Russel Metals Annual Report 2007

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FY2007 Annual Report · Russel Metals

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1900 Minnesota Court, Suite 210

Mississauga, Ontario L5N 3C9 Canada

Tel: (905) 819 7777 Fax: (905) 819 7409

info@russelmetals.com www.russelmetals.com

M
E

POSITIONED FOR GROWTH

Annual Report 2007

RUSSEL METALS is one of

the largest metals distribution

companies in North America.

We conduct business primarily

in three metals distribution

segments: metals service

centers; energy tubular products;

and steel distributors.

METAL SERVICES CENTERS
We provide processing and distribution services to a broad base of
more than 27,000 end users through a network of 53 Canadian and
12 U.S. locations. Our metals service centers carry a broad line of
products in a wide range of sizes, shapes and specifications,
including carbon hot rolled and cold finished steel, pipe and tubular
products, stainless steel and aluminum. We purchase these
products primarily from steel producers in Nor th America and
process and package them in accordance with end user
specifications. We service all major geographic regions of Canada
and the Southeastern and Midwestern regions in the United States.

ENERGY TUBULAR PRODUCTS
These operations distribute oil country tubular goods (OCTG), line
pipe, tubes, valves and fittings, primarily to the energy industry in
Western Canada and the western United States, from 5 Canadian
and 2 U.S. locations. We purchase these products either from the
pipe processing arms of North American steel mills, independent
manufacturers of pipe and pipe accessories or international steel mills.

STEEL DISTRIBUTORS
Our steel distributors act as master distributors selling steel in
large volumes to other steel ser vice centers and equipment
manufacturers mainly on an “as is” basis. Our U.S. operation
processes some coil for its customer base at its cut-to-length facility
in Houston, Texas. Our steel distributors source their steel both
domestically and off shore. The main steel products sourced by this
segment are structural beam, plate, coils, pipe and tubing.

> russel metals inc. directory

Head Office
1900 Minnesota Court, Suite 210, Mississauga, Ontario, Canada, L5N 3C9
Tel: (905) 819-7777 Fax: (905) 819-7409 E-mail: info@russelmetals.com Internet: www.russelmetals.com

Shareholder Information
Stock Symbol: The Toronto Stock Exchange – RUS

Transfer Agent and Registrar
CIBC Mellon Trust Company
P.O. Box 7010, Adelaide Street Postal Stn.,
Toronto, Ontario, Canada M5C 2W9
Answer line: Toronto (416) 643-5500
Toll Free: 1-800-387-0825
E-mail: inquiries@cibcmellon.ca Internet: www.cibcmellon.ca

Board of Directors

Alain Benedetti
Corporate Director

James F. Dinning
Chairman of the Board
Western Financial Group Inc.

Carl R. Fiora
Corporate Director,
steel industry executive

Anthony F. Griffiths
Corporate Director,
Chairman of the Board
Russel Metals Inc.

Alice D. Laberge
Corporate Director

Lise Lachapelle
Corporate Director

John W. Robinson
Corporate Director,
steel industry executive

Edward M. Siegel, Jr.
President and Chief Executive
Officer, Russel Metals Inc.

Officers

Anthony F. Griffiths
Chairman of the Board
Toronto

Edward M. Siegel, Jr.
President and
Chief Executive Officer
Mississauga

Brian R. Hedges
Executive Vice President and
Chief Operating Officer
Mississauga

Marion E. Britton
Vice President and
Chief Financial Officer
Mississauga

Lesley M.S. Coleman
Vice President, Controller and
Assistant Secretary
Mississauga

William M. O’Reilly
Secretary
Davies Ward Phillips & Vineberg LLP
Toronto

Elaine G. Toomey
Assistant Secretary
Mississauga

Corporate Governance
Detailed disclosure concerning the Company’s governance practices may be found in the Management Proxy Circular.

Energy image on ifc courtesy of Suncor Energy Inc. ©

> five-year financial highlights

For the years ended December 31

2007

2006

2005

2004

2003

OPERATING RESULTS (millions)
Revenues
Net earnings
EBIT (Notes)
EBIT as a % of revenue
EBITDA (Notes)
EBITDA as a % of revenue
Basic earnings per common share ($) $

BALANCE SHEET INFORMATION (millions)

Metals
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable and accruals
Net working capital – Metals
Fixed assets
Goodwill and intangibles

Net assets employed in metals operations
Other operating assets
Net income tax assets and liabilities
Deferred financing charges
Pension and benefit liabilities
Other corporate assets and liabilities
Total net assets employed

CAPITALIZATION (millions)
Bank indebtedness, net of (cash)
Long-term debt (incl. current portion)
Total interest bearing debt, net of (cash)
Market capitalization (Notes)
Total firm value

OTHER INFORMATION (Notes)
Common shareholders’ equity (millions) $
Book value per share ($)
$
Free cash flow (millions)
$
Capital expenditures (millions)
$
Depreciation and amortization (millions) $
Earnings multiple
Firm value as a multiple of EBIT
Firm value as a multiple of EBITDA
Interest bearing debt/EBITDA
Debt as a % of capitalization
Market capitalization as a % of book value
Return on capital employed

COMMON SHARE INFORMATION
Ending outstanding common shares
Average outstanding common shares
Dividend yield (Notes)
Dividend per share (Notes)
Share price – High
Share price – Low
Share price – Ending

$
$
$
$

$
$
$
$
$

2,559.2
111.2
176.8

6.9%
197.2
7.7%

1.77

337.2
572.6
4.7
(272.3)
642.2
210.4
53.4
906.0
20.4
(3.7)
0.3
(1.4)
(43.8)
877.8

(181.8)
175.8
(6.0)
1,605.0
1,599.0

883.8
14.01
125.3
16.6
20.4
14.4
9.0
8.1
0.9
17%
182%
20%

$
$
$
$
$

2,692.1
158.7
250.2
9.3%
270.2
10.0%
2.65

324.7
664.0
3.8
(262.8)
729.7
170.9
9.2
909.8
21.5
(19.3)
6.8
(2.6)
(27.6)
888.6

(209.9)
203.9
(6.0)
1,665.2
1,659.2

894.6
14.34
158.8
27.6
20.0
10.1
6.6
6.1
0.8
19%
186%
28%

$
$
$
$
$

2,614.1
124.5
202.5
7.7%
221.7
8.5%
2.47

356.1
474.0
1.3
(291.2)
540.2
162.3
9.2
711.7
22.0
(9.6)
7.2
(8.9)
(24.6)
697.8

(44.9)
204.0
159.1
1,106.8
1,265.9

538.7
10.63
130.6
26.5
19.2
8.8
6.3
5.7
0.9
27%
205%
29%

$
$
$
$
$

2,411.4
177.8
305.7
12.7%
324.3
13.4%
3.64

356.8
553.9
1.7
(318.5)
593.9
161.6
9.2
764.7
22.4
(59.3)
8.4
(10.2)
(26.2)
699.8

32.6
210.6
243.2
773.3
1,016.5

456.6
9.15
189.4
25.4
18.6
4.3
3.3
3.1
0.6
32%
169%
44%

1,503.8
18.5
55.1
3.7%
71.4
4.7%
0.41

247.5
303.1
2.0
(207.9)
344.7
165.1
4.2
514.0
23.3
(1.5)
3.5
(11.5)
(5.5)
522.3

59.1
209.4
268.5
378.2
646.7

253.8
5.90
7.6
34.9
16.3
21.4
11.7
9.1
3.8
51%
149%
11%

63,066,092
62,835,303

62,366,842
59,887,382

50,656,009
50,461,330

49,887,659
48,671,915

43,023,342
40,021,479

7.1%
1.80
34.47
22.75
25.45

$
$
$
$

6.0%
1.60
29.38
21.61
26.70

$
$
$
$

4.6%
1.00
22.75
13.40
21.85

$
$
$
$

4.5%
0.70
15.75
11.61
15.50

$
$
$
$

3.6%
0.32
8.90
4.65
8.79

NOTES:
(1) In this Annual Report we use certain financial measures that do not comply with Canadian generally accepted accounting principles (GAAP) or have

standardized meanings, and thus, may not be comparable to similar measures presented by other companies, for example EBIT and EBITDA and Other
Information in the above table. Management believes that EBIT and EBITDA may be useful in assessing our operating performance and as an indicator of
our ability to service or incur indebtedness, make capital expenditures and finance working capital requirements. EBIT and EBITDA should not be considered
in isolation or as an alternative to cash from operating activities or other combined income or cash flow data prepared in accordance with Canadian GAAP.
EBIT, EBITDA and a number of the ratios provided under Other Information are used by debt and equity analysts to compare our performance against other
public companies.

This terminology is defined on page 52, under Definitions. See financial statements for GAAP earnings.

(2) Statements contained in this document that relate to Russel Metals’ beliefs or expectations as to certain future events are not statements of historical fact
and are forward-looking statements. Russel Metals cautions readers that there are important factors, risks and uncertainties, including but not limited to
economic, competitive and governmental factors affecting Russel Metals’ operations, markets, products, services and prices that could cause the
Company’s actual results, performance or achievements to be materially different from those forecasted or anticipated by Russel Metals in such forward-
looking statements. All dollar references in this report are in Canadian dollars unless otherwise stated.

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 1

> report to shareholders

For the year ended December 31, 2007

positioned for future opportunities

In 2007, the North American steel industry experienced a year of further

consolidation, relatively stable steel prices and soft demand. The consolidation

frenzy that the steel industry experienced in 2006 continued into 2007 but

tapered off somewhat near the end of the year. The credit crisis in the U.S.

spilled over to the world economy and capital markets, cooling down both the

debt and private equity markets.

On September 28, 2007, the Company completed its first major acquisition since Acier Leroux in 2003 with

the purchase of JMS Metal Services for $109 million in cash. JMS Metal Services is a full-line distributor of

carbon steel and non-ferrous products with eight strategically located processing and distribution facilities

in Alabama, Arkansas, Georgia, Kentucky and Tennessee. The JMS Metal Services group of companies has

been renamed JMS Russel Metals, and we welcome our new employee group with John Reid as President.

These operations provide us with a platform for future growth in a new geographic region, the Southeastern

and Midwestern United States.

The JMS Russel Metals operations were immediately accretive to earnings. Since the acquisition occurred

on the last business day of the third quarter, the results of JMS Russel Metals are included in the

operating results only for the fourth quarter.

Historically, the Company rationalizes certain operations following an acquisition. Since JMS Russel Metals is

in a new geographical region, there will be no rationalization of operations as a result of the acquisition. We

will move the JMS Russel Metals operations onto our centralized computer systems in the first half of 2008.

Russel Metals – Year 2007 Operations

In 2007, our net earnings were $111 million, or $1.77 per common share. These results were lower than

our net earnings of $159 million, or $2.65 per common share, recorded in 2006.

The slowdown in conventional gas drilling in Alberta and the weak forestry sector in British Columbia

negatively impacted earnings of our service centers in those provinces. The strong Canadian dollar should

have impacted our Ontario customers but, to date, our segment of the Ontario market, which includes very

little automotive, has held up quite nicely. The U.S. dollar weakness, strong international steel pricing and

excessive inventories caused many of our steel distributor customers to curtail their purchasing activities.

Our energy tubular products segment continued to have strong results, led by our U.S. operation, Pioneer

Pipe, which services conventional gas drilling, and the Canadian operation, Comco Pipe & Supply Company,

which services the oil sands in Northern Alberta. Comco Pipe & Supply Company ended 2007 with the

strongest results in its history. The operations that service primarily the gas drilling industry in Western Canada

experienced lower demand levels due to lower rig counts and drilling activity. Excess inventory, Canadian

2 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

dollar strength and concern about Alberta Royalty increases led to decreased investment in Alberta

conventional gas drilling activities. A bright side to this picture is the Canadian government announcement in

January 2008 that it will review carbon steel welded pipe imported from China, which should help to tighten

supply and reduce excess inventories in the sector.

For most of 2007 inventory reduction was a high priority of our management team. Throughout the year we

have continued to align our inventories with our perception of forward demand. Inventory levels improved

significantly, decreasing by $89 million on a same store basis excluding foreign exchange.

The Company’s cash flows are counter-cyclical due to changes in working capital on the balance sheet.

Current assets, excluding cash, comprise 76% of our net assets. This enables us to generate significant

cash flow in periods of economic weakness; however, we use significant cash in periods of economic

expansion. In 2007, the Company generated significant positive cash flows from operations of $211 million

and free cash flow of $125 million supporting payment of $110 million to shareholders by way of our

industry-leading dividend.

Shareholder Returns

The maintenance of a strong dividend policy has been, and continues to be, a primary goal. For the sixth

consecutive year, we increased the annual dividend. Our annual dividend of $1.80 per share has continued

to make our common shares one of the top yielding securities in the S&P/TSX Composite Index.

We believe that our cash flow, balance sheet and debt to equity ratio support our dividend policy.

The payment of dividends reduces the restricted payments basket in our U.S. Senior Notes indenture.

At December 31, 2007, this basket had available in excess of $400 million for the payment of dividends.

On February 18, 2008, we filed a notice of intention to initiate a normal course issuer bid, which allows us

to purchase up to six million of our common shares. Our share price has recently traded at prices which we

believe do not truly reflect the value of the Company. The purchase of six million shares will not jeopardize

our ability to pay our dividend. Debt to total capitalization would be approximately 19%. We would still have

the ability to finance acquisitions of a size comparable to our recent acquisition of JMS Metal Services.

Succession Planning

Recently, the Company announced that Brian Hedges, previously our Chief Financial Officer, has been

appointed Chief Operating Officer. In addition, Marion Britton, previously our Chief Accounting Officer, has

been appointed Chief Financial Officer. We are delighted that, with these appointments, succession planning

is in place and that our goals, direction, and culture will be reinforced and enhanced. The Company will

continue to emphasize shareholder returns and to ensure that earnings are returned to shareholders

through a strong dividend policy. Both Brian and Marion have been critical contributors since the current

management team was formed in 1997.

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 3

> report to shareholders cont’d

For the year ended December 31, 2007

Environment

The profile of environmental issues throughout the world is on the rise. Shareholders are holding companies

responsible for decisions that affect the environment. The reduction of greenhouse gases has become a

high priority. As a distributor, we are not a producer of significant greenhouse gases, but we have been

taking action to reduce our greenhouse emissions. We have started to utilize smart terminals in our truck

fleet. These computer GPS based systems optimize vehicle routing and monitor speeds to help reduce

emissions.

Our Service Center customer base exceeds 18,000 customers in Canada and will be impacted by

environmental issues in the same manner as the Canadian economy. Some of the 18,000 customers will

benefit and others will be penalized but at this point in the evolution the final impact is not predictable.

Environmental issues are given a high priority at Russel Metals. Our Board has an Environmental Management

and Health & Safety Committee whose purpose is to review compliance policies and procedures in

accordance with legislative and regulatory requirements. On a quarterly basis, our environmental coordinator

reports to the Board of Directors on new legislation and environmental issues relating to our operations. We

proactively manage environmental and health and safety issues throughout our operations.

Corporate Governance

We were pleased to announce the appointment of Ms. Alice Laberge to our Board during 2007. As previously

announced, Ms. Laberge’s financial expertise will complement our current slate of directors. I would like to

personally welcome Alice to the Board.

Mr. Robbert Hartog, a long-term director and former audit committee chair, passed away on January 27, 2008.

Mr. Hartog joined our Board on May 14, 1997 and his guidance and counsel was invaluable throughout his

tenure. He will be sadly missed.

The Company continues to stress strong corporate governance as a primary goal. Once again the Company was

recognized with a high ranking in The Globe and Mail’s Board Games analysis of Canada’s top corporations.

4 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

Outlook

We are starting to see revenue improvement and margin enhancement due to price increases. With the

unsettled outlook for the North American economy, we cannot forecast past the first quarter of 2008 at this

time; however, we anticipate continuing enhancement of our margins in the first quarter in line with price

increases announced by the North American steel mills which will provide higher margins on our existing

inventories. Furthermore, JMS Russel Metals operations, acquired at the end of the third quarter in 2007,

are expected to provide additional accretion on a comparative basis versus the first three quarters in 2007.

E.M. Siegel, Jr.

President and Chief Executive Officer

February 18, 2008

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 5

> management’s discussion and analysis of financial condition and results of operations

For the year ended December 31, 2007

The Management’s Discussion and Analysis of Financial Condition and Results of Operations of Russel Metals Inc. and its
subsidiaries provides information to assist the reader and should be read in conjunction with the audited Consolidated Financial
Statements for the year ended December 31, 2007, including the notes thereto. Statements contained in this document that relate
to our beliefs or expectations as to certain future events are not statements of historical fact and are forward-looking statements.
We caution readers that there are important factors, risks and uncertainties, including but not limited to economic, competitive and
governmental factors affecting our operations, markets, products, services and prices that could cause our actual results,
performance or achievements to be materially different from those forecasted or anticipated by us in such forward-looking
statements. All dollar references in this report are in Canadian dollars unless otherwise stated.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a number of measures that
are not prescribed by generally accepted accounting principles (GAAP) and as such may not be comparable to similar measures
presented by other companies. We believe these measures are commonly employed to measure performance in our industry and are
used by analysts, investors, lenders and other interested parties to evaluate financial performance and our ability to incur and
service debt to support our business activities. The measures we use are specifically defined where they are first used in this report.

While we believe that non-GAAP measures are helpful supplemental information, they should not be considered in isolation as an
alternative to net income, cash flows generated by operating, investing or financing activities, or other financial statement data
presented in accordance with GAAP.

> Additional information related to Russel Metals Inc., including our Annual Information Form, may be obtained from SEDAR at

www.sedar.com or on our website at www.russelmetals.com.

Overview

We are one of the largest metals distribution companies in North America. We conduct business primarily in three metals
distribution segments: metals service centers; energy tubular products; and steel distributors.

Our basic earnings per share of $1.77 for 2007 were lower than those reported for 2006 of $2.65 per share. Lower volumes in the
metals service centers and steel distributors segments as well as lower gross margins in all segments, caused mainly by excess
inventories in the industry and lower demand, were the most significant factors for this decline.

On September 28, 2007, we completed the acquisition of the JMS Metal Services group of companies consisting of eight metals
service center facilities located in Tennessee, Arkansas, Alabama, Kentucky and Georgia. The operations represent a nucleus in a
region in the U.S. where we previously did not have service center locations. The JMS Metal Services group of companies had
revenues of approximately $190 million for the trailing twelve month period prior to the acquisition date. As the acquisition occurred
at the end of the third quarter of 2007, our income statement includes revenues and operating earnings of JMS Metal Services only
for the last three months of 2007.

Total Revenues
$ billions

2.7

2.6

2.4

1.5

Earnings per Share
$ per share

3.64

2.65

2.47

1.77

0.41

Return on Capital Employed
%

6 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

Summarized Financial Information
The table discloses selected information related to revenues, earnings and common share information over the last eight quarters.

2007

(millions, except per share data and volumes)

Mar. 31

June 30

Sept. 30

Dec. 31

Three Months Ended

Year
Ended

Dec. 31

Revenues

Earnings from operations

Net earnings

-- continuing operations

Net earnings

Basic earnings per common share

-- continuing operations

Basic earnings per common share

Diluted earnings per common share

-- continuing operations

Diluted earnings per common share

Market price of common shares

High

Low

683.7

652.8

624.3

598.4

2,559.2

46.0

28.7

0.46

28.55

25.27

48.9

29.3

0.47

0.46

34.47

27.75

46.8

27.9

0.44

37.6

23.7

25.3

0.38

0.40

0.37

0.40

33.35

26.50

32.47

22.75

179.3

109.6

111.2

1.74

1.77

1.73

1.76

34.47

22.75

Number of common shares traded

20,036,046

21,195,621

13,412,506

16,500,623

71,144,796

20 06

(millions, except per share data and volumes)

Mar. 31

June 30

Sept. 30

Dec. 31

Three Months Ended

Year
Ended

Dec. 31

Revenues

Earnings from operations

Net earnings

-- continuing operations

Net earnings

Basic earnings per common share

-- continuing operations

Basic earnings per common share

Diluted earnings per common share

-- continuing operations

Diluted earnings per common share

Market price of common shares

High

Low

740.7

685.9

672.3

593.2

2,692.1

61.2

37.3

0.71

0.70

27.50

21.61

70.0

46.2

0.74

27.47

22.15

69.2

44.6

0.72

0.71

29.05

24.30

48.6

30.6

0.49

29.38

25.95

249.0

158.7

2.65

2.63

29.38

21.61

Number of common shares traded

17,295,366

18,556,903

16,513,705

15,387,461

67,753,435

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 7

> management’s discussion and analysis cont’d

For the year ended December 31, 2007

Results of Operations
The following table provides operating profits before interest, taxes and restructuring costs. The corporate expenses included are
not allocated to specific operating segments. Gross margins (revenue minus cost of sales) as a percentage of revenues for the
operating segments are also shown below. The table shows the segments as they are reported to management and they are
consistent with the segment reporting in our consolidated financial statements.

(millions, except percentages)

Segment Revenues

Metals service centers

Energy tubular products

Steel distributors

Other

Segment Operating Profits

Metals service centers

Energy tubular products

Steel distributors

Corporate expenses

Other

2007

Change
as a %
of 2006

(5%)

10%

(22%)

2006

Change
as a %
of 2005

(2%)

(19%)

2007

2006

2005

1,435.2

1,507.9

1,538.5

614.3

559.4

10.5

595.2

468.7

11.7

677.2

436.1

10.7

2,559.2

101.9

54.5

39.1

(18.6)

2.4

2,692.1

2,614.1

(5%)

126.4

115.2

62.2

76.7

(18.2)

1.9

54.0

46.6

(16.8)

2.4

(19%)

(12%)

(49%)

(2%)

10%

15%

65%

(8%)

Operating profits from continuing operations

179.3

249.0

201.4

(28%)

24%

Segment Gross Margin as a % of Revenues

Metals service centers

Energy tubular products

Steel distributors

Total operations

Segment Operating Profits as a % of Revenues

Metals service centers

Energy tubular products

Steel distributors

Total operations

Return on Averaged Capital Employed

24.1%

14.4%

13.5%

19.9%

7.1%

8.0%

9.0%

7.0%

25.1%

16.5%

18.3%

21.9%

8.4%

10.1%

13.7%

9.3%

23.1%

14.6%

14.3%

19.8%

7.5%

9.1%

9.9%

7.7%

Metals Service Centers
%

Energy Tubular Products
%

Steel Distributors
%

8 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

Metals Service Centers

a) Description of operations
We provide processing and distribution services to a broad base of approximately 27,000 end users through a network of
53 Canadian locations and 12 U.S. locations. Our metals service centers carry a broad line of products in a wide range of sizes,
shapes and specifications, including carbon hot rolled and cold finished steel, pipe and tubular products, stainless steel and
aluminum. We purchase these products primarily from steel producers in Nor th America and process and package them in
accordance with end user specifications. We service all major geographic regions of Canada and the Southeastern and Midwestern
regions in the United States. Within Canada, our ser vice centers operate under the names Russel Metals, Métaux Russel,
A.J. Forsyth, Acier Leroux, Acier Loubier, Acier Richler, B&T Steel, Leroux Steel, Mégantic Métal, Russel Metals Specialty Products,
Métaux Russel Produits Spécialisés, McCabe Steel and York-Ennis. Our U.S. service center operations are conducted under the
names Russel Metals Williams Bahcall, JMS Russel Metals and Baldwin International. Our Russel Metals Williams Bahcall
operations focus primarily on the distribution of general line carbon products through three facilities located in Wisconsin.
JMS Metal Services, which was acquired September 28, 2007, has operations in Tennessee, Arkansas, Alabama, Kentucky and
Georgia. These operations process and distribute carbon hot rolled and cold finished steel, pipe and tubular products, stainless
steel and aluminum. These operations changed their name to JMS Russel Metals. Baldwin International distributes specialty alloy
products from its facility in Ohio.

b) Factors affecting results
The following is a general discussion of the significant factors affecting our metals service centers results. More specific
information on how these factors impacted 2007, 2006 and 2005 is found in the sections that follow.

Steel pricing fluctuates significantly throughout the steel cycle. Steel prices are influenced by overall demand, trade sanctions,
scrap steel pricing and product availability. Supply side management, practiced by steel producers in North America, and
international supply and demand, which impacts steel imports, affect product availability. Trade sanctions are initiated either by
steel mills or government agencies in North America and, less directly, worldwide. Steel prices continue to be volatile; however, they
remain at levels above historical norms.

Demand is significantly affected by economic cycles with revenues and operating profits fluctuating with the level of general
business activity in the markets serviced. We are most impacted by the manufacturing (excluding automotive), resource and
construction segments of the Canadian economy. Demand has been relatively stable over the last several years with softening
starting in the fourth quarter of 2006 and continuing throughout 2007. Excluding tons shipped by JMS Russel Metals, tons shipped
for 2007 were approximately 8% less than 2006, with a decline in the first half of 2007 of approximately 13% and only a small
decline in the second half of 2007 compared to the second half of 2006.

Canadian service centers, which represent the majority of our metals service centers operations, are particularly affected by
regional general economic conditions. We have operations in all regions of Canada and believe that we have a national market

Metals Service Centers

Revenues
$ millions

Operating Profits
$ millions

1,531

1,539

1,508

1,435

910

209

126

115

102

Operating Profits as
a % of Revenues

13.7

8.4

7.5

7.1

4.1

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 9

> management’s discussion and analysis cont’d

For the year ended December 31, 2007

share above 25%. This large market share and our diverse customer base of approximately 18,000 customers suggest that our
results should mirror the performance of the regional economies of Canada excluding the automotive sector in which we are not a
significant participant.

Our U.S. operations have approximately 9,000 customers and with the addition of the JMS Russel Metals operations we have an
increased presence in the U.S.

Our Canadian operations are affected by the U.S. dollar exchange rate since some products are sourced outside of Canada and are
priced in U.S. dollars. The strength of the Canadian dollar during the second half of 2007 resulted in some products that we purchased
being subsequently available in the marketplace at a lower cost, resulting in lower gross margins during the second half of 2007.

c) Metals service centers segment results -- 2007 compared to 2006
Revenues for 2007 decreased by 7% compared to 2006, excluding revenues related to JMS Russel Metals which was acquired in
September 2007, mainly due to demand. Overall tons shipped for 2007 were approximately 8% lower than those shipped in 2006.
Tons shipped declined in all regions with Ontario representing the largest decline in tons shipped and the U.S. service centers
having the least decline in tons shipped. The decline in tons shipped in Ontario, which started in the third quarter of 2006,
stabilized in the fourth quarter of 2007.

Our British Columbia region decline in tons for the year is similar to the decline in the segment; however, the decline occurred in the
last half of 2007 and was related to reduced demand in the forestry sector.

The average selling price of metal for 2007 was approximately the same as the average selling price for 2006. Selling prices
declined to current levels in the third quarter of 2005 and have moved up and down within a 5% band of this level during the last
two and one-half years.

Gross margin as a percentage of revenues at 24.1% for 2007 represents a decline compared to 25.1% for 2006. Lower demand
resulting in excess inventories in the service center industry has resulted in margin pressure.

The average revenue per invoice for 2007 was approximately $1,801 compared to $1,906 for 2006.

We believe that the strength of the Canadian dollar in 2007 adversely impacted those of our customers in Ontario and Quebec who
sell finished products outside of Canada and, consequently, we experienced reduced volumes in these regions. To date, the change
in the Canadian dollar versus the U.S. dollar has not been a significant factor in relation to inventory costs in the metals service
centers as inventory is purchased for our Canadian operations from Canadian or U.S. suppliers based on the landed cost at the
specific location in Canada. The strength of the Canadian dollar during the last half of 2007 has reduced the replacement cost for
certain products sourced from the U.S. This has put pressure on selling prices and gross margins as customers expect the lower
exchange rate to immediately be factored into the price they pay for metal.

Operating expenses in our metals service centers segment decreased by $16.9 million, or 7%, compared to 2006, prior to the
operating expenses of JMS Russel Metals operations. This was primarily due to lower compensation expense. Our compensation
plans are based on pay for performance and our compensation expenses declined with the lower profits in our operations. In
addition, we had lower plant and trucking expenses related to lower volumes and lower bad debts in 2007 as one large claim
in 2006 was not repeated.

Metals service centers operating profits for 2007 of $101.9 million were $24.5 million lower than 2006, mainly related to lower
volumes and gross margins partially offset by lower operating expenses.

d) Metals service centers segment results -- 2006 compared to 2005
Revenues for 2006 were 2% lower than revenues for 2005. The average selling price of steel for 2006 declined approximately 3%
from the average selling price for 2005. The average selling price declined each quarter for the first three quarters in 2005.
Average selling price remained relatively constant after that, with the average selling prices for the 2006 year being equivalent to
the average selling price for the fourth quarter of 2005.

Overall tons shipped for 2006 were approximately 1% higher than those shipped in 2005. Tons shipped in Alberta and British
Columbia were both up 10% due to oil and gas related activity in Alberta and infrastructure build in both provinces. Volumes were

1 0 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

strong at our Russel Metals Williams Bahcall operations with an increase of approximately 12% in tons shipped due to improved
customer demand in the Wisconsin region. Tons shipped declined approximately 9% in our Atlantic region due to lack of project
work in this area. All other regions had tons shipped that approximated those of 2005.

Gross margin as a percentage of revenues improved from 23.1% for 2005 to 25.1% for 2006 related to stable inventory costs
during 2006 compared to 2005 when we had higher cost inventory on hand as purchasing prices were declining.

The average revenue per invoice for 2006 was approximately $1,906 compared to the average for 2005 of approximately $1,888.

Operating expenses in our metals service centers segment increased by $11.8 million, or 5%, compared to 2005. This was
primarily due to higher compensation expense, delivery costs and bad debt expense. The increase in compensation expense relates
to higher wages in regions where the volumes are up, as well as higher costs to maintain staff in Western Canada and higher
amounts within our pay for performance plans. The increase in bad debt expense occurred in the first quarter of 2006 related to a
specific customer.

Metals service centers operating profits for 2006 of $126.4 million were $11.2 million higher than 2005, related to lower cost of
goods sold and the elimination in 2006 of inventory holding losses experienced in 2005.

Energy Tubular Products

a) Description of operations
These operations distribute oil country tubular goods (OCTG), line pipe, tubes, valves and fittings, primarily to the energy industry
in Western Canada and the western United States, from 5 Canadian and 2 U.S. locations. We purchase these products either from
the pipe processing arms of North American steel mills, independent manufacturers of pipe and pipe accessories or international
steel mills. Our energy tubular products segment operates under the names Comco Pipe and Supply Company, Fedmet Tubulars,
Triumph Tubular & Supply, Pioneer Pipe and Spartan Steel.

b) Factors affecting results
The following is a general discussion of the factors affecting our energy tubular products segment operations. More specific
information on how these factors impacted 2007, 2006 and 2005 is found in the sections that follow.

Oil and gas prices, which are among the factors that can impact oil rig count and subsequent drilling activities particularly in
Western Canada, have the ability to significantly affect demand for our products. Rig activity was significantly lower in 2007 versus
2006 and 2005. Rig activity in 2007 declined to levels lower than those experienced at any time in the last 10 years. Oil and gas
prices denominated in Canadian dollars, which dropped during 2006, have shown only modest improvement in 2007.

Our Canadian operations are affected by the U.S. dollar exchange rate since some products are sourced outside Canada and are
priced in U.S. dollars. The appreciation of the Canadian dollar has reduced the average cost of metal purchased. This reduction in
cost has resulted in pressure on selling prices, resulting in lower margins on inventory purchased earlier in the year.

Energy Tubular Products

Revenues
$ millions

677

595

614

395

298

Operating Profits
$ millions

Operating Profits as
a % of Revenues

11.9

10.1

9.1

8.0

4.6

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 1 1

> management’s discussion and analysis cont’d

For the year ended December 31, 2007

The Province of Alberta announced higher royalty payments to the Alberta provincial government starting in 2009. This, along with
pricing and foreign exchange rates, has impacted the level of oil and gas rig activity, oil sands activity and investment in this sector
in the second half of 2007.

Oil and gas drilling in Western Canada usually peaks during the period from October to March; thus our revenues and operating
profits have historically been higher during these two quarters. The first quarter remained strong in both 2006 and 2007; however,
the fourth quarter was not stronger than the third quarter in both years. This was caused by a decline in volumes for the traditional
Western Canada oil and gas drilling pipe and an increase in volumes related to oil sands projects in northern Alberta, gas drilling
in western U.S. and sales to the utilities sector which do not follow the seasonal patterns of oil and gas drilling. Oil and gas
drilling in Western Canada was significantly lower in 2007; however, activity in the oil sands of northern Alberta and line pipe
volumes in the U.S. have offset this decline.

Pricing is influenced by overall demand, trade sanctions and product availability. Trade sanctions are initiated either by steel mills or
government agencies in North America. Trade sanctions have not been a factor for pipe products during the reported period; however, it
may improve pricing in 2008 as both Canada and the U.S. initiated actions against Chinese pipe at the end of 2007 or early 2008.

c) Energy tubular products segment results -- 2007 compared to 2006
Revenues increased 10% to $677.2 million in 2007 compared to 2006. The increase in revenues is a result of volume increases in
2007 related to large transactional sales at lower margins in both Canada and the U.S.

Comco Pipe, which services the oil exploration activities in the oil sands of northern Alberta, had a record year in volumes and
operating profits. Our U.S. operation distributing line pipe to the oil and gas industry had increased volumes resulting in strong profits.

These volume increases were partially offset by lower volumes shipped from our two operations in Western Canada due to lower oil
and gas drilling activity and excess inventory in the region. Trade actions on Chinese pipe imports at year end in both Canada and
the U.S. are expected to help reduce inventory levels in the sector in 2008.

Gross margin as a percentage of revenues was 14.4% for 2007, a decrease from 16.5% for 2006. The lower margin mainly relates
to the increased cost of goods sold resulting from higher tubing and casing prices and lower margins on the large line pipe
transactions in the U.S. during 2007.

Operating expenses were higher by $4.3 million for 2007 compared to 2006, due to higher delivery costs related to our U.S.
operations and higher employee costs in our operations with higher volumes.

Operating profits were $54.5 million for 2007 compared to $62.2 million for 2006. The decrease in operating profits was due to
both lower margins and higher expenses.

d) Energy tubular products segment results -- 2006 compared to 2005
Revenues increased 3% to $614.3 million for 2006 compared to 2005. The increase in revenues was related to strong volumes
sold to the oil and gas drilling industry in both Western Canada and the western United States. The second and third quarter of
2005 had significant revenues related to infrastructure build for the oil sands of northern Alberta that was not present in 2006.

Gross margin as a percentage of revenue was 16.5% for 2006, an increase from 14.6% for 2005. This improved margin was
generated by higher margins on tubular products in short supply. The 2006 results include a smaller portion of lower margin energy
project revenues, resulting in a higher gross margin as a percentage of revenues. Gross margin dollars increased 16% in 2006
mainly related to higher volumes.

Operating expenses were higher by $5.9 million for 2006 compared to 2005 due to higher delivery costs related to volume
increases and variable compensation related to higher profitability.

Operating profits increased by $8.2 million, or 15%, to $62.2 million for 2006, compared to 2005. This increase in operating
profits was driven by higher volumes and gross margins.

1 2 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

Steel Distributors

a) Description of operations
Our steel distributors act as master distributors selling steel in large volumes to other steel service centers and equipment
manufacturers mainly on an "as is" basis. Our U.S. operation processes some coil for its customer base at its cut-to-length facility
in Houston, Texas. Our steel distributors source their steel both domestically and off shore. The international sourcing provides our
other business segments with valuable insight regarding international pricing trends and their potential impact on steel markets in
North America.

The main steel products sourced by this segment are structural beam, plate, coils, pipe and tubing. The operations in this sector
are Wirth Steel and Sunbelt Group. Arrow Steel, a division of Sunbelt Group, processes coils.

b) Factors affecting results
The following is a general discussion of the factors affecting our steel distributors. More specific information on how these factors
impacted 2007, 2006 and 2005 is found in the sections that follow.

Steel pricing is influenced by overall demand, trade sanctions and product availability both domestically and worldwide. Trade
sanctions are initiated either by steel mills or government agencies in North America. Mill capacity by product line in North America
and international supply and demand impact steel imports and significantly affect product availability. The weakening of the U.S.
dollar against other world currencies has increased the price of import material.

Demand for steel that is sourced off shore fluctuates significantly, mainly driven by price and product availability in North America.
Our steel distributors have a significant number of customers who buy from them on a periodic basis, which can result in large
fluctuations in revenues reported from period to period. Demand has declined due to overstock of inventory at service centers and
lower demand by the customers of the service center sector. In addition, pricing for off shore product is currently higher due to
demand outside North America and increased transportation costs, which means import product is not competitively priced
compared to domestic product.

Movement in the U.S. dollar has had some effect on our Canadian steel distributor operations since inventory is purchased mainly
in U.S. dollars. Steel is predominantly transacted in U.S. dollars and the Canadian mills adjust the price accordingly. The
strengthening of the Canadian dollar during the last half of 2007 put pressure on selling prices and margins.

c) Steel distributors segment results -- 2007 compared to 2006
Steel distributors revenues decreased 22% to $436.1 million for 2007 compared to 2006. Lower volumes accounted for most of the
decrease in revenues; however, selling prices have declined in Canada with the weakening of the U.S. dollar. Volumes were lower due to
decreased demand for steel at both our Canadian and U.S. operations caused by excess inventory in the service center industry and
strong international pricing which resulted in material flowing to areas outside North America. Approximately 2% of the decline in
revenues related to lower exchange rates on our U.S. steel distributor operations converted to Canadian dollars for reporting purposes.

Steel Distributors

Revenues
$ millions

559

471

469

436

284

Operating Profits
$ millions

Operating Profits as
a % of Revenues

16.6

13.7

9.9

9.0

4.7

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 1 3

> management’s discussion and analysis cont’d

For the year ended December 31, 2007

Gross margin as a percentage of revenues of 13.5% for 2007 declined from 18.3% for 2006. The decline is due to pressure on
pricing caused by reduced steel demand in 2007 and the strengthening Canadian dollar putting pressure on selling prices in Canada
as current purchases are at lower prices because inventory is mainly purchased in U.S. dollars.

Operating expenses were $5.8 million lower for 2007 compared to 2006, mainly related to variable compensation being lower based
on profitability in the year and income from a foreign exchange gain related to embedded derivatives on purchases outside North
America by the Canadian steel distributors operation. The new financial instruments accounting standard we adopted January 1, 2007,
considers transactions between a buyer and a seller in a currency that is not the functional currency of either party to be a foreign
currency derivative. This requires us to calculate a foreign currency gain or loss upon adoption of the standard and for each
reporting period thereafter. Upon transition, a foreign currency loss was charged to retained earnings on open purchase orders at
the transition date. A portion of the foreign exchange gain in the year was a reversal of this transitional adjustment, recorded as part
of inventory cost as the goods were received.

Volatility in world exchange rates could cause the foreign currency gain or loss to vary materially from reporting period to reporting
period. The amounts recorded in operating expenses in future periods will reverse and be recorded to inventory costs when the
material is received.

Operating profits for 2007 were $39.1 million, which is $37.6 million lower than those of 2006, mainly related to lower volumes and
gross margins.

d) Steel distributors segment results -- 2006 compared to 2005
Steel distributors revenues increased 19% to $559.4 million for 2006 compared to 2005. Higher volumes accounted for most of the
increase in revenues. Volumes were significantly higher due to strong demand for steel.

Gross margin as a percentage of revenues of 18.3% for 2006 was higher than the 14.3% for 2005 due to strong demand for our
products resulting in higher metal pricing in 2006.

Operating expenses were $5.1 million higher for 2006 compared to 2005, mainly due to variable compensation related to higher
profitability.

Operating profits for 2006 were $76.7 million, which is $30.1 million higher than 2005, generated by higher volumes and selling prices.

Corporate Expenses -- 2007 Compared to 2006 and 2005
Corporate expenses increased $1.8 million for 2007 and $1.4 million for 2006 compared to 2005, primarily due to higher stock-
based compensation expense. The expense related to stock options issued has increased due to the higher stock price and also
due to EIC-162, adopted in 2006, which required us to recognize immediately or accelerate any expense related to options issued
to employees who are eligible to retire during the vesting period.

Total Revenues
$ billions

2.7

2.6

2.4

1.5

Total Operating Profits
$ millions

323

249

201

179

Interest Expense
$ millions

1 4 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

Other -- 2007 Compared to 2006 and 2005
Other revenues and income represent the results of our bulk commodities handling terminal in Thunder Bay, Ontario. Revenues and
operating profits for 2007 compared to 2006 have improved primarily related to higher volumes handled in 2007 and the absence
of severance costs relating to downsizing recorded in the first quarter of 2006.

Consolidated Results -- 2007 Compared to 2006 and 2005
Operating profits from operations before other costs or income for 2007 were $179.3 million compared to $249.0 million in 2006 and
$201.4 million in 2005. Lower volumes in the metals service centers and steel distributors segments account for most of this decline.
Weaker margins in 2007 resulted in operating earnings for each of our three segments being lower than the results for the same period in 2006.

Interest Expense
The following table shows the components of our interest expense:

(millions)

Interest on long-term debt

Other interest (net)

Total interest

2007

15.3

(8.2)

7.1

2006

14.8

(8.1)

6.7

2005

15.2

2.3

17.5

Consolidated interest expense for 2007 increased by $0.4 million to $7.1 million compared to 2006. We have had cash on hand
and, correspondingly, interest income since March 2006 when we issued 11 million common shares. Interest income for 2007 was
similar to 2006 as the reduction in cash related to the acquisition of JMS Metal Services at September 28, 2007 was offset by a
reduction in working capital in the fourth quarter of 2007.

Unrealized Loss on Investment
Prior to August 23, 2007, a portion of our cash and cash equivalents was held in non-bank Canadian asset-backed commercial
paper. On August 23, 2007, we were notified that the principal of $11.0 million was not able to be repaid due to a disruption in the
Canadian market for asset-backed commercial paper. The Montreal Group, representing banks, asset-backed commercial paper
providers and major investors, requested that we, along with other participants, agree to a standstill agreement. At this point, the
details of the trust we have invested in have not been disclosed. As required by GAAP, we have made a fair value determination of
this investment which is classified as held-for-trading. As no active market exists for this investment, we used a probability-weighted
valuation technique to obtain a fair value. This technique considers the time value of money and the credit risk associated with the
investment. We used the following assumptions in our valuation: the trust is a going concern, the senior notes will be AAA rated and
the notes will be interest bearing; however, interest received will be net of restructuring costs and standby fees on the margin
facility. Based on our assumptions, a write-down of $1.1 million was recorded and the asset was reclassified to other assets on our
balance sheet. As we have substantial cash and available credit, this had no material impact on our liquidity.

Dividends Paid per
Common Share
$ per share

1.75

1.50

0.90

0.50

0.29

Common Share Price
$ per share

Dividend Yield
%

26.70

25.45

21.85

15.50

8.79

6.9

5.6

4.1

3.3

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 1 5

> management’s discussion and analysis cont’d

For the year ended December 31, 2007

Ineffectiveness on Cash Flow Hedges
As required under the standard for financial instruments and hedges, we evaluated the effectiveness of our swaps which hedge our
U.S. Senior Notes. Due to the significant movement in the Canadian dollar versus the U.S. dollar and the reduction in the U.S.
prime rate for interest, we determined that a portion of our hedge was ineffective and a loss of $0.9 million was recorded. In
addition, the value of our call option related to the Senior Notes was reduced resulting in a loss of $0.5 million.

Restructuring
In May 2006, we sold our Milton, Ontario facility, which was closed during 2005. The gain on sale before income taxes was
approximately $1.2 million.

Income Taxes
Our provision for income taxes for 2007 was $60.1 million, which was $24.7 million lower than that of 2006, related to lower
earnings. Our income tax rate for 2007 was 35.4%. This is slightly higher than our normalized effective income tax rate for 2007,
as the rate was increased by non-deductible expenses related to stock options issued in the second quarter of 2007. The rate was
favourably impacted by a Canadian Federal tax rate reduction enacted in the fourth quarter of 2007, which reduced our future tax
liabilities by approximately $0.5 million resulting in lower tax expense. We estimate our normalized effective income tax rate to be
34.0% for 2008, which reflects the tax budget changes enacted in 2007.

For 2006, the income tax rate was 34.8%. Our income tax rate for 2006 was favourably impacted, as we were able to utilize
unrecorded capital losses against a one-time capital gain on the sale of our Milton facility, resulting in lower income tax expense on
the transaction. During the second quarter of 2006, the Canadian Federal budget, which proposed rate reductions in 2008 to
2010, was enacted. This change reduced our future tax liabilities by approximately $0.4 million resulting in lower income tax
expense in 2006. Our income tax rate was negatively impacted by non-deductible expenses related to stock options issued in the
first and second quarters of 2006.

Discontinued Operations
During the fourth quarter of 2007, an outstanding legal issue related to the U.S. operations acquired with the Acier Leroux
acquisition was settled in our favour. An unused provision of $1.6 million related to this matter was recorded as income from
discontinued operations in 2007.

Earnings
Earnings from continuing operations for 2007 were $109.6 million compared to $158.7 million for 2006.

Net earnings for 2007 were $111.2 million compared to $158.7 million for 2006. Basic earnings per common share for 2007 were
$1.77 compared to $2.65 in 2006.

Shares Outstanding and Dividends
The weighted average number of common shares outstanding for 2007 was 62,835,303 compared to 59,887,382 for 2006 and
50,461,330 for 2005. The increase related to the 11 million common shares issued in March 2006 under a public offering and
employee stock options exercised. As at December 31, 2007 and February 18, 2008 we had 63,066,092 common shares outstanding.

Common Shares Outstanding
millions

EBITDA
$ millions

324

270

222

197

Interest Bearing
Debt to EBITDA
Times

3.8

0.9

0.8

0.9

0.6

1 6 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

We have returned a portion of our earnings to our shareholders by paying common share dividends of $110.1 million in 2007,
$89.4 million in 2006 and $45.4 million in 2005. The increase relates to additional shares outstanding and our increased dividend
rate. We paid a cash dividend of $1.75 per share for 2007, $1.50 per share for 2006 and $0.90 per share for 2005.

Our U.S. Senior Notes indenture provides that any dividend payment in excess of $0.08 per common share per quarter is
considered a restricted payment. We currently have a basket of approximately $405 million available for restricted payments.
The basket is replenished by 50% of net earnings on a quarterly basis. Share buybacks deplete the basket and proceeds for shares
issued increase the basket.

EBITDA
The following table shows the reconciliation of GAAP earnings from continuing operations to EBITDA:

(millions)

Earnings from continuing operations

Provision for income taxes

Interest expense, net

Earnings before interest and income taxes (EBIT)

Depreciation and amortization

2007

2006

109.6

158.7

60.1

7.1

176.8

20.4

84.8

6.7

250.2

20.0

Earnings before interest, income taxes, depreciation and amortization (EBITDA)

197.2

270.2

2005

124.6

60.4

17.5

202.5

19.2

221.7

We believe that EBITDA may be useful in assessing our operating performance and as an indicator of our ability to service or incur
indebtedness, make capital expenditures and finance working capital requirements. The items excluded in determining EBITDA are
significant in assessing our operating results and liquidity. Therefore, EBITDA should not be considered in isolation or as an
alternative to cash from operating activities or other combined income or cash flow data prepared in accordance with GAAP.

Capital Expenditures

Capital expenditures were $16.6 million for 2007 compared to $27.6 million for 2006. During 2006 and the first half of 2007, we
were expanding some of our locations and adding laser burning equipment to certain of our metals service center operations. In the
second half of 2007, we delayed planned additional expansions in Western Canada as volumes have declined and construction
costs have increased above our original budget.

Capital expenditures mainly relate to the replacement of capital items, the purchase of additional processing equipment across
a broad base of our operations and upgrades to our existing facilities and computer systems. Our expectation is for capital
expenditures to be at levels higher than depreciation expense over a period of years for the expansion of product lines and
processing capabilities.

Depreciation expense was $19.5 million in 2007 and $18.4 million in 2006. The increase mainly relates to additional assets acquired
with JMS Metal Services.

Liquidity

On September 28, 2007, we utilized $114 million of cash and assumed debt of $7 million to acquire the JMS Metal Services group
of companies. At December 31, 2007, we had cash and cash equivalents of $181.8 million.

We stress working capital management to ensure that working capital is minimized and leverage reduced over the economic cycle.
Our metals distribution business experiences significant swings in cash flow in order to fund working capital. Inventory and accounts
receivable represent a large percentage of our total assets employed and vary throughout each cycle. At December 31, 2007, current
assets represented 79% of our total assets versus 85% at December 31, 2006. The decline in current assets mainly relates to the
cash utilized to acquire fixed assets, intangibles and goodwill of JMS Metal Services. Total assets were $1.4 billion at December 31,
2006 and at December 31, 2007.

The balances disclosed in our consolidated cash flow statements are adjusted to remove the non-cash component related to foreign
exchange rate fluctuations impacting inventory, accounts receivable, accounts payable and income tax balances of our U.S. operations.

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 1 7

> management’s discussion and analysis cont’d

For the year ended December 31, 2007

Inventory turns improved in 2007 compared to 2006 in all segments. Reductions in inventory balances generated cash of $89.1 million
in 2007, excluding the reduction related to foreign exchange on inventories held in the U.S. and inventories related to the JMS Metal
Services acquisition. All segments are reducing inventories to levels required to service current volumes. We intend to continue to
reduce inventory levels in our energy tubular products segment over the next several quarters. Our goal is to ensure that we keep
our inventory levels as low as possible in order to minimize inventory valuation risk while still satisfying the needs of our customers.

Inventory turns are calculated using our cost of sales for the quarter annualized, divided by our inventory position at the end of
the quarter.

Inventory Turns

Metals service centers

Energy tubular products

Steel distributors

Total operations

Dec. 31
2007

Sept. 30
2007

June 30
2007

Mar. 31
2007

4.4

2.6

3.1

3.5

4.2

3.0

3.8

3.7

4.0

2.4

3.3

3.9

2.7

4.5

3.6

Quarter Ended

Dec. 31
2006

3.8

2.3

2.2

2.9

Metals service centers reduced inventory during the third and fourth quarters of 2007 compared to the prior quarters in 2007;
however, a similar decline in cost of sales resulted in only a slight improvement in turns. We expect our metals service centers
operations to turn over their inventory at higher rates than the industry average. Based on information published by the Metals
Service Center Institute in its monthly Metals Activity Report, average inventory turns for U.S. based steel companies for the three
months ended December 31, 2007 was 3.9 turns and the average for Canadian based companies was 3.0 turns.

Our energy tubular products segment has reduced inventory levels since December 31, 2006. Inventory needs to be further
reduced to align with current volumes.

The improvement in turns in our steel distributors segment relates to lower inventories during 2007 compared to 2006; however,
lower sales in the fourth quarter of 2007 impacted turns. In addition, the Canadian operations have increased inventory in the
fourth quarter due to the close of navigation on the Great Lakes and we anticipate levels to decline in the first quarter of 2008
based on historical patterns.

The other major components of working capital are accounts receivable and accounts payable. Excluding the acquisition of JMS
Metal Services, accounts receivable and accounts payable at December 31, 2007 are approximately the same as December 31,
2006. Also, revenues for the fourth quarter of 2007 are similar to revenues for the fourth quarter of 2006.

During 2007, we made income tax payments of $75.7 million compared to payments of $71.0 million in 2006 and $110.4 million in 2005.

During 2007, we utilized cash of $16.6 million on capital expenditures and $110.1 million on common share dividends. During
2006, we utilized cash of $27.6 million on capital expenditures and $89.4 million on common share dividends.

Inventories
$ millions

664

573

554

474

303

Net Assets Employed
$ millions

889

878

700

698

522

Free Cash Flow
$ millions

189

159

131

125

1 8 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

Free Cash Flow

(millions)

Cash from operating activities before working capital
Purchase of fixed assets
Proceeds on sale of fixed assets
Proceeds from assets held for sale and sale of businesses

2007

140.4
(16.6)
1.5
–

2006

178.5
(27.6)
1.7
6.2

125.3

158.8

2005

149.6
(26.5)
1.6
5.9

130.6

Free cash flow may be useful in assessing our ability to pay dividends, reduce outstanding debt and fund working capital growth.
Free cash flow is a non-GAAP measure regularly used by investors and analysts to evaluate companies.

Cash, Debt and Credit Facilities

At December 31, 2007, we had cash and cash equivalents, net of outstanding cheques, of $181.8 million. In March 2006, we
issued 11 million common shares for net proceeds of $271.4 million resulting in cash, which has been invested in short-term
investments until a suitable acquisition or other use of cash occurs. On September 28, 2007, $114 million of cash was used to
acquire the JMS Metal Services group of companies. In addition, we assumed development bonds of $7 million.

The application of the new accounting standards related to Financial Instruments and Hedges (see section on Changes in Accounting
Policies) requires all derivatives to be recorded at their fair values and the deferred costs to be netted against the applicable liability. In
accordance with this standard, the Senior Notes are recorded net of deferred financing charges at December 31, 2007. At December 31,
2006 deferred financing charges were recorded in assets. The following table details the changes related to long-term debt:

(millions)

Long-term debt

Amortized Cost
or Fair Value as at

Balance as at
December 31, 2007 December 31, 2006

6.375% US$175 million Senior Notes due March 1, 2014

169.0

203.9

Capital leases

Arkansas development bonds, maturing 2014 to 2017

Current portion

Obligations under cross currency swaps

Foreign exchange difference on US$100 million

(recorded as Other accrued liabilities at December 31, 2006)

Additional fair value of cash flows to terminate swap

(not recorded on balance sheet in 2006)

6.8

175.8
0.9

174.9

33.0

6.5

39.5

–

203.9
–

203.9

15.4

–

15.4

Changes in the value of the debt and the swaps are recorded in other comprehensive income net of income taxes.

Interest Bearing Debt
$ millions

Shareholders’ Equity
$ millions

Debt to Capitalization
%

895

884

539

457

254

209

211

204

176

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 1 9

> management’s discussion and analysis cont’d

For the year ended December 31, 2007

Cash and Bank Credit Facilities

As at December 31, 2007 (millions)

Bank loans

Cash net of outstanding cheques

Cash

Facilities availability

Letters of credit

Undrawn facilities

Russel Metals
Facility

U.S. Subsidiary
Facility

–

168.2

200.0

13.6

186.4

13.6

49.4

14.5

34.9

Total cash and undrawn facilities

354.6

48.5

Total

–

181.8

249.4

28.1

221.3

403.1

We have a facility with a syndicate of Canadian and U.S. banks for a revolving loan of $200 million, including letters of credit. This
facility was extended to January 15, 2011 in December 2007. We may extend this facility annually with the consent of the syndicate.
We are entitled to borrow, on a revolving basis, up to an amount equal to the sum of specified percentages of our eligible accounts
receivable and inventories, to a maximum of $200 million. We are currently entitled to borrow $200 million including letters of credit
under this facility. At December 31, 2007, we had no borrowings and had letters of credit of $13.6 million. At December 31, 2006,
we had no borrowings and had letters of credit of $54.8 million under this facility.

In addition, a U.S. subsidiary has its own one-year bank credit facility. The maximum borrowing under this facility at December 31,
2007 was US$50 million. At December 31, 2007, this subsidiary had no borrowings and had letters of credit of US$14.6 million. At
December 31, 2006, this subsidiary had no borrowings and had letters of credit of US$36.1 million.

Cash generated from operating activities before working capital changes was $140.4 million for 2007 and was $178.5 million for
2006 due to lower earnings in 2007.

Based on cash, cash equivalents and our bank facilities, we have access to approximately $403 million of cash availability based on
our December 31, 2007 balances. In the past, we have made several acquisitions and we believe we can continue to grow by
acquisition. We believe we have the ability to fund future acquisitions using cash or through the utilization or expansion of our
existing bank facilities. We believe we have the ability to significantly increase the bank facility, if required.

Book Value per
Common Share
$ per share

14.34 14.01

10.63

9.15

5.90

Market Capitalization
$ millions

1,665

1,605

1,107

773

378

Market Capitalization
to Book Value
Times

2.1

1.9

1.8

1.7

1.5

2 0 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

Contractual Obligations
As at December 31, 2007, we were contractually obligated to make payments under our long-term debt agreement, cross currency
swap agreements and operating lease obligations that come due during the following periods.

(millions)

2008

2009

2010

2011

2012

2013 and beyond

Total

Long-Term Cross Currency
Swaps

Debt Maturities

Long-Term
Debt Interest

Lease
Obligations

0.9

1.0

1.1

–

175.2

33.0

14.6

14.5

14.4

16.8

11.2

10.4

9.5

7.5

6.1

9.8

180.3

33.0

89.2

54.5

Total

26.7

25.9

25.0

23.0

21.6

234.8

357.0

The long-term debt interest in the table includes the impact of our swaps. Long-term debt interest has been estimated based on
current exchange rates for the portion not hedged.

Derivatives
Our fixed interest cross currency swaps obligate us to purchase US$100 million at $1.3180 for each US$1.00. Based on the
December 31, 2007 exchange rate, we would incur an obligation of $33.0 million in addition to our long-term debt obligation of
$172.9 million. The fair value of our swaps includes an additional obligation of $6.5 million, which represents the fair value of
payments for the remaining life of the debt if we were to extinguish the swaps at December 31, 2007.

Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist of the letters of credit disclosed in the bank credit facilities table and operating lease
obligations disclosed in the contractual obligations table.

We have multiple defined benefit pension plans in Canada, as disclosed in Note 17 to our 2007 annual consolidated financial
statements. During 2007, we contributed $4.3 million to these plans. We expect to contribute approximately $2.7 million to these
plans during 2008.

Accounting Policies and Estimates

a) Change in Accounting Policies in 2007

Effective January 1, 2007, as required by Canadian accounting standards, we adopted new accounting standards – Financial
Instruments – Recognition and Measurement, Hedges and Comprehensive Income. The principal impacts of the standards are:

(i) Other comprehensive income is a new component of shareholders’ equity and a new statement entitled Statement of

Comprehensive Income has been added to our consolidated financial statements.

(ii) Financial assets and liabilities are classified as available-for-sale, held-to-maturity, held-for-trading, other liabilities or loans

and receivables.

(iii)

Items classified as held-for-trading are measured at fair value with gains and losses recognized in net income. Assets
classified as available-for-sale are measured at fair value with gains and losses recognized in other comprehensive income
until the item is sold. Other loans and receivables and other liabilities are measured at amortized cost using the effective
interest method.

(iv) Derivative instruments including hedges are recorded on the balance sheet at fair value.

(v)

This new hedging standard replaces our previous policy and the swaps which hedge our Senior Notes are recorded at fair
value on the balance sheet with any gains or losses recorded in other comprehensive income until the hedged items are
recognized in the consolidated statement of income.

Our held-for-trading assets include short-term investments, bank accounts, forward exchange contracts and embedded derivatives
in inventory purchases. We currently do not have any assets classified as available-for-sale or held-to-maturity. Our accounts receivable
are classified under loans and receivables, and accounts payable and long-term debt are classified as other financial liabilities.

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 2 1

> management’s discussion and analysis cont’d

For the year ended December 31, 2007

The impact on our financial statements is that changes in foreign exchange related to certain open purchase orders and forward
exchange contracts have been reported in operating expenses for 2007. As metal is transacted mainly in U.S dollars worldwide, the
majority of the entries relate to U.S. versus Canadian dollar movements on U.S. dollar purchase orders with non North American
suppliers. These derivatives have been fair valued at December 31, 2007 and January 1, 2007 and changes are reported in income
for 2007. The net impact of these items in 2007 totalled $1.3 million of income and has been reported in the operating profits of
the operating segments where the contracts exist. Any transitional adjustment related to the January 1, 2007 fair value of like items
has been included in retained earnings.

In addition, our long-term debt and the related swaps are recorded at amortized costs or fair values on the balance sheet. See
details under Cash, Debt and Credit Facilities.

b) Future Accounting and Reporting Changes

Effective January 1, 2008, we are adopting the Canadian accounting standards new section on Inventories. This section gives
specific guidance on costing of inventories and presentation of expense allocation between cost of goods sold and operating
expenses.

We, along with other distributors in our industry, have not used absorption accounting for allocation of certain plant costs between
cost of sales and operating expenses for processing activities. Effective January 1, 2008, we will use absorption accounting for our
processing activities. This will result in an increase in cost of sales and a decrease in gross margin dollars and operating expenses
of a similar number.

In addition, the new standard requires a net realizable value test for inventory on hand at the item level. Consistent with previous
practice we will write down inventories when the net realizable value is less than cost. The new standard requires us to write up
values to original cost if the net realizable value has increased in the period. We anticipate more volatility in our numbers due to this
change in a declining market, as metals pricing tends to fluctuate with demand and with mill costs that we do not control.

c) Accounting Estimates
The preparation of our financial statements requires management to make estimates and judgements that affect the reported
amounts. On an ongoing basis, we evaluate our estimates, including those related to bad debts, inventory obsolescence, useful
lives of fixed assets, asset retirement obligations, income taxes, restructuring costs, pensions and other post-retirement benefits,
fair values, guarantees, environmental obligations, contingencies, litigation and assigned values on net assets acquired. We base
our estimates on historical experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these estimates.

Our most significant assets are accounts receivable and inventory.

Accounts Receivable
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required
payments. Assessments are based on aging of receivables, legal issues (bankruptcy status), past collection experience, current
financials or credit agency reports and the experience of our credit personnel. Accounts receivable that we determine to be
uncollectible are reserved in the period in which the determination is made. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Our reserve for
bad debts at December 31, 2007 is consistent with the level at December 31, 2006.

Inventories
We review our inventory to ensure that the cost of inventory is not in excess of its estimated market value and for obsolete and
slow moving product. Inventory reserves or write-downs are recorded when cost exceeds the market value and when product is
determined to be slow moving or obsolete. Significant reductions in market value could result in additional write-downs. The
inventory reserve level at December 31, 2007 is reduced from the level at December 31, 2006 based on net realizable values at
December 31, 2007.

2 2 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

Other areas involving significant estimates and judgements include:

Income Taxes
We believe that we have adequately provided for income taxes based on all of the information that is currently available. The
calculation of income taxes in many cases requires significant judgement in interpreting tax rules and regulations, which are
constantly changing. Our tax filings are also subject to audits, which could materially change the amount of current and future
income tax assets and liabilities. Any change would be recorded as a charge to or reduction in income tax expense.

Employee Benefit Plans
We perform a valuation, at least every three years, for each plan to determine the actuarial present value of the accrued pension
and other retirement benefits. The valuation uses management’s assumptions for the discount rate, expected long-term rate of
return on plan assets, rate of compensation increase, health-care cost trend rates and expected average remaining years of service
of employees.

While we believe that these assumptions are reasonable, differences in actual results or changes in assumptions could materially
affect employee benefit obligations and future net benefit plans costs. We account for differences between actual and assumed
results by recognizing differences in benefit obligations and plan performance over the working lives of the employees who benefit
from the plans.

Investment in Asset-Backed Commercial Paper
We have excess cash which is currently being invested on a short-term basis. Prior to August 2007, our investment policy allowed for
investments in non-bank and bank asset-backed commercial paper. The policy limits the amounts invested by asset type and issuer.

We performed a probability-weighted valuation technique to obtain a fair value for this asset. While we believe our assumptions are
reasonable based on available information, the actual recovery on this investment could be materially different and our valuation
may change in future periods as more information becomes available.

Controls and Procedures

Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and
reported to senior management on a timely basis so that appropriate decisions can be made regarding public disclosure.

The purpose of internal controls over financial reporting as defined by the Canadian Securities Administrators is to provide
reasonable assurance that:

(i)

(ii)

financial statements prepared for external purposes are in accordance with the Company’s Generally Accepted Accounting
Principles,

transactions are recorded as necessary to permit the preparation of financial statements, and records are maintained in
reasonable detail,

(iii)

receipts and expenditures of the Company are made only in accordance with authorizations of the Company’s management
and directors, and

(iv) unauthorized acquisitions, uses or dispositions of the Company’s assets that could have a material effect on the financial

statements will be prevented or detected in order to prevent material error in financial statements.

The President and Chief Executive Officer, and the Vice President and Chief Financial Officer have caused management and other
employees to design and document our internal controls over financial reporting. No material weaknesses in the design
effectiveness were identified during the documentation of these internal controls.

No changes were made in our disclosure controls or our internal control over financial reporting during 2007 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 2 3

> management’s discussion and analysis cont’d

For the year ended December 31, 2007

Vision and Strategy
The metals distribution business is a segment of a mature, cyclical industry. The use of service centers and steel distributors by
both manufacturers and end users of steel continues to grow. This is evidenced by the growth in the percentage of total steel
shipments from steel producers to service centers. As the distribution segment’s share of steel industry shipments continues to
grow, service centers such as ours can grow their business over the course of a cycle.

We strive to deal with the cyclical nature of the business by operating with the lowest possible net assets throughout the course of
a cycle. In order to achieve this, management emphasizes profitability rather than revenue growth. This intensive asset management
reduces borrowings and therefore interest expense in declining periods in the economic cycle. This in turn creates higher, more
stable returns on net assets over the course of the cycle. Our conservative management approach creates relatively stronger trough
earnings but could cause potential peak earnings to be somewhat muted. Management strongly believes that it is more prudent to
be profitable throughout a cycle, without the spikes in earnings caused by less emphasis on asset management, and have average
earnings over the full range of the cycle in the top deciles of the industry.

Growth from selective acquisitions is also a core strategy. We focus on investment opportunities in businesses that have strong
market niches or provide mass to our existing operations. We believe that our acquisition of JMS Metal Services in September
2007 provides a platform for growth in the Southeastern and Midwestern regions of the United States.

In both the energy tubular products and steel distributors segments, all of the business units have significant operations in the
market niche that they service. Consistent with our acquisition philosophy, any new acquisitions in these areas would likely be
either major stand-alone operations or those that complement our existing operations.

In the future, we believe that the length of the steel-based economic cycle will continue to shorten and a management structure
and philosophy that allows the fastest reaction to changes that affect the industry will be the most successful. We will continue to
invest in business systems to enable faster reaction times to changing business conditions. In addition, management believes the
high level of service and flexibility provided by service centers will enable this distribution channel to capture an increasing
percentage of total steel revenues to end users, allowing for increased growth within the sector.

Risk
The timing and extent of future price changes from the steel producers and their impact on us can not be predicted with any
certainty due to the inherent cyclical nature of the steel industry.

Fourth Quarter Results
Revenues for the fourth quarter of 2007 compared to the fourth quarter of 2006 were down 4% when the revenues of JMS Russel
Metals are excluded. The energy tubular products segment had higher volumes whereas the steel distributors volumes have
declined. The earnings are lower mainly due to lower selling prices resulting in lower margins. Our earnings per share were $0.40
for the fourth quarter of 2007 compared to that reported for the fourth quarter of 2006 of $0.49.

Outlook
We are starting to see revenue improvement and margin enhancement due to price increases. With the unsettled outlook for the
North American economy, we cannot forecast past the first quarter of 2008 at this time; however, we anticipate continuing
enhancement of our margins in the first quarter in line with price increases announced by the North American steel mills which will
provide higher margins on our existing inventories. Furthermore, JMS Russel Metals operations, acquired at the end of the third
quarter in 2007, are expected to provide additional accretion on a comparative basis versus the first three quarters in 2007.

Subsequent Event
On February 18, 2008, the Board approved the filing of a normal course issuer bid, which will allow us to purchase up to six million
of our common shares. Our share price has recently traded at prices which we believe do not truly reflect the value of the Company.
The purchase of six million shares will not jeopardize our ability to pay our dividend.

February 18, 2008

2 4 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

> management’s report to the shareholders

The accompanying consolidated financial statements, management’s discussion and analysis and all information in the Annual
Report have been prepared by management and approved by the Audit Committee and the Board of Directors of the Company.

These consolidated financial statements were prepared in accordance with Canadian generally accepted accounting principles and,
where appropriate, reflect management’s best estimates and judgements. Management is responsible for the accuracy, integrity and
objectivity of the consolidated financial statements and management’s discussion and analysis within reasonable limits of materiality
and for the consistency of financial data included in the text of the Annual Report with that contained in the consolidated financial
statements.

To assist management in the discharge of these responsibilities, the Company has developed, documented and maintained a
system of internal controls in order to provide reasonable assurance that its assets are safeguarded; that only valid and authorized
transactions are executed; and that accurate, timely and comprehensive financial information is prepared in accordance with Canadian
generally accepted accounting principles. In addition, the Company has developed and maintained a system of disclosure controls in
order to provide reasonable assurance that the financial information is relevant, reliable and accurate. The Company has evaluated
its disclosure controls for the year ended December 31, 2007, and has concluded that they are effective.

The Company’s Audit Committee is appointed annually by the Board of Directors. The Audit Committee, which is composed entirely of
outside directors, meets with management to satisfy itself that management is properly discharging its financial reporting
responsibilities and to review the consolidated financial statements, the management’s discussion and analysis and the report to
shareholders. The Audit Committee reports its findings to the Board of Directors for consideration in approving the consolidated
financial statements, the management’s discussion and analysis and the report to shareholders for presentation to the shareholders.

The consolidated financial statements have been audited on behalf of the shareholders by the external auditors Deloitte & Touche LLP
in accordance with Canadian generally accepted auditing standards. Deloitte & Touche LLP has full and free access to the
Audit Committee.

February 18, 2008

E.M. Siegel, Jr.

President and
Chief Executive Officer

M.E. Britton

Vice President and
Chief Financial Officer

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 2 5

> auditors’ report

To the Shareholders of Russel Metals Inc.
We have audited the consolidated balance sheets of Russel Metals Inc. as at December 31, 2007 and 2006 and the consolidated
statements of earnings, retained earnings, comprehensive income, accumulated other comprehensive loss and cash flows for each
of the years in the three-year period ended December 31, 2007. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company
as at December 31, 2007 and 2006 and the results of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2007 in accordance with Canadian generally accepted accounting principles.

Deloitte & Touche LLP
Chartered Accountants
Licensed Public Accountants

Toronto, Ontario
February 18, 2008

2 6 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

> consolidated balance sheets

At December 31 (millions)

ASSETS

Current

Cash and cash equivalents

Accounts receivable

Inventories

Prepaid expenses and other assets

Income taxes

Property, Plant and Equipment (Note 7)

Deferred Financing Charges

Future Income Tax Assets (Note 13)

Other Assets (Note 8)

Goodwill and Intangibles (Note 5)

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current

Accounts payable and accrued liabilities

Income taxes payable

Current portion long-term debt

Other Accrued Liabilities (Note 15)

Derivatives (Note 15)

Long-Term Debt (Note 10)

Pensions and Benefits (Note 17 b))

Future Income Tax Liabilities (Note 13)

Shareholders’ Equity (Note 14)

On behalf of the Board,

2007

2006

181.8

341.8

572.6

8.5

3.9

209.9

329.0

664.0

7.4

2.1

1,108.6

1,212.4

227.9

0.3

1.0

12.1

53.4

189.5

6.8

0.4

3.9

9.2

1,403.3

1,422.2

294.2

2.8

0.9

297.9

–

39.5

174.9

1.4

5.8

519.5

883.8

283.9

15.0

–

298.9

15.4

–

203.9

2.6

6.8

527.6

894.6

1,403.3

1,422.2

A. Benedetti

Director

L. Lachapelle

Director

The accompanying notes are an integral part of these consolidated financial statements.

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 2 7

> consolidated statements of earnings

For the years ended December 31 (millions, except per share data)

2007

2006

2005

Revenues

Cost of sales and operating expenses

Earnings before the following

Other expense (income) (Note 11)

Interest expense, net (Note 12)

Earnings before income taxes

Provision for income taxes (Note 13)

Earnings from continuing operations

Income (loss) from discontinued operations (Note 6)

2,559.2

2,692.1

2,614.1

2,379.9

2,443.1

2,412.7

179.3

2.5

7.1

169.7

(60.1)

109.6

1.6

249.0

(1.2)

6.7

243.5

(84.8)

158.7

–

201.4

(1.1)

17.5

185.0

(60.4)

124.6

(0.1)

Net earnings for the year

111.2

158.7

124.5

Basic earnings per common share

– continuing operations (Note 14)

Basic earnings per common share

Diluted earnings per common share

– continuing operations

Diluted earnings per common share

1.74

1.77

1.73

1.76

2.65

2.63

2.47

2.44

> consolidated statements of retained earnings

For the years ended December 31 (millions)

Retained earnings, beginning of the year,

as previously reported

Transitional adjustment – financial instruments (Note 2)

Retained earnings, beginning of the year, as restated

Net earnings for the year

Dividends on common shares

2007

2006

2005

411.1

341.8

262.7

(0.5)

410.6

111.2

(110.1)

–

341.8

158.7

(89.4)

–

262.7

124.5

(45.4)

341.8

Retained earnings, end of the year (Note 14)

411.7

411.1

The accompanying notes are an integral part of these consolidated financial statements.

2 8 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

> consolidated statement of comprehensive income

For the year ended December 31 (millions)

Net earnings for the year

Other comprehensive loss

Unrealized foreign exchange losses on translating

financial statements of self-sustaining foreign operations (U.S. subsidiaries)

Gains on items designated as net investment hedges (net of tax of $0.6)

Gains on items designated as cash flow hedges (net of tax of $3.1)

Other comprehensive loss

Comprehensive income

2007

111.2

(34.5)

9.1

7.6

(17.8)

93.4

> consolidated statements of accumulated other comprehensive loss

For the years ended December 31 (millions)

2007

2006

Accumulated net unrealized foreign currency translation gains and losses

Balance, beginning of year

Net unrealized gain (loss) on translation of net investment in foreign operations

Balance, end of year

Accumulated net unrealized loss on cash flow and net investment hedges

Balance, beginning of year

Transitional adjustment (Note 2)

Unrealized gains on items designated as net investment hedges (net of tax of $0.6)

Unrealized gains on items designated as cash flow hedges (net of tax of $3.1)

Balance, end of year

(11.2)

(34.5)

(45.7)

–

(9.3)

9.1

7.6

7.4

(12.5)

1.3

(11.2)

–

Total accumulated other comprehensive loss

(38.3)

(11.2)

The accompanying notes are an integral part of these consolidated financial statements.

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 2 9

> consolidated cash flow statements

For the years ended December 31 (millions)

Operating activities

Earnings from continuing operations

Depreciation and amortization

Future income taxes

Gain on sale of fixed assets and assets held for sale

Stock-based compensation

Pension expense (funding) (Note 17)

Other

2007

2006

2005

109.6

158.7

20.4

4.2

(0.5)

4.8

(1.3)

3.2

20.0

3.9

(1.3)

3.4

(6.2)

–

124.6

19.2

6.3

(2.0)

1.5

–

Cash from operating activities before working capital

140.4

178.5

149.6

Changes in non-cash working capital items

Accounts receivable

Inventories

Accounts payable and accrued liabilities

Current income taxes

Other

Change in non-cash working capital

Cash from (used in) operating activities

Financing activities

Decrease in bank borrowing

Issue of common shares (Note 14)

Dividends on common shares

Deferred financing

Repayment of long-term debt

Cash from (used in) financing activities

Investing activities

Purchase of fixed assets

Proceeds on sale of fixed assets

Purchase of business (Note 4)

Proceeds from assets held for sale

Reclassification of cash equivalents to other assets

Other

Cash used in investing activities

Cash from discontinued operations

Effect of exchange rates on cash

(Decrease) increase in cash and cash equivalents

Cash and cash equivalents, beginning of the year

(5.0)

89.1

4.7

(17.6)

(0.9)

70.3

210.7

–

10.9

(110.1)

(0.2)

(0.3)

(99.7)

(16.6)

1.5

(109.0)

–

(11.0)

1.6

(133.5)

–

(5.6)

(28.1)

209.9

30.3

(188.2)

(30.9)

9.2

(0.4)

(180.0)

(1.5)

(2.1)

277.9

(89.4)

(1.1)

–

185.3

(2.4)

76.5

(32.2)

(55.6)

–

(13.7)

135.9

(31.2)

4.4

(45.4)

(0.3)

–

(72.5)

(27.6)

(26.5)

1.7

–

6.2

–

(0.9)

(20.6)

–

(0.4)

162.8

47.1

1.6

–

5.9

–

(4.4)

(23.4)

6.5

–

46.5

0.6

47.1

Cash and cash equivalents, end of the year

181.8

209.9

The accompanying notes are an integral part of these consolidated financial statements.

3 0 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

> notes to the consolidated financial statements

1. Summary of Significant Accounting Policies

a) Basis of presentation
The consolidated financial statements include the accounts of Russel Metals Inc. and its subsidiary companies herein referred to
as the Company. The reporting currency is Canadian dollars unless otherwise noted. All inter-company balances, transactions and
profits have been eliminated.

These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles.

b) Cash and cash equivalents
Cash and cash equivalents includes demand deposits, bank term deposits, and investment grade short-term investments with a
maturity of less than three months at time of purchase. At December 31, 2007, short-term investments were $26.4 million
(2006: $132.7 million) and demand deposits were $139.9 million (2006: $67.4 million). Cash and cash equivalents are recorded
at cost, which approximates market value.

c) Inventories
Inventories are recorded at the lower of cost and net realizable value. Cost is determined on either an average cost basis or an
actual cost basis depending on the business unit (Note 3).

d) Property, plant, equipment and depreciation
Property, plant, equipment and leasehold improvements are recorded at cost. Depreciation is provided on a straight-line basis at
rates that charge the original cost of such assets to operations over their estimated useful lives. These are 20 to 40 years for
buildings, 5 to 10 years for machinery and equipment, 2 to 5 years for computer equipment, and over the lease term for leasehold
improvements. Depreciation expense was $19.5 million in 2007 (2006: $18.4 million; 2005: $17.7 million).

e) Deferred financing charges and amortization
Eligible costs incurred relating to bank financing are deferred and amortized on a straight-line basis over the period of the related
financing. Deferred financing charges are recorded at cost less accumulated amortization. Amortization of deferred financing
charges was $0.8 million in 2007 (2006: $1.6 million; 2005: $1.5 million). Effective January 1, 2007, eligible costs related to
long-term debt financing are capitalized to the carrying amount of the associated debt and amortized using the effective interest
method (Note 2). Prior to January 1, 2007, deferred charges related to long-term debt financing were recorded as deferred
financing charges.

f) Goodwill and intangibles
Goodwill represents the excess purchase price paid on acquisitions over the value assigned to identifiable net assets acquired.
The Company reviews goodwill for impairment annually and whenever facts and circumstances indicate that carrying amounts may
not be recoverable. As part of the evaluation, the estimated future undiscounted cash flows associated with the underlying
business operation are compared to the carrying amount of goodwill to determine if a write-down is required. If such an
assessment indicates that the undiscounted future cash flows will not be recovered, the carrying amount is reduced to the
estimated fair value (Note 5).

Intangible assets are recorded at cost, which for business acquisitions represents the fair value at the date of acquisition, and are
comprised of customer lists. Customer lists are amortized on a straight-line basis over their estimated useful life, 15 years.
Amortization of customer lists was $0.1 million for the year ended December 31, 2007.

g) Pensions and other benefit plans
The cost of pension benefits earned by employees covered under defined benefit plans is determined using the projected benefit
method prorated on service and is charged to expense as services are rendered. Actuarial gains and losses and past service costs
are amortized on a straight-line basis over the estimated average remaining service lives of the employee groups utilizing the
corridor approach. The corridor approach amortizes the excess of the net accumulated actuarial gain (loss) over 10% of the greater
of the benefit obligation and the fair value of plan assets. The cost of post-retirement benefits other than pensions is recognized on
an accrual basis.

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 3 1

> notes to the consolidated financial statements cont’d

Income taxes

h)
The Company uses the liability method of income tax allocation. Under this method, future tax assets and liabilities are determined
based on differences between the financial accounting and tax bases of assets and liabilities and are measured using the
substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse. Future income tax
assets are recognized to the extent that their realization is more likely than not.

Foreign currency translation

i)
The accounts of self-sustaining foreign subsidiaries are translated from U.S. dollars to Canadian dollars at the noon spot rate in
effect at the balance sheet date, which was 0.9881 at December 31, 2007 (2006: 1.1653). Revenues and expenses are
translated at the average rate of exchange during the year. For 2007, the U.S. dollar published average exchange rate was 1.0740
(2006: 1.1343; 2005: 1.2114). The resulting gains or losses are included in other comprehensive loss (Note 2).

Exchange gains or losses on long-term debt denominated in foreign currencies not designated as a hedge are expensed as
incurred. Exchange gains or losses on the translation of long-term debt denominated in a foreign currency designated as a hedge of
the Company’s net investment in foreign subsidiaries are included in other comprehensive loss.

Revenue recognition

j)
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, selling price is fixed and
collection is reasonably assured. Revenue on certain sales within the energy tubular products segment, where the Company acts as
an agent, is presented on a net basis. Freight and shipping billed to customers are included in revenue.

Stock-based compensation

k)
The Company uses the fair value-based approach to account for stock-based compensation granted to employees subsequent to
January 1, 2003. Compensation expense is recognized for stock options over their vesting period based on their estimated fair
values on the date of grant with the related credit charged to contributed surplus except for employees who are eligible to retire
during the vesting period. Fair value is determined by the Black-Scholes option-pricing model. Compensation expense is also
recognized for deferred share units when issued and changes in the quoted market price from the issue date to the reporting
period date are charged to compensation expense.

Earnings per share

l)
Basic earnings per common share is calculated using the weighted daily average number of common shares outstanding. The
weighted average number of common shares for 2007 was 62,835,303 (2006: 59,887,382; 2005: 50,461,330). Diluted earnings
per share is calculated using the treasury stock method.

m) Derivative financial instruments
The Company uses foreign exchange contracts to manage foreign exchange risk on certain committed cash outflows, primarily
inventory purchases. When the derivative instruments have been designated and are highly effective at offsetting risks, hedge
accounting is applied. Hedge accounting requires that gains and losses on the hedge instrument are recognized through income in
the same period or manner as the item being hedged. Realized and unrealized foreign exchange gains and losses not designated
as a hedge are included in income. Derivatives are not entered into for speculative purposes and the use of derivative contracts is
governed by documented risk management policies.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management
objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific firm
commitments or forecasted transactions. The Company assesses, both at the inception of the hedge and on an ongoing basis, whether
the derivatives that are used in hedging transactions are highly effective in offsetting changes in the cash flows of hedged items.

Use of estimates

n)
The preparation of consolidated financial statements in conformity with Canadian generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the
reporting periods. In particular, inventories, accounts receivable, estimated useful lives, asset retirement obligations, fair values,
pension and benefit obligations, other contingencies, and assigned values on net assets acquired represent management’s best
estimates. Actual results could differ from these estimates.

3 2 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

Changes in Accounting Policies
On January 1, 2007, the Company adopted six new accounting standards: CICA Handbook section 1506, Accounting

2.
a)
Changes; CICA Handbook section 1530, Comprehensive Income; CICA Handbook section 3855, Financial Instruments –
Recognition and Measurement; CICA Handbook section 3861, Financial Instruments – Disclosure and Presentation; CICA Handbook
section 3865, Hedges; and CICA Handbook section 3251, Equity.

Certain of these new standards require the Company to classify all financial instruments resulting in certain financial instruments
being valued at fair value on the balance sheet. As permitted, the Company chose January 1, 2003 as the transition date for the
search for embedded derivatives. The impact of this change in accounting policy is presented as a transitional adjustment in
opening retained earnings and opening accumulated other comprehensive income as appropriate. In compliance with the
standards, prior periods are not restated, except for the cumulative translation adjustment which has been reclassified to
accumulated other comprehensive income.

i) Comprehensive Income
This standard provides guidance on the presentation of comprehensive income, which is defined as the change in equity
during a period from transactions and other events from non-owner sources. Comprehensive income is comprised of net
earnings and other comprehensive income (OCI). OCI includes certain gains and losses that are recognized outside of net
earnings. The major components of the Company’s OCI are the cumulative translation adjustment and the effective portion
of cash flow hedges including the fixed for fixed cross currency swaps which are designated as a cash flow hedge of a
portion of our U.S. Senior Notes. Our consolidated financial statements include a new Statement of Comprehensive Income.
The accumulated OCI, which includes the Company’s cumulative translation adjustment, is presented as a new category of
Shareholders’ Equity in our Consolidated Balance Sheets and the Company has disclosed its components in the
Consolidated Statements of Accumulated Other Comprehensive Loss.

ii) Financial Instruments
The recognition and measurement standard provides guidance for recognizing and measuring financial assets, financial
liabilities and non-financial derivatives, which are classified as held-for-trading, available-for-sale, held-to-maturity, loans and
receivables or other liabilities. The Company’s held-for-trading assets include investments, bank accounts, forward exchange
contracts and embedded derivatives in inventory purchases. The Company currently does not have any assets classified as
available-for-sale or held-to-maturity. Accounts receivable are classified under loans and receivables, and accounts payable
and long-term debt are classified as other financial liabilities. Financial assets and financial liabilities classified as held-for-
trading are measured at fair value with gains and losses recognized in net income. Financial assets classified as held-to-
maturity, loans and receivables and financial liabilities not classified as held-for-sale are measured at amortized cost using
the effective interest method.

Derivative instruments, including embedded derivatives, are recorded on the balance sheet at fair value as Other Assets,
Other Accrued Liabilities or Derivatives. Changes in fair value are recognized in net income except for derivatives designated
as cash flow hedges, whose change in fair value is recognized in OCI. Fair values were determined using quoted market
values for similar instruments or other third party information.

Available-for-sale financial assets are measured at fair value. Unrealized gains and losses on available-for-sale financial
assets and derivatives designated as cash flow hedges are recorded through OCI.

The standard provides an accounting policy choice on the treatment of transactions costs. The Company’s accounting policy
is to capitalize transaction costs to the carrying amount of the associated debt and to amortize them to net interest expense
using the effective interest method.

The disclosure and presentation standard provides guidance on the disclosure and presentation under the new financial
instruments standards.

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 3 3

> notes to the consolidated financial statements cont’d

iii) Hedges
This standard replaces existing hedge accounting guidance in CICA Handbook section 1650, Foreign Currency Translation,
and accounting guideline AcG-13, Hedging Relationships, and provides requirements for the designation, documentation,
accounting and disclosure of qualifying hedge relationships. The Company’s cash flow hedges on a portion of its US$175 million
Senior Notes are recorded at fair value on the balance sheet with gains and losses recorded through OCI until realized.
The adoption of the hedging standard has not had a material effect on the Company’s results of operations or cash flows;
however, the effective portion of the cash flow hedges is recorded as a component of OCI.

iv) Transitional Adjustment
The transitional adjustments relating to financial instruments, including embedded derivatives, are recorded in opening
retained earnings as at January 1, 2007. These adjustments include (i) financial instruments classified as held-for-trading
that were not previously recorded at fair value, and (ii) deferred gains and losses on discontinued hedging relationships that
do not qualify for hedge accounting under the new standards.

Adjustments arising as a result of re-measuring hedging instruments designated as cash flow hedges are recognized in the
opening balance of accumulated other comprehensive loss.

Transitional adjustments were as follows:

(millions)

Financial instruments classified as held-for-trading, net of tax of $0.6
Deferred gain on discontinued hedging relations, net of tax of $0.3

Transitional adjustment – retained earnings

Fair value of cash flow hedges, net of tax of $4.4

Transitional adjustment – accumulated other comprehensive loss

January 1, 2007

(1.0)
0.5

(0.5)

(9.3)

The fair value of the cash flow hedges, which include amounts previously recorded as other accrued liabilities, are recorded as
derivatives on the consolidated balance sheet.

v) Accounting Changes and Equity
The adoption of these standards did not have a material effect on the Company’s results of operation, financial position or cash flows.

3 4 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

On September 30, 2006, the Company adopted EIC-162, Stock-Based Compensation for Employees Eligible to Retire Before

b)
the Vesting Date. This standard requires that the compensation cost attributable to stock options be recognized over the period from
grant date to the date the employee becomes eligible to retire. The impact of adopting this standard was an increase to the 2006
compensation expense of $0.9 million. The standard requires retroactive restatement of prior periods and accordingly income was
reduced and contributed surplus was increased by $0.2 million for the year ended December 31, 2005.

On January 1, 2006, the Company adopted EIC-156, Accounting by a Vendor for Consideration Given to a Customer (including a

c)
Reseller of the Vendor’s Products). This standard requires that the consideration given to a customer, such as rebates, be recorded
as a reduction of revenues, not as cost of sales or as an operating expense. The standard requires retroactive restatement of prior
periods and, accordingly, revenues and cost of sales for the year ended December 31, 2005 were reduced by $1.2 million but had no
impact on net earnings.

Future Accounting Changes

3.
In June 2007, the CICA issued a new accounting standard: CICA Handbook section 3031, Inventories. This standard is effective for
fiscal years beginning on or after January 1, 2008. The standard requires certain costs, previously recorded as period costs, be
allocated to inventory and included in cost of sales when inventory is sold. Prior to the adoption of this standard, these costs were
treated as operating expenses. The Company is adopting this standard effective January 1, 2008. Prior periods will not be restated.
The adoption of this standard is not expected to have a material effect on the Company’s results of operations or cash flows.

In addition, during 2007 the CICA issued section 3862, Financial Instruments – Disclosures and section 3863, Financial Instruments
– Presentation, which provide enhanced disclosure and presentation requirements and replace section 3861, Financial Instruments –
Disclosure and Presentation. The CICA also issued section 1535, Capital Disclosures, which provides guidance on disclosure of the
entity’s objectives, policies and processes for managing capital. The Company does not expect that the adoption of these standards
will have a material impact on its consolidated financial statements.

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 3 5

> notes to the consolidated financial statements cont’d

Acquisition

4.
On September 28, 2007, the Company completed its acquisition of 100% of the outstanding shares of JMS Metal Services, Inc. and
related companies. JMS Metal Services is part of the metals service centers segment (Note 16).

The Company has accounted for the acquisition using the purchase method. The purchase price is allocated to the assets acquired
and liabilities assumed based on their estimated fair value at the date of acquisition. The Company’s purchase price allocations are
as follows:

(millions)

Accounts receivable

Inventories

Prepaids and other assets

Property, plant and equipment

Accounts payable and accrued liabilities

Intangible assets

Goodwill

Net identifiable assets

Debt assumed

Cash

Net assets acquired

Consideration:

Cash

Transaction costs

18.2

24.3

0.2

44.0

(15.6)

8.9

36.1

116.1

(7.1)

109.0

4.9

113.9

112.7

1.2

113.9

The cash consideration and purchase price allocation is subject to change due to tax election and other adjustments under the acquisition
agreement that will be finalized by September 30, 2008. The structure of the acquisition includes an election which qualifies the goodwill to be
tax deductible in the United States.

3 6 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

5.
a)

Goodwill, Intangibles and Restructuring
Components of goodwill and intangibles were as follows:

(millions)

Customer lists – metals service centers

Goodwill – metals service centers

Goodwill – energy tubular products

The continuity of goodwill is as follows:
(millions)

Balance – beginning of year

Goodwill acquired

Foreign exchange

Balance – end of year

The continuity of intangibles is as follows:
(millions)

Customer lists acquired

Amortization

Foreign exchange

2007

2006

2005

8.6

–

43.4

1.4

53.4

7.8

1.4

9.2

2007

2006

9.2

36.1

(0.5)

–

44.8

9.2

–

7.8

1.4

9.2

2005

9.2

–

9.2

2007

8.9

(0.1)

(0.2)

8.6

Goodwill impairment

b)
The Company completed its annual goodwill impairment tests using projected discounted cash flows, during the fourth quarter of
2007 and 2006, resulting in no impairment charge.

Restructuring

c)
Restructuring of the Company’s metals service center segment’s operations as a result of acquisitions is charged to income as
incurred. Under certain conditions, restructuring relating to the acquired operation is included in the net assets acquired. There was
no restructuring accrued as part of the JMS Metal Services acquisition.

Restructuring recorded in income:

(millions)

Gain on Assets Held for Sale

Impairment loss – Ontario branch

Ontario branch severance and other employee termination costs

Restructuring (Note 11)

2007

2006

2005

–

(1.2)

–

(1.2)

(2.9)

1.3

0.5

(1.1)

During 2005, the Company announced the closure of its Milton, Ontario branch. The Company determined, based on a valuation,
that the carrying amount of the property and equipment was greater than the fair value and recorded an impairment loss in 2005
of $1.3 million. On December 31, 2005, the Company vacated the property and accordingly classified its carrying value of
$5.1 million as an Asset Held for Sale. On May 18, 2006, the Company sold the Milton, Ontario location for $6.2 million. The
resulting gain of $1.2 million was recorded in restructuring. The Company provided for contractual termination costs
of $0.5 million relating to the employees terminated at this location in 2005.

On May 2, 2005, the Company sold its Lachine property for net proceeds of $5.8 million. The before tax gain of $2.9 million was
recorded in restructuring.

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 3 7

> notes to the consolidated financial statements cont’d

Discontinued Operations and Divestitures

6.
As part of the acquisition of Acier Leroux in 2003, the Company adopted a formal plan to dispose of the Acier Leroux U.S.
operations and classified them as discontinued, all of which were divested. During 2007, the Company resolved the remaining
issues relating to these operations and recorded a recovery of $1.6 million.

On May 10, 2005, the Company sold its investment in Armabec Inc., a metals service center, for book value less selling costs. In the
second quarter of 2005, as a result of this divestiture, the Company classified Armabec Inc. as discontinued, and the revenue and
results of operations for the period from January 1, 2005 to the date of sale were reclassified to discontinued operations accordingly.

On February 23, 2005, the Company sold its investment in Poutrelles Delta, for $4.1 million in cash with no gain or loss upon sale.
The revenue and results of operations for Poutrelles Delta for 2005 and prior periods were reclassified as discontinued.

Basic and fully diluted loss per share from discontinued operations was $0.03 (2005 and 2006: $nil).

Property, Plant and Equipment

(millions)

Land and buildings

Machinery and equipment

Leasehold improvements

Cost

2007
Net

Cost

171.4

126.3

144.0

234.2

26.3

92.0

9.6

207.8

26.1

2006
Net

103.3

76.2

10.0

431.9

227.9

377.9

189.5

The Company has asset retirement obligations relating to the land lease for its Thunder Bay Terminal operations whose lease term
expires in 2017. The landlord has the option to retain the facilities or to require the Company to remove them. In addition, the
Company has end-of-lease obligations in six of its service center operations.

During the year ended December 31, 2007, the Company increased its probability-weighted undiscounted expected cash flow
relating to its asset retirement obligations and the probability-weighted discounted expected cash flow by insignificant amounts as
a result of an increase in forecasted costs. The probability range was 50% to 99% and the discount rate used was 10%. The asset
retirement obligation, including applicable accretion at December 31, 2007, was $0.5 million (2006: $0.5 million) and the
undiscounted expected cash flow relating to its asset retirement obligation was $1.6 million (2006: $1.6 million).

Other Assets

8.
Other assets includes $9.9 million of asset-backed commercial paper. As at December 31, 2007, the Company held an $11.0 million
investment in non-bank Canadian asset-backed commercial paper (ABCP). This investment matured on August 23, 2007 but was not
repaid due to a disruption of the Canadian ABCP market. The Montreal Group representing banks, asset-backed commercial paper
providers and major investors has reached an agreement to restructure the ABCP market. This restructuring, which is expected to be
completed by March 31, 2008, will replace the existing short-term investments with longer term notes with a maturity of 7 years, on
average. These notes will be issued as Senior and Subordinated Notes and a margin facility will be in place for those investors who
do not wish to self finance margin calls.

At December 31, 2007, the Company made a fair value determination of this investment. There is no active market for this type of
investment, therefore the Company used a probability-weighted valuation technique considering the time value of money and the
associated credit risk. The Company used the following assumptions in its valuation based on limited available information: the trust
is a going concern, the Senior Notes will be AAA rated, and the Notes will be interest bearing but interest received will be net of the
restructuring costs and the standby fees on the margin facility. The credit risk interest premium was estimated by management and
these estimates are not based on observable market prices or rates. Changes in the assumptions may have an effect on the fair
market value of this investment. In addition, there is no certainty regarding the eventual recovery of this investment and, consequently,
the timing and amount of any future cash flows may vary materially from current estimates.

The fair value write-down of this investment was $1.1 million (Note 11) for the year ended December 31, 2007. The fair value
write-down could range from $0.6 million to $2.2 million based on alternative reasonable assumptions. Since the investment is no
longer capable of reasonably prompt liquidation, the Company has reclassified this investment to long-term in other assets. This
investment continues to be classified as held-for-trading.

3 8 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

Revolving Credit Facilities

9.
On December 27, 2007, the Company extended its credit facility for an additional period to January 15, 2011. This facility was originally
entered into with a syndicate of banks on October 29, 2004. This facility provides a line of credit to a maximum of $200 million, including
letters of credit. This three-year facility provides for annual extensions. Borrowings under this facility are restricted by certain financial
covenants which the Company was in compliance with at December 31, 2007. The obligations of the Company under this agreement are
secured by a pledge of trade accounts receivable and inventories of a significant portion of the Company’s operations. At December 31,
2007 and 2006, the Company had no borrowings and letters of credit of $13.6 million and $54.8 million, respectively.

In addition, a U.S. subsidiary has its own credit facility. The maximum borrowing under this facility is US$50.0 million. At December 31,
2007 and 2006, this subsidiary had no borrowings and letters of credit of US$14.6 million and US$36.1 million, respectively.

Long-Term Debt

10.
The long-term debt was comprised of the following:

(millions)

6.375% US$175 million Senior Notes due March 1, 2014

Capital lease obligations – Arkansas development bonds

Less: current portion

2007

169.0

6.8

(0.9)

2006

203.9

–

174.9

203.9

On February 20, 2004, the Company issued US$175 million Senior Notes due March 1, 2014, bearing interest at 6.375%.

The Company entered into fixed for fixed cross currency swaps with major banks to manage the foreign currency exposure on
US$100 million of the 6.375% Senior Notes. On the swaps, the Company receives U.S. denominated interest at 6.375% on a
notional US$100 million and pays Canadian dollar interest at 7.12% on a notional $131.8 million. As part of the swaps, the Company
exchanged US$100 million for $131.8 million on February 20, 2004 and will receive US$100 million for $131.8 million on March 1, 2014.
Both the swap counterparties and the Company have the right to early terminate the swaps in the first quarter of 2009. Effective
January 1, 2007, the swaps are recorded at fair value on the balance sheet. The Company has designated the swaps as a cash flow
hedge of its long-term debt. The effective portion of the change in fair value is recorded through other comprehensive income and the
ineffective portion is recorded through net income. The ineffective portion charged to income in 2007 was $0.9 million (Note 11).

The US$175 million Senior Notes are redeemable, in whole or in part, at the option of the Company on or after March 1, 2009 at
103.188% of the principal amount declining rateably to 100% of the principal amount on or after March 1, 2012. In addition, the
Senior Notes are also redeemable, in whole, at the option of the Company at any time at 100% of the principal amount in the event
of certain changes affecting Canadian withholding taxes. The Senior Notes contain certain restrictions on the payment of common
share dividends in excess of $0.08 per share per quarter. Fees associated with the issue of the debt have been recorded as
deferred charges and, effective January 1, 2007, these costs are included in the carrying amount of the debt and amortized using
the effective interest method. The Company was in compliance with all debt covenants at December 31, 2007.

On September 28, 2007, the Company assumed certain capital lease obligations as part of the JMS Metal Services acquisition.
Obligations on these capital leases have maturities as follows: March 1, 2014: $2.2 million; May 1, 2014: $3.0 million and
September 1, 2017: $2.2 million.

Interest rates on these capital leases range from 2.4% to 5.4%. These leases require annual payments as follows: 2008: $1.3 million;
2009: $1.3 million; 2010: $1.3 million; 2011: $1.3 million; 2012: $1.3 million; 2013 and beyond: $2.7 million.

11. Other Expense (Income)

(millions)

Unrealized loss on investment (Note 8)

Ineffectiveness on cash flow hedges (Note 10)

Change in fair value of financial instruments

Restructuring (Note 5)

2007

2006

2005

1.1

0.9

0.5

–

(1.2)

2.5

(1.2)

–

(1.1)

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 3 9

> notes to the consolidated financial statements cont’d

12.

Interest Expense

(millions)

Interest on long-term debt

Other interest expense

Interest income

2007

2006

15.3

14.8

0.2

(8.4)

0.4

(8.5)

7.1

6.7

2005

15.2

2.3

–

17.5

Total interest paid by the Company in 2007 was $15.2 million (2006: $14.8 million; 2005: $17.7 million).

13.

Income Taxes

The non-current future income tax balances consisted of:

2007

2006

0.8

0.2

–

1.0

–

1.0

(8.2)

(0.1)

1.7

0.8

(5.8)

(4.8) $

0.9

0.2

0.4

1.7

(1.3)

0.4

(7.7)

(0.1)

(0.8)

1.8

(6.8)

(6.4)

(millions)

Future income tax assets

Pensions and benefits

Other timing

Tax benefits of loss carryforwards

Plant and equipment

Gross future income tax assets

Valuation allowance

Total future income tax assets

Future income tax liabilities

Plant and equipment

Pensions and benefits

Other timing

Items charged to equity

Total future income tax liabilities

Net future income taxes

4 0 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

The Company’s effective income tax rate was derived as follows:

(millions)

Average combined statutory rate

Rate difference of U.S. companies

Recognition of previously unrecorded tax benefits

Statutory tax rate changes

Stock compensation not deductible

Other

Average effective tax rate

The details of the income tax provision are as follows:

(millions)

Current provision

Future provision

Statutory rate adjustments

2007

34.3%

1.1%

(1.0%)

(0.3%)

1.2%

0.1%

35.4%

2006

34.5%

1.1%

(0.5%)

(0.2%)

0.5%

(0.6%)

34.8%

2007

2006

55.9

80.9

4.7

(0.5)

4.3

(0.4)

60.1

84.8

2005

35.5%

0.7%

(1.3%)

–

0.3%

(2.6%)

32.6%

2005

54.1

6.3

–

60.4

Income taxes paid in 2007 were $75.7 million (2006: $71.0 million; 2005: $110.4 million).

The Company has utilized all of its net operating losses of $1.2 million previously carried forward. At December 31, 2007, the

Company had capital losses of $39.4 million (2006: $41.0 million) which do not expire. A valuation allowance has been recorded as

the realization of these losses is not more likely than not.

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 4 1

> notes to the consolidated financial statements cont’d

14. Shareholders’ Equity
a)

The components of shareholders’ equity are as follows:

(millions)

Common shares

Retained earnings

Contributed surplus (related to stock-based compensation)

Accumulated other comprehensive loss

2007

504.2

411.7

6.2

(38.3)

2006

491.2

411.1

3.5

(11.2)

883.8

894.6

At December 31, 2007 and 2006, the authorized share capital of the Company consisted of:

(i) an unlimited number of common shares without nominal or par value;

(ii) an unlimited number of Class I preferred shares without nominal or par value, issuable in series; and

(iii) an unlimited number of Class II preferred shares without nominal or par value, issuable in series.

The directors have the authority to issue the Class I and Class II preferred shares in series and fix the designation, rights,
privileges and conditions to be attached to each series, except that the Class I shares shall be entitled to preference over the
Class II shares with respect to the payment of dividends and the distribution of assets in the event of liquidation, dissolution or
winding-up of the Company.

The number of common shares issued and outstanding at December 31 was as follows:

Balance, December 31, 2005

Common shares issued – public offering

Stock options exercised

Balance, December 31, 2006

Stock options exercised

Balance, December 31, 2007

Number of
Shares

Amount
(millions)

50,656,009

11,000,000

710,833

62,366,842

699,250

63,066,092

208.1

275.3

7.8

491.2

13.0

504.2

On March 16, 2006, the Company closed its public offering of 10,000,000 common shares at a price of $25.75 per share and
received net proceeds of $246.7 million. The Company granted the underwriters an option to purchase up to an additional
1,000,000 common shares on the same terms as the issue. These additional shares were issued on March 30, 2006 for net
proceeds of $24.7 million. In addition to the underwriters fees, expenses of $0.5 million have also been netted from the proceeds of
this offering and the tax benefits of $3.9 million associated with the share issue costs have been recorded in share capital.

The Company has a shareholder-approved share option plan, the purpose of which is to provide the employees of the

d)
Company and its subsidiaries with the opportunity to participate in the growth and development of the Company. The number of
common shares that may be issued under the share option plan is 5% of the current issued and outstanding common shares.
The options are exercisable on a cumulative basis to the extent of 20% per year of total options granted, except that under certain
specified conditions the options become exercisable immediately. The consideration paid by employees for purchase of common
shares is added to share capital.

4 2 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

The following is a continuity of options outstanding:

Number of Options

Weighted Average Exercise Price

Balance, beginning of the year

2,014,033

1,869,466

18.09

2007

2006

2007

Granted

Exercised

Expired or forfeited

Balance, end of the year

Exercisable

845,500

865,000

(699,250)

(710,833)

(13,600)

(9,600)

2,146,683

2,014,033

449,183

326,233

33.81

15.55

24.44

25.07

24.15

The outstanding options had an exercise price range as follows:

2006

11.12

25.88

9.23

19.20

18.09

20.29

2006

858,500

633,600

371,400

150,533

2007

1,481,350

424,900

215,600

24,833

2,146,683

2,014,033

(number of options)

$25.75 – $33.81

$9.16 – $15.85

$5.50 – $9.15

$3.00 – $5.49

Options outstanding

The options expire in the years 2010 to 2017 and have a weighted average remaining contractual life of 7.3 years (2006: 7.5 years).

The Black-Scholes option-pricing model assumptions used to compute compensation expense under the fair value-based
method are as follows:

Dividend yield

Expected volatility

Expected life

Risk free rate of return

2007

28%

5 yrs

2006

29%

5 yrs

2005

25%

7 yrs

Weighted average fair value of options granted

5.99

5.05

2.93

The Company has established a Deferred Share Unit (DSU) plan for its non-executive directors. A DSU entitles the holder to receive,

e)
upon redemption, a cash payment equivalent to the market value of a common share at the redemption date. DSUs are credited to the
director accounts on a quarterly basis and vest immediately. At December 31, 2007, there were 27,673 DSUs outstanding (2006: 20,981).

Total compensation cost for stock-based compensation was as follows:

(millions)

Stock options

Deferred share units

Diluted share amounts as restated were computed as follows:

(number of shares)

Weighted average shares outstanding

Dilution impact of stock options

2007

2006

2005

4.8

0.1

4.9

3.4

0.2

3.6

1.5

0.3

1.8

2007

2006

2005

62,835,303

59,887,382

50,461,330

415,088

562,688

591,797

Diluted weighted average shares outstanding

63,250,391

60,450,070

51,053,127

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 4 3

> notes to the consolidated financial statements cont’d

Fair value

15. Financial Instruments
a)
The Company records its debt at amortized cost using the effective interest method. The fair value of long-term debt as at
December 31, 2007 and 2006 is estimated based on the last quoted trade price, where it exists, or on the current rates available
to the Company for similar debt of the same remaining maturities. The fair value of the Company’s Senior Notes at December 31,
2007 was US$162.0 million (2006: US$166.9 million).

The fixed cross currency swaps (derivatives) qualify for hedge accounting because of high correlation and effectiveness between the
hedging instrument and hedged item. The swaps are measured at market value at the balance sheet date, recorded on the balance
sheet under the caption Derivatives, and the effective portion of the gains or losses on the derivatives are recorded in other
comprehensive income until maturity. The ineffectiveness is measured and recognized in the statement of earnings with an offset
to other comprehensive income. Prior to January 1, 2007 the difference between the foreign exchange rate on the swaps and the
period end exchange rate was recorded under the caption Other Accrued Liabilities (2006: $15.4 million).

As at December 31, 2007 and 2006, the estimated fair value of other financial assets and liabilities approximates their
carrying values.

Credit risk

The Company, in the normal course of business, is exposed to credit risk relating to accounts receivable from its customers. This

risk is mitigated by the fact that its customer base is geographically diverse and in different industries. The Company is also

exposed to credit risk from the potential default by any of its counterparties on its foreign exchange forward contracts and the fixed

for fixed cross currency swaps. The Company mitigates this risk by entering into forward contracts and swaps with members of its

credit facility syndicate.

Interest rate risk

The Company is not exposed to significant interest rate risk. The Company’s long-term debt is at fixed rates. The Company’s cash

and cash equivalents used to finance working capital, which is short-term in nature, are at floating interest rates.

Foreign exchange risk

The Company uses foreign exchange contracts with maturities of less than a year to manage foreign exchange risk on certain future

committed cash outflows. As at December 31, 2007, the Company had outstanding forward foreign exchange contracts in the
amounts of US$11.5 million and €3.5 million, maturing in the first half of 2008 (2006: US$16.5 million and € nil). The foreign
exchange gain on U.S. denominated financial assets and liabilities included in 2007 operating earnings from continuing operations

was $3.8 million (2006: $1.7 million; 2005: $1.6 million).

In order to mitigate its foreign exchange exposure, the Company has designated its swaps as a hedge of US$115 million of its long-

term debt. In addition, the Company has designated a portion of the Senior Notes not hedged by the swaps as a hedge of its net

investment in foreign subsidiaries.

16. Segmented Information
The Company conducts business primarily in three metals business segments:

ii)

iii)

Metals service centers
The Company’s network of metals service centers provides processing and distribution services on a broad line of
metal products in a wide range of sizes, shapes and specifications, including carbon hot rolled and cold finished steel,
pipe and tubular products, stainless steel and aluminum. The Company services all major geographic regions of
Canada and certain regions in the Southeastern and Midwestern United States.

Energy tubular products
The Company’s energy tubular products operations distribute oil country tubular products, line pipe, tubes, valves and
fittings, primarily to the energy sector in Western Canada and western United States.

Steel distributors
The Company’s steel distributors act as master distributors selling steel to customers in large volumes, mainly on an
“as is” basis. The steel distributors source their steel domestically and off shore.

4 4 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

The Company has segmented its operations on the basis of type of customer, management reporting and geographic segments
in which it operates. The inter-segment sales from steel distributors to metals service centers were $51.9 million (2006:
$85.1 million; 2005: $57.4 million). These sales, which are at market rates, are eliminated in the table following.

Results by business segment:

(millions)

Segment Revenues
Metals service centers

Energy tubular products

Steel distributors

Other

Segment Operating Profits
Metals service centers

Energy tubular products

Steel distributors

Corporate expenses

Other income

Capital Expenditures
Metals service centers

Energy tubular products

Steel distributors

Other

Depreciation Expense
Metals service centers

Energy tubular products

Steel distributors

Other

Identifiable Assets
Metals service centers

Energy tubular products

Steel distributors

Identifiable assets by segment

Assets not included in segments

Cash

Income tax assets

Deferred financing charges

Other assets

Corporate and other operating assets

Total assets

2007

2006

2005

1,435.2

1,507.9

1,538.5

677.2

436.1

2,548.5
10.7
2,559.2

614.3

559.4

2,681.6
10.5
2,692.1

595.2

468.7

2,602.4
11.7
2,614.1

101.9

126.4

115.2

54.5

39.1

195.5

(18.6)

2.4

62.2

76.7

265.3

(18.2)

1.9

179.3

249.0

54.0

46.6

215.8

(16.8)

2.4

201.4

13.8

24.4

23.6

2.3

0.3

0.2

2.8

0.3

0.1

1.5

0.2

1.2

16.6

27.6

26.5

16.9

15.8

15.1

1.3

0.4

0.9

1.1

0.4

1.1

1.0

0.4

1.2

19.5

18.4

17.7

693.0

618.7

358.0

128.7

359.3

195.3

583.8

281.0

138.1

1,179.7

1,173.3

1,002.9

181.8

4.9

0.3

11.8

24.8

209.9

2.5

6.8

3.2

26.5

47.1

1.3

7.3

2.8

33.8

1,403.3

1,422.2

1,095.2

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 4 5

> notes to the consolidated financial statements cont’d

Results by geographic segment:

(millions)

Segment Revenues

Canada

United States

Segment Operating Profits

Canada

United States

Identifiable Assets

Canada

United States

2007

2006

2005

1,916.1

1,999.8

1,983.8

632.4

681.8

618.6

2,548.5

2,681.6

2,602.4

144.0

190.8

51.5

74.5

195.5

265.3

856.2

946.4

323.5

226.9

161.3

54.5

215.8

839.4

163.5

1,179.7

1,173.3

1,002.9

The Company maintains defined benefit pension plans, post-retirement benefit plans and defined contribution pension plans in

17. Pensions and Benefits
a)
Canada and 401(k) defined contribution pension plans in the United States. Actuarial valuations are performed on defined benefit
plans every three years or earlier if required. The most recent valuations for the Company’s defined benefit pension plans are as follows:

Number of Plans

Valuation Date

January 1, 2005

January 1, 2006

December 31, 2006

January 1, 2007

All of the Company’s pension plans had a measurement date of December 31, 2007.

The components of the Company’s pension and benefit expense included the following:

(millions)

Defined benefit pension plans

Benefits earned during the year

Interest cost on benefit obligation

Expected return on plan assets

Valuation allowance adjustment

Other

Post-retirement benefits

Defined contribution plans – contributions

Related to discontinued operations

Pension and benefit expense

4 6 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

2007

2006

2005

2.5

4.6

(5.5)

0.9

0.5

3.0

0.4

0.8

4.2

2.3

4.4

(4.8)

–

0.7

2.6

0.4

0.6

3.6

(0.2)

4.0

3.4

1.8

4.5

(4.2)

–

0.3

2.4

0.4

0.8

3.6

(0.3)

3.3

The actuarial determinations were based on the following assumptions in each year:

Assumed discount rate – year end

Expected long-term rate of return on plan assets

Rate of increase in future compensation

Rate of increase in future government benefits

2007

2006

2005

5.8%

7.0%

4.0%

3.5%

5.0%

7.0%

4.0%

3.5%

5.0%

7.0%

4.0%

3.5%

The health care cost trend rates used were 5% for dental and 10% graded out for medical, which is reduced 0.5% per year until 5%
and 5% thereafter. A 1% change in trend rates would not result in a significant increase or decrease in either the accrued benefit
obligation or the net periodic cost.

The following information pertains to the Company’s defined benefit pension and other benefit plans, excluding those which

b)
are in the process of being wound up.

(millions)

Reconciliation of accrued benefit obligation

Pension Plans

Other Benefit Plans

2007

2006

2007

2006

Balance, beginning of the year

90.6

87.9

6.8

Current service cost

Participant contribution

Interest cost

Benefits paid

Plan amendments

Actuarial gain

Balance, end of the year

Reconciliation of fair value of plan assets

Balance, beginning of the year

Actual return of plan assets

Employer contributions

Employee contributions

Benefits paid

Balance, end of the year

Unamortized amounts

Funded status – (deficit)

Unrecognized prior service cost

Unamortized net actuarial loss

Valuation allowance

2.5

0.3

4.6

(4.0)

0.1

(10.5)

2.3

0.3

4.4

(4.1)

–

(0.2)

–

0.3

(0.3)

–

(0.2)

83.6

90.6

6.6

78.1

66.3

6.2

4.3

0.3

(4.0)

6.7

8.9

0.3

(4.1)

–

0.3

–

(0.3)

84.9

78.1

–

6.9

–

0.3

(0.4)

–

6.8

–

0.4

–

(0.4)

–

1.3

0.8

3.2

(0.9)

(12.5)

(6.6) $

(6.8)

0.8

14.8

–

0.8

–

1.1

–

Accrued benefit asset (liability)

4.4

3.1

(5.8) $

(5.7)

As at December 31, 2007, one of the defined benefit pension plans in the above table had an unfunded obligation and all executive
pension plans had an unfunded obligation. As at December 31, 2006, all the plans in the above table had an unfunded obligation.

The other benefit plans represent obligations to retired employees of sold or closed businesses. No active employees are entitled to
post-retirement benefits.

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 4 7

> notes to the consolidated financial statements cont’d

(millions)

Defined contribution plans

Fair value of plan assets

Canadian plans

401(k) U.S. plans

2007

2008

6.5

25.0

31.5

6.3

23.6

29.9

As at December 31, 2007, approximately 56% of all pension plan assets were invested in equities, 22% in fixed income

c)
securities, and 22% in cash and cash equivalents. The expected return on plan assets is based on the fair value of plan assets.
Management endeavours to have an asset mix of approximately 55% in equities, 40% in fixed income securities and 5% in cash
and cash equivalents. The investment policy allows up to 30% in cash and cash equivalents. The volatility of the markets has
caused management to invest a correspondingly greater percentage of the pension plan assets in cash and cash equivalents.
The plan assets are not invested in either derivatives or real estate assets.

The expected annual benefits to be paid from the plans are as follows:

Pension
Plans

Other
Benefit Plans

3.6

3.8

4.0

4.3

4.6

29.0

0.4

2.6

2007

2.5

4.9

(6.2)

(10.5)

0.1

(9.2)

0.7

11.0

0.8

3.3

Total

4.0

4.2

4.4

4.7

5.0

31.6

2006

2.3

4.8

(6.7)

(0.2)

–

0.2

1.9

0.8

0.1

3.0

(millions)

2008

2009

2010

2011

2012

2013 – 2017

The elements of defined benefit costs recognized in the year are as follows:

(millions)

Current service costs

Interest on accrued benefit obligation

Actual return on assets

Actuarial gain on accrued benefit obligation

Prior service costs

Elements of future benefit costs

Adjustments to recognize the long-term nature of employee benefit costs:

Difference between expected and actual return on assets

Difference between actuarial losses recognized and actuarial losses incurred

Difference between prior service costs recognized and prior service costs incurred

Defined benefit cost recognized

4 8 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

18. Contingencies, Guarantees and Commitments
a)
The Company and certain of its subsidiaries have been named defendants in a number of legal actions. Although the
outcome of these claims cannot be determined, management intends to defend all claims and has recorded provisions based on
its best estimate of the potential losses. In the opinion of management the resolution of these matters is not expected to have a
materially adverse effect on the Company’s financial position, cash flows or operations.

The Company and its subsidiary companies have operating lease commitments, with varying terms, requiring approximate

b)
annual payments as follows: 2008: $11.2 million; 2009: $10.4 million; 2010: $9.5 million; 2011: $7.5 million; 2012:
$6.1 million, 2013 and beyond: $9.8 million. Rental expense on operating leases was as follows: 2007: $12.4 million; 2006:
$11.8 million and 2005: $11.1 million.

The Company is incurring site cleanup and restoration costs related to properties not utilized in current operations.
c)
Remedial actions are currently underway at three sites. The estimated costs of these cleanups have been provided for based on
management’s best estimates. Additional costs may be incurred at these or other sites as site cleanup and restoration progress,
but the amounts cannot be quantified at this time.

The Company has also entered into other agreements that provide indemnifications to counterparties in certain transactions
d)
including underwriting agreements. These indemnifications generally require the Company to indemnify the counterparties for costs
incurred as a result of losses from litigation that may be suffered by counterparties arising from those transactions. The Company
does not expect to make any payments on these indemnifications and, accordingly, no liability has been accrued.

19. Subsequent Event
On February 18, 2008, the Company approved a normal course issuer bid. The bid allows the purchase on the open market of up
to 6,000,000 common shares over the next twelve months. All purchases will be made in compliance with the by-laws, rules and
policies of the Toronto Stock Exchange.

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 4 9

> canadian metals service centers directory

Operating under the name
Russel Metals, unless
otherwise noted.

CANADA
BRITISH COLUMBIA
Operating under the name
A.J. Forsyth throughout BC

Delta (Vancouver) – Regional Office
830 Carlisle Road, V3M 5P4
Tel: (604) 525-0544

Campbell River
2710 Vigar Road, V9W 6A3
Tel: (250) 287-8841

Fort Nelson
4850 44th Avenue, V0C 1R0
Tel: (250) 774-7553

Fort St. John
10019 Finning Frt.,
Mile 49 1/2 Alaska Highway,
V1J 4M6
Tel: (250) 785-5641

Kelowna
8955 Grigg Road, V4V 2N5
Tel: (250) 766-6050

Kitimat
815 Enterprise Avenue, V8C 2P1
Tel: (250) 632-4702

Nanaimo
1950 East Wellington Road,
V9S 5V2
Tel: (250) 753-1555

Prince George
1154 Pacific Street, V2N 5S3
Tel: (250) 563-1274

990 Industrial Way, V2N 5S1
Tel: (250) 563-1274

ALBERTA
Calgary
5724 40th Street SE, T2C 2A1
Tel: (403) 279-6600

Edmonton
7016 99th Street NW, T6E 3R3
Tel: (780) 439-2051

5730 72A Avenue NW, T6B 3L1
(Specializing in plate processing)
Tel: (780) 439-2051

2471 76th Avenue NW, T6P 1P6
(Specializing in non-ferrous sales)
Tel: (780) 440-0779

Grande Prairie
11035 89th Avenue, T8V 5B9
Tel: (780) 539-3193

Red Deer
6724 Golden West Avenue, T4P 1A8
Tel: (403) 346-2096

SASKATCHEWAN
Regina
445 1st Avenue E, S4N 4Z3
Tel: (306) 721-6411

Russel Metals Specialty Products
475 1st Avenue E, S4N 4Z3
Tel: (306) 721-9355

Saskatoon
922 51st Street E, S7K 5C7
Tel: (306) 931-3338

Russel Metals Specialty Products
3319 Wells Avenue, S7K 5W6
Tel: (306) 931-2257

5 0 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

MANITOBA
Winnipeg
1359 St. James Street, R3H 0K9
Tel: (204) 772-0321

1510 Clarence Avenue, R3T 1T6
Tel: (204) 475-8584

Russel Metals Specialty Products
75 Terracon Place, R2J 4B3
Tel: (204) 772-0321

ONTARIO
Mississauga (Toronto) –
Regional Office
1900 Minnesota Court,
Suite 210, L5N 3C9
(Ontario General Line Sales)
Tel: (905) 819-7777

Aberfoyle (Guelph)
24 Nicholas Beaver Road, RR#3, N1H 6H9
(Specializing in plate processing)
Tel: (519) 767-3800

Burlington
Milspec Industries
5036 South Service Road, L7L 5Y7
(Specializing in strapping)
Tel: (905) 333-0646

Cambridge
15 Cherry Blossom Road, N3H 4R7
Tel: (519) 650-1666

Hamilton
175 Shaw Street, L8N 3S2
(Specializing in non-ferrous sales)
Tel: (905) 522-5930
(Specializing in chain)
Tel: (905) 522-1130

Kingston
191 Dalton Avenue, K7K 6C2
Tel: (613) 546-1281

London
685 Hale Street, N5W 1J1
Tel: (519) 451-1140

Oldcastle (Windsor)
4051 Del Duca Drive, N0R 1L0
Tel: (519) 737-1549

Ottawa
2420 Stevenage Drive, K1G 3W3
Tel: (613) 738-2961

Port Robinson
York – Ennis
200 South Street North, L0S 1K0
Tel: (905) 384-9700

Stoney Creek (Hamilton)
B&T Steel
1052 South Service Road, L8E 6G3
(Specializing in flat rolled)
Tel: (905) 643-3008

McCabe Steel
687 Arvin Avenue, L8E 5R2
Tel: (905) 643-4271

Thunder Bay
620 Norah Crescent, P7C 5V8
Tel: (807) 622-8898

QUEBEC
Boucherville – Regional Office
Acier Leroux
1331, rue Graham-Bell, J4B 6A1
Tel: (450) 641-2280

NEW BRUNSWICK
Edmundston
25, rue Richards, Parc Industriel Nord,
E3V 4H4
Tel: (506) 739-9561

Métaux Russel Produits Spécialisés
1330, rue Graham-Bell, J4B 6H5
Tel: (450) 641-1130

Sackville
141 Crescent Street, E4L 3V2
Tel: (506) 364-1234

Saint John
37 McIlveen Drive,
McAllister Industrial Park,
E2L 4B3
Tel: (506) 635-0005

NOVA SCOTIA
Halifax – Regional Office
28 Lakeside Park Drive, B3T 1A3
Tel: (902) 876-7861

NEWFOUNDLAND
St. John’s (Mount Pearl)
11 Panther Place,
Donovans Industrial Estates,
A1N 5B7
Tel: (709) 364-3300

Acier Richler
1330, rue Graham-Bell, J4B 6H5
Tel: (450) 449-5112

Amos
Acier Leroux
1675, route de l’Aéroport, J9T 3A8
Tel: (819) 732-8381

Baie-Comeau
Acier Leroux
55, avenue William-Dobell, G4Z 1T8
Tel: (418) 296-8626

Chicoutimi
Acier Leroux
2149, rue de la Fonderie, G7H 8C1
Tel: (418) 545-8881

Jonquière
Métaux Russel
2420, rue Bauman, G7S 4S4
Tel: (418) 548-3103

Quebec
Acier Loubier
5225, rue John Molson, G1X 3X4
Tel: (418) 656-9911

Rimouski
Acier Leroux
221, rue des Négociants, G5M 1B7
Tel: (418) 724-4937

Saint-Augustin-de-Desmaures
Acier Leroux
167, rue de Rotterdam, G3A 2K2
Tel: (418) 878-5737

Sept-Îles
Acier Leroux
533, boulevard Laure Est, G4R 4K2
Tel: (418) 962-6374

Terrebonne
Acier Leroux
1025, boulevard des Entreprises,
J6Y 1V2
(Specializing in structurals)
Tel: (514) 333-5380

Thetford Mines
Mégantic Métal
1400, boulevard Frontenac Est,
G6G 5R9
Tel: (418) 338-3188

> united states metals service centers directory

UNITED STATES
Operating under the name
Russel Metals Williams Bahcall
throughout Wisconsin

WISCONSIN
Appleton
975 North Meade Street,
54912 – 1054
Tel: (920) 734-9271

Green Bay
895 Hinkle Street, 54303
Tel: (920) 497-1020

Milwaukee
999 West Armour Avenue, 53221
Tel: (414) 481-7100

OHIO
Solon (Cleveland),
Baldwin International
30403 Bruce Industrial Parkway,
44139
Tel: (440) 248-9500

Operating under the name
JMS Russel Metals

ARKANSAS
Blytheville
5027 N. County Road 1015, 72315
(Specializing in processing)
Tel: (870) 762-9956

1061 James Buchanan Drive, 38301
(Specializing in plate processing)
Tel: (731) 424-6359

ALABAMA
Decatur
1312 Commerce Drive N.W., 35601
Tel: (256) 308-0580

GEORGIA
Trenton
199 South Industrial Blvd., 30752
Tel: (706) 657-5484

Hope
3716 Highway 32 North, 71801
Tel: (870) 972-5802

Jonesboro
2801 Commerce Drive, 72402
Tel: (870) 972-5802

KENTUCKY
Paducah
1455 Bloom Avenue, 42001
Tel: (270) 575-0308

TENNESSEE
Jackson – Regional Office
620 Old Hickory Blvd.,
Suite 400, 38305
Tel: (731) 984-8122

1320 E. Chester, 38301
Tel: (731) 423-3297

> energy tubular products directory

CANADA
Comco Pipe and Supply Company
Edmonton, Alberta
5910 17th Street NW, T6P 1S5
Tel: (780) 440-2000

Calgary, Alberta
9307 48th Street SE, T2C 2R1
Tel: (403) 203-0766

Fort McMurray, Alberta
300 MacDonald Crescent, T9H 4B6
Tel: (780) 743-3404

Stonewall, Manitoba
116 4th Street E, R0C 2Z0
Tel: (204) 467-8797

Guelph, Ontario
Kerr Industrial Park (Aberfoyle), N1H 6H9
Tel: (519) 763-1114

Sarnia, Ontario
1018 Prescot Drive, N7T 7H3
Tel: (519) 332-6666

Dollard des Ormeaux, Quebec
65 boulevard Brunswick,
Suite 106, H9B 2N4
Tel: (514) 421-2455

Fedmet Tubulars
Calgary, Alberta
700 9th Avenue SW,
Suite 2200, T2P 3V4
Tel: (403) 237-0955

Triumph Tubular & Supply
Calgary, Alberta
441 5th Avenue SW,
Suite 875, T2P 2V1
Tel: (403) 262-3777

UNITED STATES
Pioneer Pipe
Woodland, Washington
1780 Down River Drive, 98674
Tel: (360) 225-3101

Orange, California
2430-A N. Glassell Street, 92865
Tel: (714) 998-9938

Lindon, Utah (Provo)
1610 West 200 South, 84042
Tel: (801) 224-8739

Aurora, Colorado
2401 Picadilly Road, 80019
Tel: (303) 307-9021

Denver, Colorado
1660 Lincoln Street,
Suite 2300, 80264
Tel: (303) 289-3201

Houston, Texas
2203 Timberloch Place,
The Woodlands, Suite 125-1,
77380
Tel: (281) 292-2875

Spartan Steel Products
Evergreen, Colorado
2942 Evergreen Parkway,
Suite 300, 80439
Tel: (303) 670-9048

Idyllwild, California
P.O. Box 3496, 92549
Tel: (951) 659-5868

Pittsburg, Texas
P.O. Box 10, 75686
Tel: (903) 856-1800

> steel distributors directory

> other

CANADA
Wirth Steel
Burnaby, British Columbia
4603 Kingsway,
Suite 308, V5H 4M4
Tel: (604) 436-1741

Toronto, Ontario
2 Bloor Street W.,
Suite 700, M4W 3R1
Tel: (416) 961-7311

Montreal, Quebec
1 Westmount Square
Suite 200, H3Z 2P9
Tel: (514) 939-5555

UNITED STATES
Sunbelt Group L.P.
Houston, Texas
1990 Post Oak Boulevard,
Suite 950, 77056-3817
Tel: (713) 840-0550

Overland Park, Kansas
7300 W. 110th Street
Suite 660, 66210
Tel: (913) 491-6660

Arrow Steel Processors
Houston, Texas
8710 Clinton Drive, 77029
Tel: (713) 673-0666

CANADA
Thunder Bay Terminals
Thunder Bay, Ontario
P.O. Box 1800, Station F,
McKellar Island, P7C 5J7
Tel: (807) 625-7800

R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT 5 1

> definitions

Book value per share

Earnings multiple

Equity value divided by ending shares outstanding.

Period ending common share price divided by basic

Debt as % of capitalization

earnings per common share.

Total net interest bearing debt excluding cash on

Free cash flow

hand divided by common shareholders’ equity plus

Cash from operating activities before change in

interest bearing debt excluding cash on hand.

working capital less capital expenditures plus

Dividend per share

proceeds on sale of assets.

The December 15th quarterly dividend annualized.

Interest bearing debt to EBITDA

Dividend yield

The dividend per share divided by the year end

common share price.

EBIT

Earnings from continuing operations before

deduction of interest and income taxes.

EBITDA

Earnings from continuing operations before

deduction of interest, income taxes, depreciation

and amortization.

Total interest bearing debt excluding cash on hand

divided by EBITDA.

Market capitalization

Outstanding common shares times market price

of a common share at December 31.

Return on capital employed

EBIT over net assets employed.

5 2 R U S S E L M E TA L S 2 0 0 7 A N N U A L R E P O RT

RUSSEL METALS is one of

the largest metals distribution

companies in North America.

We conduct business primarily

in three metals distribution

segments: metals service

centers; energy tubular products;

and steel distributors.

> russel metals inc. directory

Head Office
1900 Minnesota Court, Suite 210, Mississauga, Ontario, Canada, L5N 3C9
Tel: (905) 819-7777 Fax: (905) 819-7409 E-mail: info@russelmetals.com Internet: www.russelmetals.com

Shareholder Information
Stock Symbol: The Toronto Stock Exchange – RUS

Board of Directors

Alain Benedetti
Corporate Director

James F. Dinning
Chairman of the Board
Western Financial Group Inc.

Carl R. Fiora
Corporate Director,
steel industry executive

Anthony F. Griffiths
Corporate Director,
Chairman of the Board
Russel Metals Inc.

Alice D. Laberge
Corporate Director

Lise Lachapelle
Corporate Director

John W. Robinson
Corporate Director,
steel industry executive

Edward M. Siegel, Jr.
President and Chief Executive
Officer, Russel Metals Inc.

Officers

Anthony F. Griffiths
Chairman of the Board
Toronto

Edward M. Siegel, Jr.
President and
Chief Executive Officer
Mississauga

Brian R. Hedges
Executive Vice President and
Chief Operating Officer
Mississauga

Marion E. Britton
Vice President and
Chief Financial Officer
Mississauga

Lesley M.S. Coleman
Vice President, Controller and
Assistant Secretary
Mississauga

William M. O’Reilly
Secretary
Davies Ward Phillips & Vineberg LLP
Toronto

Elaine G. Toomey
Assistant Secretary
Mississauga

Corporate Governance
Detailed disclosure concerning the Company’s governance practices may be found in the Management Proxy Circular.

1900 Minnesota Court, Suite 210

Mississauga, Ontario L5N 3C9 Canada

Tel: (905) 819 7777 Fax: (905) 819 7409

info@russelmetals.com www.russelmetals.com

M
E

POSITIONED FOR GROWTH

Annual Report 2007