**Russel Metals Inc.Management's Discussion and Analysis ofFinancial Condition and Results of OperationsFor The Year Ended December 31, 2004**

The following management's discussion and analysis of financial condition and results of operations of Russel Metals Inc. andits subsidiaries provides information to assist the reader and should be read in conjunction with the audited consolidatedfinancial statements for the year ended December 31, 2004, including the notes thereto. Statements contained in this document thatrelate to our beliefs or expectations as to certain future events are not statements of historical fact and are forward-lookingstatements.  We caution readers that there are important factors, risks and uncertainties, including but not limited toeconomic, competitive and governmental factors affecting our operations, markets, products, services and prices that could causeour actual results, performance or achievements to be materially different from those forecasted or anticipated by us in suchforward-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 thatare not prescribed by generally accepted accounting principles (GAAP) and as such may not be comparable to similar measurespresented by other companies.  We believe these measures are commonly employed to measure performance in our industry and areused by analysts, investors, lenders and other interested parties to evaluate financial performance and our ability to incur andservice debt to support our business activities.

The measures we use are specifically defined where they are first used in this report.  Generally, we adjust earningsmeasures to exclude, net of tax, foreign exchange gains or losses, restructuring costs related to the rationalization ofacquisitions, debt restructuring costs and discontinued operations.  We have completed several acquisitions in the last fouryears, which have resulted in restructuring costs for branches that were closed.  These costs have been excluded because theydo not impact our ongoing profitability.

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

Additional information related to Russel Metals Inc. including our Annual Information Form may be obtained from SEDAR atwww.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 metalsdistribution segments: metals service centers; energy tubular products; and steel distributors. In 2004, we have renamed our threebusiness segments to utilize names that we feel are more descriptive of the distribution channels that they service.  Theoperating units within these segments have not changed in the last three years other than as a result of acquisitions.

The unprecedented rate of increase in the price of steel and our acquisition of Acier Leroux in 2003 have been the mostsignificant factors affecting our results for 2004.  We achieved net earnings per share of $3.64 for the year ended December31, 2004, including net earnings per share of $0.87 in the fourth quarter.

During the first quarter of 2004, our long-term debt was completely refinanced at significantly lower interest rates, fixed for10 years.  Our capital structure was simplified with the redemption of our preferred shares and the issue of 5,750,000 commonshares.

The increase in the price of steel also impacted our balance sheet with significant increases in accounts receivable andinventory, which is discussed in more detail below in the liquidity section.
| ***Summarized Financial Information*** |
|----------------------------------------|

The table discloses selected information related to revenue and earning over the last eight quarters.  The quarterlynumbers from September 2003 have been restated to reclassify the operations of Poutrelles Delta to discontinued related to theanticipated sale as required.  The increases in revenues and earnings for all four quarters of 2004 relates most significantlyto the increases in metal pricing.  The acquisition of Acier Leroux in July 2003 has contributed to a lesser extent.  Therevenues and operating earnings of our energy tubular products segment are usually seasonally higher in the first and fourthquarter; however, the appreciation in the price of metal has masked this in 2004.

**2004**
|           | **Three Months Ended**                                    | **Year Ended**                                            |
|------------------------------------|-----------------------------------------------------------|-----------------------------------------------------------|
| *     *   | ****                                                      | **     **                        |
| *(in thousands of dollars,*        | **     **                        | **     **                        | **     ** | **     ** | **     ** |
| *except per share data)*           | **Mar. 31**                                               | **June 30**                                               | **Sept. 30** | **Dec. 31** | **Dec. 31** |
| ****                               |
| Revenues                           | **$  512,879**                                  | **$  590,000**                                  | **$  690,703** | **$  625,042** | **$ 2,418,624** |
| Net earnings                       |                                                           |                                                           |  |  |  |
| -- continuing operations           | **25,596**                                                | **51,362**                                                | **57,820** | **45,991** | **180,769** |
| Net earnings                       | **25,304**                                                | **50,407**                                                | **58,605** | **43,530** | **177,846** |
| **     ** | **     **                        | **     **                        | **     ** | **     ** | **     ** |
| Basic earnings per common share    | **     **                        | **     **                        | **     ** | **     ** | **     ** |
| -- continuing operations           | **$        0.54** | **$        1.05** | **$        1.17** | **$       0.92** | **$          3.70** |
| Basic earnings per common share    | **$        0.53** | **$        1.03** | **$        1.18** | **$       0.87** | **$          3.64** |
| **     ** | **     **                        | **     **                        | **     ** | **     ** | **     ** |
| Diluted earnings per common share  | **     **                        | **     **                        | **     ** | **     ** | **     ** |
| -- continuing operations           | **$        0.53** | **$        1.01** | **$        1.14** | **$       0.91** | **$          3.62** |
| Diluted earnings per common share  | **$        0.52** | **$        1.00** | **$        1.16** | **$       0.86** | **$          3.56** |
| ****                               |

2003
| **     ** | Three Months Ended                                    | Year Ended                                            |
|------------------------------------|-------------------------------------------------------|-------------------------------------------------------|
| *     *   |                                                       |                              |
| *(in thousands of dollars,*        | **     **                    | **     **                    | **     ** | **     ** | **     ** |
| *except per share data)*           | Mar. 31                                               | June 30                                               | Sept. 30 | Dec. 31 | Dec. 31 |
| ****                               |
| Revenues                           | $  367,021                                  | $  339,756                                  | $  389,518 | $  410,688 | $ 1,506,983 |
| Net earnings                       | **     **                    | **     **                    | **     ** | **     ** | **     ** |
| -- continuing operations           | 3,539                                                 | 3,522                                                 | 4,198 | 8,000 | 19,259 |
| Net earnings                       | 3,539                                                 | 3,522                                                 | 3,607 | 7,831 | 18,499 |
|           | **     **                    | **     **                    | **     ** | **     ** | **     ** |
| Basic earnings per common share    | **     **                    | **     **                    | **     ** | **     ** | **     ** |
| -- continuing operations           | $        0.08 | $        0.08 | $        0.09 | $       0.18 | $          0.42 |
| Basic earnings per common share    | $        0.08 | $        0.08 | $        0.07 | $       0.17 | $          0.41 |
| Diluted earnings per common share  |                              |                              |       |       |       |
| -- continuing operations           | $        0.07 | $        0.07 | $        0.09 | $       0.17 | $          0.42 |
| Diluted earnings per common share  | $        0.07 | $        0.07 | $        0.07 | $       0.17 | $          0.39 |
| ****                               |

***Results of Operations***

The following table provides segment operating profits from continuing operations, which excludes interest expense andrestructuring costs.  The corporate expenses included are not allocated to specific operating segments.  The grossmargins (revenue minus cost of sales) as a percentage of revenues for the operating segments are also shown.  The table showsthe segments as they are reported to management, and they are consistent with the segmented reporting in note 12 to our auditedconsolidated financial statements.
|                     |                   |                          |                           | ** 2004**                 | ** ** 2003                |
|----------------------------------------------|--------------------------------------------|---------------------------------------------------|----------------------------------------------------|--------------------------------|--------------------------------|
|                     |                   |                          |                           | ** Change**               | ** ** Change              |
| ***(in thousands of dollars,***              |                   |                          |                           | ** as a %**               | ** ** as a %              |
| ***  except percentages)***        | ** 2004**                             | ** ** 2003                                   | ** ** 2002                                    | ** of 2003**              | ** ** of 2002             |
|                                              |
| *Segment Revenues*                           |                   |                          |                           |       |       |
| Metals service centers                       | ** $ 1,538,170**                 |  $    912,671            |  $    750,878             | ** 69%**                  |  22%                      |
| Energy tubular products                      | **395,296**                                | 297,532                                           | 289,623                                            | ** 33%**                  |  3%                       |
| Steel distributors                           | **471,205**                                | 283,579                                           | 348,055                                            | ** 66%**                  |  (19%)                    |
| Other                                        | **13,953**                                 | 13,201                                            | 14,719                                             | ** 6%**                   |  (10%)                    |
|                                              | **     **         |                          |
| *     *             | ** $ 2,418,624**                 |  $ 1,506,983                            |  $ 1,403,275                             | ** 60%**                  |  7%                       |
|                                              |
| *Segment Operating Profits*                  |                   |                          |                           |       |       |
| Metals service centers                       | ** $    209,850** |  $      37,832 |  $       31,516 | ** 455%**                 |  20%                      |
| Energy tubular products                      | **47,200**                                 | 13,764                                            | 13,612                                             | ** 243%**                 |  1%                       |
| Steel distributors                           | **78,189**                                 | 13,380                                            | 28,090                                             | ** 484%**                 |  (52%)                    |
| Other                                        | **4,565**                                  | 4,002                                             | 5,732                                              | ** 14%**                  |  (30%)                    |
| Corporate expenses                           | **(16,256)**                               | (8,018)                                           | (8,539)                                            | ** (****103%)**           | 6%                             |
|                                              |                   |                          |
| Operating profits from continuing operations | ** $    323,548** |  $      60,960 |  $       70,411 | ** 431%**                 |  (13%)                    |
|                                              |
| *Segment Gross Margin as a % of Revenues*    |                   |                          |                           |       |       |
| Metals service centers                       | ** 30.9%**                            | ** ** 26.3%                                  | ** ** 26.8%                                   |       |       |
| Energy tubular products                      | ** 19.6%**                            | ** ** 11.6%                                  | ** ** 13.1%                                   |       |       |
| Steel distributors                           | ** 23.5%**                            | ** ** 10.8%                                  | ** ** 14.3%                                   |       |       |
| Total operations                             | ** 27.8%**                            | ** ** 20.8%                                  | ** ** 21.3%                                   |       |       |
|                                              |
| *Segment Operating Profits*                  |                   |                          |                           |       |       |
| *  as a % of Revenues*             |                   |                          |                           |       |       |
| Metals service centers                       | ** 13.6%**                            | ** ** 4.1%                                   | ** ** 4.2%                                    |       |       |
| Energy tubular products                      | ** 11.9%**                            | ** ** 4.6%                                   | ** ** 4.7%                                    |       |       |
| Steel distributors                           | ** 16.6%**                            | ** ** 4.7%                                   | ** ** 8.1%                                    |       |       |
|                                              |
| Total operations                             | **13.4%**                                  | 4.0%                                              | 5.0%                                               |       |       |
|                                              |

***Metals service centers***

**

**a)                     Descriptionof operations**

We provide processing and distribution services to a broad base of more than 18,000 end users through a network of 57 Canadianlocations.  In addition, we have 4 U.S. locations.  Our metals service centers carry a broad line of products in a widerange 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 North America and process andpackage them in accordance with end user specifications. We service all major geographic regions of Canada and the Midwest regionin the United States.  Within Canada, the service centers operate under the names Russel Metals, Métaux Russel, A.J.Forsyth, Acier Leroux, Acier Loubier, Acier Richler, Ennisteel, B&T Steel, Leroux Steel, Mégantic Métal, McCabeSteel, Russel Leroux, and Vantage Laser.  Our U.S. service center operations are conducted under the names Russel MetalsWilliams Bahcall and Baldwin International.  The Williams Bahcall operations focus primarily on the distribution of generalline carbon products through three facilities in Wisconsin. Baldwin International distributes specialty alloy products from itsfacility in Ohio.

On July 3, 2003, we completed our acquisition of Acier Leroux inc. Acier Leroux was a publicly traded TSX company with sales ofapproximately $471 million for the year prior to the acquisition date.  Sales from Acier Leroux's Canadian operations for suchperiod were approximately $401 million.  The balance of the revenue was from its U.S. operations, which we immediatelydiscontinued.  During the second quarter of 2004, we finalized the purchase price equation resulting in goodwill of $7.8million.

Our metals service centers results for 2003 include Acier Leroux results for the period from July 3, 2003 to December 31,2003.  The U.S. operations of Acier Leroux, consisting of one small location that we sold in the third quarter of 2004, andthe operations of Poutrelles Delta were reclassified and are reported as discontinued operations and thus are not included in themetals service centers segment.

**b)                     Factorsaffecting results**

The following is a general discussion of the significant factors affecting metals service centers results.  More specificinformation on how these factors impacted 2004, 2003 and 2002 is found in the sections that follow.

Steel pricing fluctuates significantly throughout the business cycle.  Steel prices are influenced by overall demand, tradesanctions and by product availability.  Supply side management, practiced by steel producers in North America, andinternational supply and demand which impacts steel imports affects product availability.  Trade sanctions are initiatedeither by steel mills or governmental agencies in North America, and less directly worldwide.  Over the last several yearssteel prices have been extremely volatile.

Demand is significantly affected by economic cycles with revenues and operating profit fluctuating with the level of generalbusiness activity in the markets serviced.  We are most impacted by the manufacturing, resource and construction segments ofthe Canadian economy.  Demand has been very stable over the last several years.

Canadian service centers, which represent the majority of the metals service centers operations, are particularly affected byregional general economic conditions.  We have operations in all regions of Canada and believe that we have a national marketshare of approximately 24%.  This large market share and our diverse customer base of approximately 18,000 customers mean ourresults should mirror the performance of the regional economies of Canada, excluding the automotive industry.

**c)                     Metalsservice centers segment results -- 2004 compared to 2003**

Revenue for 2004 increased $625 million due to the acquisition of Acier Leroux and the increased price of steel compared to theyear ended December 31, 2003.  We have fully merged the operations of Acier Leroux with that of our service centers and thusthe impact of the acquisition on revenues can only be estimated.  We estimate, before giving effect to the impact of increasesin steel prices, that approximately a quarter of the revenue increase for the year ended December 31, 2004 related to theacquisition of Acier Leroux.  Gross margin percentages and segment operating profits as a percentage of revenue for the AcierLeroux operations are similar to that of our other service center operations and have increased by the same amount.  Increasesin selling prices account for the balance of the increased revenue in 2004.  The selling price increases have occurred acrossall regions and product lines.  The Williams Bahcall operations, which had lost money for a number of years, had a veryprofitable year driven by the price of metal.

In January 2004, steel mills initiated raw material surcharges due to the sharp price increases in scrap metal and other inputcosts that have caused the price of steel to increase substantially.  These charges, which are being applied to all of theservice center carbon steel products, increased from approximately $25 to $30 per ton in January 2004 to an original peak ofapproximately $140 per ton on average in April 2004.  Although surcharges came down from April 2004 to July 2004, prices didnot drop as a number of the mills increased the base price of steel by at least the amount of the drop in the surcharge. Thesurcharge subsequently increased with a new high of approximately $190 per ton in September 2004.  This level has beenmaintained throughout most of the fourth quarter of 2004.  Based on our mix of products, the average cost of metal received,including surcharges, has increased approximately 56% from January 2004 to December 2004.  The increase was more significantin the first half of 2004 with approximately two thirds of the increase occurring in that period.  The average cost of goodsreceived during the fourth quarter of 2004 was relatively stable.

The service center segment has the centralized information systems necessary to manage change in the volatile steelsector.  Its focus is on inventory management and gross margin generation.  Rising steel prices create inventory holdinggains, as demonstrated in the first three quarters of 2004, and declining prices would result in inventory holding losses. The majority of our inventories are accounted for using average cost.  We have estimated that our operating profit for 2004includes a before tax inventory holding gain of approximately $63 million.  This holding gain occurred during the first ninemonths of 2004 and is an estimate based on the best information available.  The selling price and material purchase cost wasmuch more stable over the last three months of 2004.  We are unable to quantify with precision these inventory holding gainsor losses due to the complexity of our over 60 service center locations, which buy and sell over 14,000 different SKU's.

We estimate that the average selling price per ton, for our product mix in the service center segment, has increasedapproximately 43% for 2004 compared to 2003.  The increases in each quarter during 2004 compared to the prior quarter werefirst quarter 17%, second quarter 19%, third quarter 12% and fourth quarter 4%.  The average selling price increase isconsistent with the increase in the cost of metal.

Based on a comparison of inventory at December 31, 2004 to inventory at December 31, 2003, the average cost per ton of inventoryon hand has increased approximately 69%.  Based on announced steel prices for raw material surcharges and the base price ofsteel, we anticipate the cost for inventory purchases to remain at the levels experienced in the fourth quarter of 2004 during thefirst quarter of 2005.

For 2003 and 2004, demand, based on tons sold, excluding the Acier Leroux acquisition, has been surprisingly stable given theincrease in selling price and the stronger Canadian dollar.

We caution readers that the recent trend of large increases in the price of steel has the potential to end with a sudden drop inprices.  We may incur material inventory holding losses or inventory write-downs to estimated market value if the decline israpid and steep.  At this time, we have neither an indication when a decline could occur nor how sharp the decline couldbe.  We believe our conservative inventory management approach will enable us to minimize the impact of a swift pricedecline.  The price increases have resulted in improved operating results for all regions of Canada and United States and adrop in selling price will similarly impact all of the service center operations.

The average revenue per invoice for 2004 was approximately $1,866 compared to the average for the 2003 year of approximately$989.  A significant portion of service center operating expense per order is fixed, and thus operating expense as apercentage of revenue improves with higher revenues per order.

The change in the Canadian dollar versus the U.S. dollar is not a significant factor in the metals service centers results asthe value of sales in U.S. dollars is not significant and inventory is purchased for the Canadian operations from Canadian or U.S.suppliers based on the landed cost at the location in Canada.  We have not noticed a material impact on the purchasingdecisions of our customers as a result of the stronger Canadian dollar, which should have made Canadian manufactured products lesscompetitive in the United States, Canada's largest trading partner.

Operating expenses in the service center segment have increased significantly primarily as a result of the Acier Lerouxacquisition.  In addition, we have a pay for performance program, which covers a large portion of our employees. Provisions for incentive payouts, based on the higher level of profits, have increased operating expenses.  Operating expensesas a percentage of revenues have improved as the higher revenues more than offset the higher expenses.

Service center operating profits for 2004 increased $172 million or 455% compared to 2003.

**d)                     Metalsservice centers segment results-- 2003 compared to 2002**

Revenues for 2003 increased 22% due to the acquisition of Acier Leroux in July 2003.  Revenues from operations, excludingAcier Leroux, were approximately the same as 2002. Excluding Acier Leroux, the tons and selling prices in 2003 approximated thesame levels as 2002.  Alberta and British Columbia experienced higher volume due to increased activity related to the oil andgas industries and a slight pickup in the pulp and paper industry in British Columbia.  Ontario flat rolled operations hadlower volume due to relocation of the facility, whereas the tons in other regions in 2003 were comparable to 2002.  WilliamsBahcall volumes were higher due to the Williams acquisition, but the operation was unprofitable due to generally weak customerdemand in the Wisconsin region.  Gross margins decreased slightly from 26.8% in 2002 to 26.3% in 2003.

Service center operating profits in 2003 increased $6.3 million or 20% compared to 2002.  The increase was a result of theacquisition of Acier Leroux partially offset by lower operating profits in certain of the remaining operations.  The loweroperating profits in all regions, excluding Acier Leroux, in 2003 resulted from the gross margin decline.  Operating expensesin the operations, excluding Acier Leroux, were reduced $1.5 million in 2003.

Operating profits as a percentage of revenue in 2003 were 4.1% compared to 4.2% in 2002.  In the first half of 2003, priorto the acquisition, the service center operating profits as a percentage of revenues were 3.5%.  In the second half of 2003after the acquisition, service center operating profits as a percentage of revenues improved to 4.5% due to the acquisition andimproved conditions across Canada.  In the second half of 2003, revenues were up 39% compared to the first half of 2003 as aresult of the acquisition.

*Energy Tubular Products*

a)                     Descriptionof operations

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

b)                     Factorsaffecting results

The following is a general discussion of the factors affecting our energy tubular products segment operations.  Morespecific information on how these factors impacted 2004, 2003 and 2002 is found in the sections that follow.

Oil and gas pricing, which impacts oil rig count and subsequent drilling activities particularly in Western Canada,significantly affects demand.  Oil and gas pricing has been relatively high from 2001 to 2004, although drilling activity wasslow to reach levels associated with this pricing.  The higher expected activity was reached during the second half of 2003and has continued in 2004.

Canadian operations are affected by the U.S. dollar exchange rate since some products are sourced outside Canada and are pricedin U.S. dollars.  Rising metal prices in 2004 have been more of a factor in higher earnings; however, the appreciation of theCanadian dollar has also contributed to earnings.

Pricing is influenced by overall demand, trade sanctions and by product availability.  Trade sanctions are initiated eitherby steel mills or Governmental Agencies in North America.  Trade sanctions have not been a factor for pipe products in thelast three years.

c)                     Energytubular products segment results --2004 compared to 2003

Revenues increased 33% in 2004 compared to 2003.  Stable oil and gas pricing and more rig activity during 2004 compared to2003 have resulted in some volume increases for the OCTG operations in Western Canada and the Western United States. Increasing prices resulted in higher revenues and the realization of some inventory holding gains.  Comco Pipe, whichdistributes pipe, valves and fittings to other fluid handling industries as well as the energy sector and is heavily involved inproject business, had volumes at similar levels to 2003 as there were no large projects during 2004.  Revenues and operatingprofits have increased with the higher metal pricing.  The segment gross margins as a percentage of revenues were 19.6% for2004 compared to 11.6% for 2003 due mainly to stronger demand and pricing.

Operating profits increased by $33 million or 243% in 2004, compared to 2003.  The increase is due to higher volumes in theOCTG operations and strong margins.

d)                     Energytubular products segment results -- 2003 compared to 2002

Energy sector revenues increased 3% for 2003 compared to 2002.  Stable oil and gas pricing and more rig activity in 2003compared to 2002 resulted in some volume increases for the oil country tubular goods operations in Western Canada.  Comco Pipehad decreased revenue of 25% in 2003 compared to 2002.  Comco had significant revenues from large projects during 2002 thatdid not continue into 2003. Comco's revenues for 2003 were comparable to 2001.

Energy sector operating profits increased by 1% in 2003, compared to 2002.  The increase related to higher volumes in theOCTG operations in Western Canada.  The increased volumes in the OCTG operations offset the lower volumes and profitability inComco operations due to lower project business.

*Steel distributors*

a)                     Descriptionof operations

Our steel distributors act as master distributors selling steel in large volumes to other steel service centers and equipmentmanufacturers mainly on an 'as is' basis.  Our steel distributors source their steel domestically and off shore.  Theinternational presence provides our other business segments with valuable insight regarding international pricing trends and theirpotential 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 thissector are Wirth Steel and Sunbelt Group.  Arrow Steel, a division of Sunbelt Group, processes coils.

b)                     Factorsaffecting results

This section discusses the general factors affecting our steel distributors.  More specific information on how thesefactors impacted 2004, 2003 and 2002 is found in the sections that follow.

Steel pricing is influenced by overall demand, trade sanctions and by product availability both domestically andworldwide.  Trade sanctions are initiated either by steel mills or Governmental Agencies in North America.  Mill capacityby product line in North America and international supply and demand, impacts steel imports and significantly affects productavailability.

The large demand for steel and scrap steel in China has been a significant factor in the price of steel and the availability ofimports to North America.  In addition, this opened up availability of sources within North America, which our steeldistributors were able to source and sell to their customer base.

Movement in the U.S. dollar has some affect on the Canadian steel distributor operations since purchases of inventory are mainlyin U.S. dollars.  Steel is predominately transacted in U.S. dollars and the Canadian price is adjusted accordingly by theCanadian mills.  The effect of the strengthening of the Canadian dollar was offset by rising metal prices.

c)                     Steeldistributors segment --2004 compared to 2003

Steel distributors revenues increased 66% in 2004 compared to 2003 due mainly to higher selling prices and demand for importproduct due to lack of availability of certain products in North America.  In the first quarter of 2004, volumes werenegatively impacted by a lack of supply into North America due to high demand in the Far East and the lower U.S. dollar compared toother currencies.  During the remainder of 2004, the steel distributors operations realized selling prices above average dueto continuous price increases for their products during the year.  This resulted in inventory holding gains on inventory onhand and inventory ordered prior to the January 2004 raw material surcharge added by the North American mills.  The grossmargin achieved in the year continues to be higher than we have previously experienced in the steel distributors segment due to therapid increase in the price of steel in North America and tight supply of certain products; however, it has declined during thelast two quarters of 2004.

Operating expenses have increased due to expenses related to highly variable compensation plans driven by operating profits.

d)                     Steeldistributors segment results-- 2003 compared to 2002

Steel distributors revenues decreased 19% in 2003 compared to 2002.  Selling prices in 2003 had decreased compared to thehigh selling prices experienced in 2002.  Lack of product availability due to high demand in the Far East, uncertainty due toCanadian trade actions, increased production by North American producers and the weaker U.S. dollar contributed to the reducedrevenue and gross margin in 2003 compared to 2002. Gross margin as a percent of revenue was 10.8% for 2003.  The high marginsexperienced in 2002 were directly related to U.S. trade actions, which artificially induced mill price increases on flat rolledsteel. In addition in 2002, lack of product from North American suppliers, who had temporarily banked their steel-making, resultedin higher selling prices and margins for inventory on hand.

Steel distributors operating profits decreased by 52% in 2003 compared to 2002.  Lower demand and the lower margins bothcontributed to this decrease.  The reduced revenues and gross margins resulted in operating profit as a percentage of revenuedecreasing from 8.1% for 2002 to 4.7% for 2003.

***Other***--***2004 compared to 2003***

Other revenue and income includes the results of our coal handling terminal in Thunder Bay, Ontario.  Revenue in 2004 washigher than 2003 due to a favorable product mix.  The higher volumes resulted in higher earnings from operations.

***Corporate -- 2004 compared to 2003***

******

The majority of the corporate expense increase reflects accruals for corporate incentive plans and the expensing of stockoptions.  In addition during 2004, we developed a team to address the Sarbanes-Oxley and OSC regulation internal controlcertification requirements. This work is well under way and will result in increased corporate audit and Sarbanes Oxley employeeexpenses during 2005.

***Consolidated Results*** --***2004 compared to 2003 and 2002***

The following table discloses earnings from continuing operations net of income taxes, other costs net of income taxes anddiscontinued operations net of income taxes.  Earnings per common share are disclosed to assist the reader in determiningresults from ongoing operations.
| ***(in thousands of dollars except per share data)***                       | **2004**                                            | 2003                                            | 2002                                            |
|-----------------------------------------------------------------------------|-----------------------------------------------------|-------------------------------------------------|-------------------------------------------------|
|                                                                             |
| Operating profits from continuing operations                                | **$ 323,548**                                  |  $  60,960                       |  $  70,411                       |
| Interest expense                                                            | **(20,024)**                                        | (22,723)                                        | (20,324)                                        |
| Income tax expense on above                                                 | **(110,495)**                                       | (14,570)                                        | (19,340)                                        |
| Income tax rate adjustment                                                  | **-**                                               | (900)                                           | -                                               |
|                                                                             |
| Earnings from continuing operations                                         | **     **                  | **     **              | **     **              |
| **     ** before other costs                       | **193,029**                                         | 22,767                                          | 30,747                                          |
|                                                                             |
| Other costs                                                                 | **     **                  | **     **              | **     **              |
| **     ** Restructuring costs                      | **(3,632)**                                         | (3,583)                                         | (2,749)                                         |
| **     ** Debt restructuring costs                 | **(13,718)**                                        | -                                               | -                                               |
| **     ** Goodwill impairment                      | **-**                                               | (2,410)                                         | -                                               |
| **     ** Foreign exchange gain                    | **-**                                               | 348                                             | 261                                             |
| **     ** Income taxes recoverable on other costs  | **5,090**                                           | 2,137                                           | 977                                             |
|                                                                             |
| **     **                                          | **(12,260)**                                        | (3,508)                                         | (1,511)                                         |
|                                                                             |
| Earnings from continuing operations                                         | **180,769**                                         | 19,259                                          | 29,236                                          |
| Loss from discontinued operations                                           | **(2,923)**                                         | (760)                                           | -                                               |
|                                                                             |
| Net earnings                                                                | **$ 177,846**                                  |  $  18,499                       |  $  29,236                       |
|                                                                             |
| Basic earnings per common share from                                        | **     **                  |                        |                        |
| **     ** continuing operations before other costs | **$       3.95** |  $      0.51 |  $      0.75 |
|                                                                             |
| Basic earnings per common share from                                        | **     **                  | **     **              | **     **              |
| **     ** continuing operations                    | **$       3.70** |  $      0.42 |  $      0.71 |
|                                                                             |
| Basic earnings per common share                                             | **$       3.64** |  $      0.41 |  $      0.71 |
|                                                                             |

Operating profits from continuing operations before other costs were $323.5 million for 2004, compared to $61.0 million for2003.  The sharp increase in metal prices was the most significant contributor to this increase.  Consolidated revenuesincreased to $2,418.6 million due to the increase in metal prices and the acquisition of Acier Leroux in July 2003.

Operating profits from continuing operations before other costs were $61.0 million in 2003, compared to $70.4 million for 2002.A significant operating profit decline in the steel distributors segment was offset by an increase in metals service centersoperating profit due to the acquisition of Acier Leroux.  Consolidated revenues increased by 7%, to $1,507.0 million, in 2003compared to 2002.  The revenue increase relates to the acquisition of Acier Leroux.

*Interest Expense and Debt Restructuring Costs*

During the first quarter of 2004, we restructured our long-term debt at interest rates that significantly reduce the interestcosts for future periods.  During the fourth quarter of 2004, we finalized a new three year bank facility.

We issued US$175 million of 6.375% Senior Notes due March 1, 2014.  As of June 1, 2004 all other long-term debt wasredeemed.  We also entered into fixed interest cross currency swaps on US$100 million of the 6.375% Senior Notes to eliminatethe foreign exchange exposure on the unhedged US$100 million of the Senior Notes.

After completing the redemption of the remaining 10% Senior Notes on June 1, 2004, we estimate our quarterly interest cost oflong-term debt to be $3.9 million.  This interest expense includes a 60% component, which has been fixed in Canadian dollarterms by the swap, and a 40% component that will float with the average exchange rate in the quarter.  The $3.9 millionestimate is based on an average exchange rate of $1.26 per US$1.00.  The currency swaps result in an interest cost of $0.3million per quarter, which is included in the estimated interest expense of $3.9 million.

The following table shows the components of interest expense.  The preferred share dividends are noted below as thepreferred shares were replaced with interest bearing debt during the first quarter of 2004.  The reduction in interest expenselooks more significant considering the related reduction in preferred share dividends.
| ***(in thousands of dollars)***                              | **2004**                                           | 2003                                                                 | 2002                                                                 |
|--------------------------------------------------------------|----------------------------------------------------|----------------------------------------------------------------------|----------------------------------------------------------------------|
|                                                              |
| Interest on long-term debt                                   | **     **                 | **     **                                   | **     **                                   |
| **     ** 6.375% Senior Notes       | **$ 13,496**                                       | $           - | $           - |
| **     ** 10% Senior Notes          | **2,936**                                          | 16,439                                                               | 18,150                                                               |
| **     ** 8% Convertible Debentures | **557**                                            | 2,400                                                                | 2,400                                                                |
|                                                              |
| **     **                           | **16,989**                                         | 18,839                                                               | 20,550                                                               |
| Other interest (income)                                      | **3,035**                                          | 3,884                                                                | (226)                                                                |
|                                                              |
| Total interest                                               | **$  20,024**                            | $  22,723                                                  | $  20,324                                                  |
|                                                              |
| Preferred share dividends                                    | **$       611** | $    2,250                                       | $    2,250                                       |
|                                                              |

On February 23, 2004, we redeemed US$95.5 million of our 10% Senior Notes at US$1,072.50 per US$1,000 unit.  The US$72.50per unit premium as well as the deferred costs related to the debt redeemed resulted in a charge of $11.3 million in the firstquarter of 2004.

The remaining US$20.1 million of 10% Senior Notes were redeemed on June 1, 2004 at US$1,050 per US$1,000 unit.  TheUS$50.00 per unit premium and the remaining deferred costs resulted in a charge of $1.9 million in the second quarter of2004.  The remaining deferred costs of $0.5 million related to the previous bank facility were charged to debt redemptioncosts in the fourth quarter of 2004.

Consolidated interest expense in 2003 increased $2.4 million to $22.7 million compared to 2002. This was due to highershort-term debt outstanding related to the acquisition of Acier Leroux partially offset by lower exchange rates on U.S. denominatedlong-term debt in 2003 compared to 2002.

*Restructuring Costs*

The rationalization of duplicate Acier Leroux and Russel Metals operations in Eastern Canada has impacted certain Russel Metalslocations.  Russel Metals' locations incurred restructuring costs related to plant closures, employee severances and inventorymoves.  Generally accepted accounting principles in Canada and the U.S. require that these charges be included in the incomestatement in the period that they occur.  Rationalization costs related to the Acier Leroux facilities have been included ingoodwill as part of the purchase price equation.  During 2004, we recorded a charge of $3.6 million mainly related torestructuring at the Russel Metals Ontario locations and the carrying costs of the vacant Lachine, Quebec facility.  Therestructuring charges are substantially complete; however, we anticipate operating costs related to the facility held for sale anda potential gain on the sale of the Lachine property.

In 2003, we recorded a restructuring charge of $3.6 million mainly related to employee severances and pension and benefits forthe closure of our Lachine location at the end of 2003.  Employee-related charges for Ontario and Atlantic regionrestructuring were also recorded during the six months from July to December 2003.

In September 2002, we acquired the Williams Steel operation in Milwaukee, Wisconsin.  Prior to 2004, economic conditions inthe Wisconsin region resulted in significant deterioration in the Williams Bahcall customer base.  As this operation wasunprofitable and did not project a significant improvement over the forecast period, we determined that goodwill of $2.4 millionrelated to this acquisition was impaired.  The goodwill related to Williams Bahcall was reduced to zero in the fourth quarterof 2003.

****

*Income Taxes*

Income taxes for 2004 were $105.4 million compared to $13.3 million in 2003.  The increase relates to higher earnings.

The income tax rate of 36.8 % for 2004 was slightly higher than the average combined statutory rate.  The income tax rateon earnings from continuing operations was 36.4 %, which is in line with the average combined statutory rate.  The taxrecovery on other costs was at a rate of 27.6 % due to the non-deductibility for tax purposes of certain items.

Income taxes for 2003 were $13.3 million compared to $18.4 million in 2002 due to lower earnings.  The income tax expensefor 2003 includes $0.9 million recorded in the fourth quarter of 2003 relating to an Ontario tax rate adjustment enacted, whichreversed tax rate declines previously enacted for the years subsequent to 2003.  The $0.9 million additional expenserepresents the difference in rates applied to future tax liabilities.

*Earnings*

Earnings from continuing operations for 2004 were $180.8 million compared to $19.3 million for 2003.  Basic earnings percommon share from continuing operations for 2004 were $3.70 compared to $0.42 for 2003 and $0.71 in 2002.

Earnings in 2004 were significantly higher than prior years due to increased metal pricing.  These earnings includeinventory holdings gains, which will not be repeated in 2005.  The price of steel during 2005 will be a significant factor inour results.

Net loss from discontinued operations was $2.9 million for 2004.  During 2004, we recorded a provision of $3.2 million, netof income taxes, related to lease obligations under a long-term lease from an operation discontinued in 1995 and environmentalcleanup costs.  The property has been vacant for the last year and we have been unsuccessful in finding a new tenant; thus,the provision previously provided under discontinued operations was not sufficient to cover the remaining lease obligations. We continue to honor our obligations for environmental cleanup at properties utilized by operations disposed in the early1990's.  The U.S. operations of Acier Leroux made $0.3 million during 2004.  We sold the operation in Plattsburgh, NewYork in the third quarter of 2004.  In December 2004, we received a letter from the minority shareholder of our PoutrellesDelta business indicating that it would exercise its right, under an existing shareholders' agreement, to purchase the businessfrom us.  The transaction closed February 23, 2005.  Based on this information, we reclassified the income statement fromJuly 3, 2003 to December 31, 2004 and the balance sheet for December 31, 2004 to discontinued operations.  The net earnings ofPoutrelles Delta of $0.6 million were offset by a loss to write it down to fair value of $0.6 million.

Net loss from discontinued operations was $0.8 million for 2003.  The loss related to the U.S. operations of AcierLeroux.  We announced we would discontinue the U.S. operations of Acier Leroux at the time we made our offer to purchase AcierLeroux.  In October 2003, an assignment of our interest in the Acier Leroux U.S. joint venture to an unrelated party wascompleted.  All U.S. branches except Plattsburgh, New York were closed in 2003.

******

*Shares Outstanding and Dividends*

The weighted average number of common shares outstanding for 2004 was 48,671,915 compared to 40,021,479 for 2003.  Theincrease relates to the public offering of 5,750,000 common shares in February 2004 and employee stock options exercised during2004.  The number of common shares outstanding at December 31, 2004 was 49,887,659.

The weighted average number of common shares outstanding for 2003 was 40,021,479 compared to 38,024,034 for 2002.  Theincrease related to the common shares issued on the acquisition of Acier Leroux and stock options exercised in 2003.  Thenumber of common shares outstanding at December 31, 2003 was 43,023,342.

The significant increase in our stock price during the last two years resulted in employees exercising stock options to acquire1,114,317 common shares in 2004 and 1,419,567 common shares in 2003.  We have returned a portion of our earnings to our commonshareholders over the last three years by paying common share dividends of $25.0 million in 2004, $11.6 million in 2003 and $6.5million in 2002.

As at February 24, 2005, we had 49,889,159 common shares outstanding.

EBITDA and Adjusted EBITDA

The following table shows the reconciliation of GAAP earnings from continuing operations to EBITDA and Adjusted EBITDA:
| ***(in thousands of dollars)***                          | **2004**                           | 2003                                 | 2002                                 |
|----------------------------------------------------------|------------------------------------|--------------------------------------|--------------------------------------|
|                                                          |
| Earnings from continuing operations                      | ** $  180,769**     | ** ** $   19,259 | ** ** $   29,236 |
| Income taxes                                             | **105,405**                        | 13,333                               | 18,363                               |
| Interest expense - net                                   | **20,024**                         | 22,723                               | 20,324                               |
|                                                          |
| Earnings before interest and income                      | **     ** |             |             |
|    taxes (EBIT)                           | **306,198**                        | 55,315                               | 67,923                               |
|                                                          |
| Depreciation and amortization                            | **18,608**                         | 16,335                               | 15,192                               |
|                                                          |
| Earnings before interest, income taxes,                  | **     ** |        |        |
|    depreciation and amortization (EBITDA) | **324,806**                        | 71,650                               | 83,115                               |
| Debt restructuring costs                                 | **13,718**                         | -                                    | -                                    |
| Restructuring costs                                      | **3,632**                          | 3,583                                | 2,749                                |
| Goodwill impairment                                      | **-**                              | 2,410                                | -                                    |
| Foreign exchange gain                                    | **-**                              | (348)                                | (261)                                |
|                                                          |
| Adjusted EBITDA                                          | ** $  342,156**     | ** ** $   77,295 | ** ** $   85,603 |
|                                                          |

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

***Adjusted EBITDA to Interest Expense Ratio***
| **     **  | **2004**                 | 2003                                | 2002                                |
|-------------------------------------|--------------------------|-------------------------------------|-------------------------------------|
|                                     |
| EBITDA                              | ** $ 324,806** | ** ** $**  ** 71,650 | ** ** $**  ** 83,115 |
| Adjusted EBITDA                     | **342,156**              | 77,295                              | 85,603                              |
| Interest expense                    | **20,024**               | 22,723                              | 20,324                              |
| EBITDA to interest expense          | **16.2x**                | 3.2x                                | 4.1x                                |
| Adjusted EBITDA to interest expense | **17.1x**                | 3.4x                                | 4.2x                                |
|                                     |

The EBITDA and the Adjusted EBITDA to interest expense ratios are provided to assist readers in determining our ability togenerate cash from operations to cover our financial charges, income taxes and items not considered to be in the ordinary course ofbusiness.  These measures are routinely used by debt analysts and debt rating agencies to evaluate companies.

***Accounting Policies and Estimates***

****

**a)****                     ****Change in Accounting Policies**

****

During 2004, we adopted the following policies:

We adopted the new accounting guideline, AcG-13, Hedging Relationships.  This guideline sets out the requirements for theidentification, designation, documentation and assessment of effectiveness of hedging relationships for the purpose of applyinghedge accounting.  We have applied this standard to the fixed interest cross currency swaps entered into on February 20, 2004in order to hedge the last US$100 million of our US$175 million Senior Notes.  In addition, this standard has been applied toour other hedging relationships.  We chose to purchase fixed interest cross currency swaps to reduce our exposure to foreignexchange fluctuations in the income statement.  The adoption of this standard and application of hedge accounting allows us toshow the swaps on the balance sheet.

We prospectively adopted the new CICA Handbook section 1100, Generally Accepted Accounting Principles.   This standardestablishes what constitutes Canadian generally accepted accounting principals and provides guidance on the GAAP hierarchy. We will follow the Canadian pronouncements for accounting treatment and if nothing has been released on a specified area, we willfollow information published in the U.S. standards if applicable.

We adopted the new CICA Handbook section 3110, Asset Retirement Obligations.  This standard establishes standards for therecognition, measurement and disclosure of liabilities for asset retirement obligations and the associated asset retirementcost.  Our subsidiary, Thunder Bay Terminals Ltd., has certain significant asset retirement obligations relating to its landlease for its terminal operations.  The landlord has the option to retain the facilities or to require us to removethem.  In addition, we have an obligation to remove equipment at six of our metals service center operations.  AtDecember 31, 2004, the discounted probability-weighted cost of removal, calculated as required by the standard, is $106,000.

We prospectively adopted the new accounting guideline AcG-15, Variable Interest Entities.  This standard required us toreview our contracts and ownership interest for returns or losses where control may exist through other arrangements than votingownership.  The adoption of this standard did not require us to change our consolidated financial statements.

**b)****                     ****Other**

The preparation of our financial statements requires management to make estimates and judgements that affect the reportedamounts.  On an ongoing basis, we evaluate our estimates, including those related to bad debts, inventory obsolescence, usefullives of fixed assets, income taxes, restructuring costs, pensions and other post-retirement benefits, fair values, guarantees,environmental obligations, contingencies and litigation.  We base our estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgementsabout the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differfrom these estimates.

Our most significant assets are accounts receivable and inventory.  We maintain allowances for doubtful accounts forestimated losses resulting from the inability of our customers to make required payments.  If the financial condition of ourcustomers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may berequired.  We review our inventory for obsolescence and to ensure that the cost of inventory is not in excess of its estimatedmarket value.  Inventory reserves or write-downs are recorded, when cost exceeds the market value.

***Capital Expenditures***

Capital expenditures in 2004 were $25.4 million compared to $34.9 million in 2003.  Approximately $9.7 million of theseexpenditures in 2004 were for the completion of the new B&T Steel facility and the restructuring of facilities related to theintegration of Russel Metals and Acier Leroux operations.

Our normal capital expenditures are mainly related to maintenance capital, the purchase of additional processing equipmentacross a broad base of our operations and upgrades to our existing facilities and computer systems.  Our expectation is forcapital expenditures to be at levels similar to depreciation expense over a period of years.

Depreciation expense was $17.3 million in 2004 and $15.1 million in 2003.  The increase in depreciation relates to thedepreciation on the assets of Acier Leroux and the new B&T Steel facility opened in the first quarter of 2004.

***Liquidity***

We stress working capital management to ensure working capital is minimized and leverage reduced over the economic cycle. The metals distribution business experiences significant swings in cash flow to fund working capital.  Inventory and accountsreceivable represent on average over 70% of our total assets employed and vary with the cycle.  At December 31, 2004,inventory and accounts receivable represented 80% of our total assets.
| *Accounts Receivable and Inventory* |                   |
|-------------------------------------|--------------------------------------------|
| *as a Percentage of Total Assets*   |                   |
| (*in thousands of dollars*)         | **2004**                                   | 2003 | 2002 |
|                                     |
| Accounts receivable and inventory   | ** $    914,611** | ** $    ** 551,952 | ** $    ** 531,090 |
| Total assets                        | **1,146,481**                              | 790,619 | 695,594 |
| % of total assets                   | **80%**                                    | 70% | 76% |
|                                     |

Our existing bank credit facilities are used to fund the growth in working capital caused by demand or steel price increases,which require higher inventory and accounts receivable levels to support the higher activity levels.  Based on our recentexperience, a $100 million increase in revenues would require approximately $30 million of net working capital to support thehigher activity levels.  The increased price of steel during 2004 resulted in a utilization of non-cash working capital of$202.7 million on an annualized revenue increase of approximately $900 million.  We anticipate payments in the first quarterof 2005 of approximately $110 million for income taxes and bonuses, which are included in non-cash working capital at December 31,2004.  Adjusting for the $110 million means the revenue increase for 2004 required $35 million for each $100 million ofsales.  When demand weakens, or the price of steel declines, cash is generated from the reduction of inventory and lowerlevels of accounts receivable.  This cash is used to reduce the borrowings under our bank credit facilities.

The balances disclosed in our consolidated cash flow statements are adjusted to remove the non-cash component related to foreignexchange rate changes impacting inventory, accounts receivable, accounts payable and income tax balances of the U.S.operations.
|       | **Quarters Ended**             |
|--------------------------------|--------------------------------|
|       |                                |
|       | ** Dec 31,**              | ** Sep 30,** | ** Jun 30,** | ** Mar 31,** | ** ** Dec 31, |
| *Inventory Turns*              | ** 2004**                 | ** 2004** | ** 2004** | ** 2004** | ** ** 2003 |
|                                |
| Metals service centers         | ** 3.7**                  | ** 4.7** | ** 4.9** | ** 4.6** | ** ** 3.9 |
| Energy tubular products        | ** 2.9**                  | ** 3.7** | ** 3.0** | ** 4.4** | ** ** 3.1 |
| Steel distributors             | ** 3.3**                  | ** 4.6** | ** 4.7** | ** 5.6** | ** ** 7.1 |
|       |       |       |       |       |       |
| Total                          | ** 3.4**                  | ** 4.4** | ** 4.4** | ** 4.7** | ** ** 4.0 |
|                                |

Inventory turns are calculated using the cost of sales for the quarter annualized divided by the ending inventory position.

Inventory increases during 2004 used cash of $260.9 million.  Our goal is to ensure that we keep our inventory levels aslow as possible while still satisfying the needs of our customers in order to minimize inventory valuation risk.  We expectour service center operations to turn over its inventory at higher rates than the industry average.  Our metals servicecenters fourth quarter turns were 3.7, compared to 3.9 for the fourth quarter of 2003, but down from 4.7 in the third quarter of2004.  The industry typically experiences its highest inventory levels and lowest shipments in the fourth quarter due toseasonal slowdowns in December.  Based on information published by the Metals Service Center Institute, Canadian servicecenters volumes declined 1% from last year for the month of December 2004.  The December decline was the fourth consecutivemonth of steel shipment declines.  Service centers in both Canada and the United States experienced the highest inventorylevels of the year and inventory turns of 3.3 and 2.9 respectively in December 2004 according to the monthly Metals Activity Reportpublished by the Metals Service Center Institute.  Lower shipment levels in the fourth quarter of 2004 compared to the thirdquarter of 2004 were the primary driver of the decline in our turns for the fourth quarter.  Our metals service centersinventory based on tons was lower at year-end than it was a year ago.

The decline in turns for the energy tubular products and steel distributors in the fourth quarter of 2004 was caused by a rampup in inventory levels to support higher anticipated shipments in the first quarter of 2005 and normal seasonal build ups.  Itis expected that these inventory levels will be significantly reduced in the first quarter of 2005.

The other major components of working capital are accounts receivable and accounts payable.  Accounts receivable haveincreased $122.8 million related to increased revenues in 2004.  Accounts payable increased $128.4 million related to higherinventory purchases and bonus accruals, which represents a source of funds during 2004.

During 2004, we utilized cash of $25.4 million on capital expenditures, $25.0 million on common share dividends and $0.6 millionon preferred share dividends, which were redeemed during the first quarter of 2004.  During 2003, we utilized cash of $34.9million on capital expenditures, $11.6 million on common share dividends and $2.3 million on preferred share dividends.

***Debt and Credit Facilities***

During the first quarter of 2004, we completed a public offering of common shares for net proceeds of $49.3 million and issuedUS$175 million 6.375% Senior Notes due in 2014.  The net proceeds have been used to redeem US$115.6 of the 10% Senior Notes,our $30 million 8% debentures, our outstanding preferred shares of $30 million and to pay down our bank facility.  As a resultof the debt redemptions, we have no principal payments due until March 2014.

We manage our cash position based on bank borrowings net of cash.  Our bank credit facilities table provides the splitbetween loans and cash on deposit.
| *Bank Credit Facilities*         |            |                           |            |
|----------------------------------|-------------------------------------|----------------------------------------------------|-------------------------------------|
|         |     Russel Metals         |     U.S. Subsidiary                      |            |
| ***($ millions)***               |   Facility                     |   Facility                                    |   Total                   |
|                                  |
| Bank loans                       |  $    13.0 |  $       - |  $    13.0 |
| Outstanding cheques (on deposit) | 20.2                                | (0.6)                                              | 19.3                                |
|                                  |
| Net borrowings (cash)            | 33.2                                | (0.6)                                              | 32.3                                |
| Letters of credit                | 35.1                                | 17.5                                               | 52.6                                |
|                                  |
|         |  $    68.3 |  $ 16.9                                  |  $    84.9 |
|                                  |
| Facilities availability          |  $  200.0            |  $  54.2                            |  $  254.2            |
|                                  |

We completed a new bank facility on October 29, 2004, in which we reduced the facility to $200 million from $252.8 million toreduce standby fees on unused availability.  This facility is with a syndicate of Canadian and U.S. banks and expires onOctober 29, 2007.  We are entitled to borrow under this facility, on a revolving basis, up to an amount equal to the sum ofspecified percentages of our eligible accounts receivable and inventories, to a maximum of $200 million.  At December 31,2004, we were entitled to borrow $200 million, including letters of credit under this facility. At December 31, 2004, we hadborrowings of $13.0 million and had $35.1 million in letters of credit under this facility.  At December 31, 2003, we had$79.0 million of borrowings and had $25.7 million in letters of credit under our previous facility.  Our bank facility can beextended annually.

In addition, certain U.S. subsidiaries have their own one-year bank credit facility.  The maximum borrowing under thisfacility is US$45.0 million.  At December 31, 2004, these subsidiaries had no borrowings and letters of credit of US$14.6million.  At December 31, 2003, these subsidiaries had no borrowings and letters of credit of US$9.4 million.

Cash generated from operating activities before working capital changes has averaged approximately $45 million over the threecalendar years prior to 2004 and is $210.7 million for 2004.  The maximum borrowing under our bank facilities is approximately$254 million, of which approximately $169 million was unutilized at December 31, 2004.  We expect that the cash generated fromoperating activities combined with our unutilized bank facilities will be sufficient to fund our interest obligations and fixedasset purchases in 2005.  During 2004, the rapid growth in sales required additional working capital funding of $202.7million.  Increased profitability enabled us to finance the majority of this working capital growth.  The working capitalincrease and the payments of approximately $110 million during the first quarter of 2005 needed to support the $900 million inrevenue will utilize the majority of our current bank facilities.  We approached our banking syndicate for an additional oneyear facility of $50 million to allow for working capital needs over that period.  This facility was approved and will befinalized by the end of February 2005.

We have made several acquisitions over the last four years and we believe we can continue to grow by acquisition.  Webelieve we have the ability to fund future acquisitions through the utilization or expansion of our existing bank facilities andthe issuance of new equity, if required.  We currently have very low financial leverage with a debt to equity ratio of0.5.  Due to the high level and quality of accounts receivable and inventory we could also select to finance working capitalgrowth and acquisitions through an asset-backed facility.

***Contractual Obligations***

As at December 31, 2004, we were contractually obligated to make payments under our long-term debt agreements and operatinglease obligations that come due during the following periods. 
| ***(in thousands*** | Long-Term                                                                              | Cross Currency                                                                         | Long-Term                             | Lease                                |        |
|---------------------|----------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------|---------------------------------------|--------------------------------------|--------------------------------------|
| ***of dollars)***   | Debt Maturities                                                                        | Swaps                                                                                  | Debt Interest                         | Obligations                          | Total                                |
|                     |
| 2005                |  $             - |  $             - |  $    15,400 |  $    8,880 |  $   24,280      |
| 2006                | -                                                                                      | -                                                                                      | 15,400                                | 6,788                                | 22,188                               |
| 2007                | -                                                                                      | -                                                                                      | 15,400                                | 5,295                                | 20,695                               |
| 2008                | -                                                                                      | -                                                                                      | 15,400                                | 3,346                                | 18,746                               |
| 2009                | -                                                                                      | -                                                                                      | 15,400                                | 2,736                                | 18,136                               |
| 2010 and beyond     | 220,630                                                                                | 11,440                                                                                 | 64,167                                | 6,097                                | 302,334                              |
|                     |
| Total               |  $  220,630                                                             |  $   11,440                                                        |  $  141,167            |  $  33,142            |  $ 406,379                 |
|                     |

The fixed interest cross currency swaps obligate us to purchase US$100 million at 1.3180 for each U$1.00. Based on the year endexchange rate, we would incur an obligation of $11.4 million in addition to our long-term debt obligation of $220.6 million. Thelong-term debt interest in the above table is net of the swaps.

***Off-Balance Sheet Arrangements***

Our off-balance sheet arrangements consist of letters of credit disclosed in the bank credit facilities table, operating leaseobligations disclosed in the table above and foreign exchange contracts to hedge our U.S. dollar purchases.  The fair value ofthe foreign exchange contracts at December 31, 2004 approximates the contract value.

We have multiple defined benefit pension plans in Canada, as disclosed in Note 13 to the 2004 annual financial statementsincluded in the annual report.  The Company expects to contribute approximately $5.2 million to these plans during 2005.

***Vision and Strategy***

The metals distribution business is a segment of a mature, cyclical industry.  The use of service centers and steeldistributors by both manufacturers and end users of steel continues to grow.  This is evidenced by the growth in thepercentage of total steel shipments from steel producers to service centers.  As the distribution segment's share of steelindustry 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 thecourse of a cycle.  In addition, our aim is to be more profitable through the various successive peaks and troughs as thesteel cycles progress.  In order to achieve this, management emphasizes profitability rather than revenue growth.  Thisintensive asset management reduces borrowings and therefore interest expense in declining periods in the economic cycle and createshigher more stable returns on net assets over the course of the cycle.  Our conservative management approach createsrelatively stronger trough earnings but could cause peak earnings to be somewhat muted.  Management strongly believes that itis 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 decile of the industry.

Growth from selective acquisitions is also a core management philosophy.  We focus on investment opportunities inbusinesses that have strong market niches or provide mass to our existing operations.

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

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

***Risks***

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

***Outlook***

It is extremely difficult to forecast what 2005 will look like, especially coming off the record setting year of 2004.  Ourresults in 2005 will be influenced by whether the steel producing sector has actually turned the corner and evolved into abusiness, emphasizing profits, or was it merely reacting to the circumstances that created the environment that supported theresults of 2004.  Either way, our focus will remain true to our model.  We will minimize working capital and activelymanage product gross margins.  We believe that our operating costs and our inventory levels were contained as prices increasedduring 2004, and we are well positioned to respond to the inevitable fluctuations in the market during 2005 and if a declineoccurs, we will have a positive cash flow.

All three operating segments experienced record profits in 2004, which we foresee declining in 2005.  To what degree is notclear; however, the estimated $63 million in inventory holding gains realized in 2004 will not be duplicated in 2005.

The energy tubular products segment experienced strong results in the second half of 2004 and the current indications are thatthis strength will continue into 2005.

We are confident this Company will continue to perform in the top decile of the industry regardless of steel pricing and demandfor 2005 and if a decline occurs, we will have a positive cash flow.

Dated February 24, 2005.