TORONTO - Toronto-area steel distributor Russel Metals Inc. (TSX:RUS) is eliminating 500 jobs, reducing executive and white-collar salaries and slashing its dividend nearly in half to deal with what the company called an abrupt and severe drop in steel demand.

Russel Metals said Monday the cuts affect about 16 per cent of its workforce of 3,000 people. The layoffs will be done by the end of March and will reduce operating costs by more than $25 million a year.

The company cited lower steel prices, rising energy costs and the rapidly plunging steel market in the last two months for the moves, which include a 10 per cent cut to executive and white collar pay.

"The company's management has taken these actions because the decline in steel prices, energy prices and demand experienced during the last two months has exceeded anything previously experienced," stated Brian Hedges, Russel Metals' executive vice-president and chief operating officer.

"The company has experienced demand declines in the first two months of 2009 similar to the 40 per cent declines announced for January by the Metals Service Center Institute," -- a U.S. industry group.

Marion Britton, Russel Metals' chief financial officer, said demand for steel continues to drop because of the recession and she doesn't see an end to the slump.

"With this much decline, that means there's not a lot of manufacturing happening out there," Britton said in an interview. "We service all industries other than automotive across Canada and it's pretty consistent."

The worsening global recession has cut demand from major industrial customers of steel products, ranging from autos, appliances, heavy equipment and machinery to commercial building and housing.

So far, Canadian steelmakers have been cutting output and some, such as the former Stelco, Algoma Steel and Ipsco, have been streamlining their workforces and cutting jobs to lower operating costs.

United Steelworkers economist Erin Weir said both Stelco, now called U.S. Steel Canada after a takeover by the big American company, and Ipsco, renamed Evraz, have already laid off about 1,000 people. Meanwhile, Algoma is trying to avoid layoffs through a government-sponsored work-sharing program.

"What's happening at Russel is endemic to the industry," Weir said, adding that slowdowns in the automotive, construction and oil and gas industries have all hurt demand for steel.

In addition, the cost of shipping steel has slumped by more than 90 per cent since the summer, making it cheaper for companies to import foreign steeel into North America.

"This decline in demand for steel has been accompanied by a huge increase in the supply of steel that can be economically brought to market in Canada and the United States, so those two things have combined to very sharply reduce the price of steel and really hammer the industry," Weir said.

"My sense is certainly that things are on a downward trajectory right now and there's not a lot of evidence that that will change," although stimulus packages on both sides of the border could help, he added.

In a related matter, Russel also said Monday it will cut its quarterly dividend to 25 cents a share for the first quarter from 45 cents a share in the 2008 fourth quarter.

"We have reduced the dividend due to the drastic and unprecedented decline in our business levels," Hedges added.

"Our shareholder base includes a large number of individual investors and the company is aware of how important the dividend is to these owners. We have made this change with great reluctance."

Monday's cuts came as Russel Metals reported higher profits in the fourth quarter ended Dec. 31, when it earned $29 million or 48 cents a share. That was up from $25.3 million or 38 cents a share for the same year-ago period.

Three-month revenues soared to $842.7 million from $598.4 million.

For the full 2008 year, the company more than doubled its profits to $228.5 million from $111.2 million while annual revenues increased to nearly $3.4 billion from just under $2.6 billion.

President and CEO Bud Siegel said the company is "proud of our record earnings for 2008."

"However, that is history and we are now completely focused on the current economy and how it impacts our customers and in turn, Russel Metals. We are taking action to preserve capital and position the company to continue to be in a strong financial position when the recovery occurs."

Russel Metals is one of the largest metals distribution companies in North America and operates under various brands, including Russel Metals, A.J. Forsyth, Acier Leroux, Arrow Steel Processors, B&T Steel, Comco Pipe and Supply, Leroux Steel and several other companies.

Russel Metals shares were halted on the TSX pending news from the company. When they resumed trading in late afternoon, the stock fell more than 10 per cent, or $1.69 to $14.45.