Steel feels the heat

Manufacturing: sterling's strength is pounding British profits, but (below) one industry magnate is striking sparks almost everywhere else

THERE was no applause at British Steel's Albert Embankment headquarters in London after the Chancellor's Budget speech. The pleas of the bellwether of UK exporting manufacturers to act to push down the pound had fallen on deaf ears.

"We are very concerned that Gordon Brown is making the same mistakes as the Thatcher government that said manufacturing doesn't matter and we can do without it," said Ian Rodgers, policy director at the UK Steel Association, the steel industry lobby group.

Sterling's rise last year cost UK steel companies an estimated pounds 1.2bn, and British Steel, which has a UK market share of 58 per cent, pounds 700m. "Over the past two fiscal years there has been a decimation of our profit margins," said John Bowden, investor relations chief at British Steel.

Thirty per cent of British Steel's sales are in continental Europe, but because of the complexity of the pound's fluctuations against continental currencies, hedging can do little to offset the damage.

In the year to March 1996, British Steel posted pre-tax profits of pounds 1.1bn at a time when a pound bought around Dm2.3. The rise of sterling to around Dm3 was the main reason for a fall in pre-tax profits in 1997 to pounds 350m. City profit expectations for British Steel in 1998 range from break even to pounds 250m. "Should [high] sterling levels persist, the outlook for the company is quite grim," said Simon Fenwick, steel analyst at Paribas.

British Steel was one of the first European companies to undertake massive restructuring a decade ago. As its continental rivals now benefit from stronger steel prices, British Steel faces the prospect of more redundancies as it cuts costs further. Around 2,500 mainly middle-management jobs have gone since April 1997, and similar cuts are expected over the next two to three years. The gloomiest analysts predict that 12,000 jobs will go from a workforce of 50,000.

British Steel is also selling its cargo fleet, the largest non-tanker fleet under the British flag. The vessels are valued at about pounds 45m. The company is also outsourcing its information technology to Cap Gemini.

This cost-cutting, along with higher steel prices and a UK and north European building surge, have helped British Steel stay in the black. But for how long? The financial position in Asia is another threat, potentially as damaging as the strong pound. British Steel's exports to South-east Asia have halved since 1996, and it is braced for worse.

Meanwhile, there are knock-on effects as east European steel firms, which used to sell to Asia, turn to the European markets. There are also fears that South Korea and Taiwan will target Western Europe for steel exports.

There are glimmers of hope. British Steel still has a cash pile of almost pounds 500m, and it could go shopping on the continent. Restructuring of the German steel sector has finally begun, and British Steel is rumoured to be a contender for some of the assets of Preussag Stahl. Cockerille Sambre of Belgium is also inviting suitors, while several privatising Polish steel companies are coming on the market.

The sight of its European rivals thriving makes the prospect of investing in Europe tempting. However, most of the steel firms on offer would be costly to restructure and British Steel may not want to take on the Continental trade unions. "British Steel maintains its shareholders are happy and not putting pressure on them, so basically they are keeping their options open," said Mr Fenwick. But can that survive any more profit falls?