, supplies have actually fallen, thanks to high energy prices and the shutdown of a few large mills.

U.S. mills produced 613,400 metric tons of aluminum in the first quarter, down 2.5 percent from the like period a year earlier and 3.4 percent lower than the fourth quarter of 2004, according to the Aluminum Association Inc.

In 2003, a mill operated by McCook Aluminum, a major U.S. producer, shut down and liquidated; Houston-based Kaiser Aluminum & Chemical Corp. filed for Chapter 11 bankruptcy protection in 2002.

At the same time, aluminum mills in France and Germany drastically cut back on exports to the United States, instead supplying the European aerospace industry.

And earlier this month, the Bonneville Power Administration in Washington State pressured 10 aluminum smelters to stop production to keep soaring energy prices under control. Together, those smelters produce 38 percent of the country's raw aluminum.

Hot sector

With supply constraints stretching out delivery times for raw metals, companies such as Reliance that hold inventories of processed aluminum have been in a better position to pass price increases along to customers.

"A very high percentage of what we sell is to customers that come to us that have orders today that they need filled tomorrow, so it's very localized," said Bill Sales, senior vice president of non-ferrous operations who oversees the Reliance division that sells aluminum sheets, plates, rods, girders and other shapes.

The company, founded in 1939, is one of the five largest metals services companies in the United States, purchasing, processing, storing and redistributing metal products.

Reliance has 24 divisions and 19 operating subsidiaries, with more than 100 locations in 30 states--including four in L.A. County--along with Belgium, France and South Korea.

Aluminum accounted for 18 percent of Reliance's total sales last year, while carbon steel plate, structural steel, tubing and bar accounted for 39 percent of sales.

Reliance's hottest product is the heat-treated aluminum plate increasingly used in new aircraft, which accounts for 8 percent of company sales. With fuel prices high and margins slim, the newest commercial planes use much more machined aluminum plate, rather than the heavier, more expensive forged aluminum, Sales said.

Reliance Steel & Aluminum Co.

Stock Prices

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Quaterly Net Income (millions)

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YEAR (Dec. 31)                  2004     2003

Revenue (billions)             $2.95    $1.89
Total Expenses (billions)       2.67     1.83
Operating Income (millions)    279.2     53.9
Net Income (millions)          169.7       34
Earnings Per Share             $5.19    $1.07

SUMMARY

Business: Metals distributor

Headquarters: Los Angeles

CEO: David Hannah

Market Cap: $1.37 billion    Dividend Yield: 0.8%

Total Liabilities: $740.8 million    P/E Ratio: 8

Long-Term Debt: $380.9 million