Jeremy Warner's Outlook: Will China support Varin's Corus line?

Straitjacketed BT; Sir Phil Watts
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The Independent Online

Two and a half billion pounds' worth of accumulated losses since 1999 make the sight of profits at the Anglo-Dutch steel maker Corus about as rare as snow in summer.

Two and a half billion pounds' worth of accumulated losses since 1999 make the sight of profits at the Anglo-Dutch steel maker Corus about as rare as snow in summer. The big question following yesterday's triumphant return to the black is whether they will prove just as transitory.

Corus doesn't directly supply any steel at all to China, yet it is the Chinese development story which is largely responsible for the company's renaissance. China's insatiable appetite for steel has put a rocket under the price, and although the cost of the raw materials - iron ore and energy - has been rising too, it's not been by as much and, in any case, there is a big time lag. By the end of this year, Corus's prices will have risen by a half. The company confidently expects to push through further increases next year too.

Yet it's not all down to prices, insists Philippe Varin, Corus's French-born chief executive. Of the £200m turnaround from loss to profit between the first half of last year and the first half of this year, only a half is attributable to higher prices, with the rest accounted for by cost cutting and other aspects of the "Restoring Success" turnaround strategy.

M. Varin promises a £680m improvement in the bottom line by the time the strategy reaches its conclusion a couple of years hence. If all goes according to plan, Corus's British steel plants will by then be as efficient as the best in Europe. M. Varin also hopes to have lanced the boil of the Teesside plant by bringing in a joint venture partner to enable the facility to stand on its own two feet, supplying commodity steel to the world market. At present Teesside is entirely dependent on the rest of Corus as an outlet for its steel production.

The final piece of the jigsaw is to sell the aluminium business, a strategy which when first mooted by the previous regime led to an almighty row with the Dutch supervisory board of Corus. Not unreasonably, they saw it as an attempt to fleece the company so as to prop up the ailing British steel plants to the disadvantage of their Dutch counterparts. This time around, M. Varin seems to have the agreement of all to proceed with his plans.

Whether he succeeds is, unfortunately, still very much dependent on what happens to the steel price, and that in turn is dependent on what happens in China. With the Chinese economy now slowing, we may already have seen the cyclical peak of the steel price. At the same time, price advantageous contracts with raw material suppliers are coming to an end. M. Varin will just have to pray the price holds firm enough for long enough for him to complete his turnaround. There could scarcely be a more benign backdrop for the task of sorting out Corus than the current one. M. Varin's challenge would suddenly become a whole lot tougher were the price of steel to return to where it was couple of years ago.

Straitjacketed BT

British Telecom doesn't nowadays often make acquisitions. Scarred by the value destructive expansion of the late 1990s, it's thought something best avoided. So when BT does dip its toe into the acquisitions market it is worth asking why. Admittedly, yesterday's £17m purchase of BIC Systems Group, a specialist IT and networking services outfit, is tiny by the standards of a company with revenues last year of £18.5bn. Yet it tells you a lot about where BT wants to go, which is away from its legacy metered call business and firmly into the bespoke, valued-added end of the communications market.

Sir Christopher Bland, the chairman, and his chief executive, Ben Verwaayen, will ultimately be judged on how effectively they manage this transformation. Whatever happens, it's going to be a long haul. About 80 per cent of BT's revenues still come from its legacy business of line rental, calls and ISDN. With strongly growing competition from carrier pre-select and alternative network providers, this is in sharp decline. As things stand, then, the key management challenge for BT is keeping the rate of decline as low as possible while at the same time finding new sources of revenues - from broadband, networking and other high-value communications contracts - to substitute for what's lost.

Unfortunately, everyone is chasing the same holy grail, witness last night's announcement from Cable & Wireless about its plans for the broadband market. Even so, BT is not without its successes. It is winning lots of contracts and its broadband revenues are growing fast. Yet overall revenue is still in gentle decline, and you only have to look at the share price, which continues to underperform the rest of the stock market by a wide margin, to see that the City remains sceptical. This must be hugely frustrating for Sir Christopher, who spent a large sum of his own money buying BT shares at prices way in excess of what they are now. Yet the unappetising truth is that BT is today seen by investors as no more than a yield stock with very limited opportunity for capital appreciation.

Nor is there much outward sign of the "volcanic" activity and innovation which BT insists is going on just beneath the surface. BT was awarded a broadcast licence more than a year ago now, but so far it has done nothing with it. Nor has BT been quick to exploit the growing market for what might be termed "domestic telecoms solutions" - the hiring out of technicians to help subscribers get the most out of their broadband connection.

BT claims, with some justification, that in the past it has been too bluntly regulated to allow for worthwhile innovation. Much store is being put in the new regulatory regime being honed under Stephen Carter, chief executive of the Government's super regulator, Ofcom. The initial findings of Ofcom's strategic review of telecoms regulation are to be published next month. BT has high hopes of a more enlightened approach.

I've no doubt BT is right in believing it has finally seen off calls for a structural break-up of the company, separating its customer facing retail operations from the wholesale, backbone network. Provided adequate transparency and appeal mechanisms are maintained, there is no regulatory reason to impose such a break-up. Yet I doubt very much this will be the end of the matter.

Personally, I remain convinced that a break-up would be the best possible solution to BT's present predicament, allowing the regulated wholesale operation to be more efficiently financed through debt and freeing up the retail business to produce the sort of innovation and cutting edge services that are now so sadly lacking.

Mr Verwaayen insists that technically it would be extraordinarily difficult and costly to achieve such a separation. In his view, you cannot in any case have an effective telco which is separated from the technology of the networks it uses. I cannot agree. Both business models already exist, and highly effective they are too. The outcome of Ofcom's strategic review is unlikely to be all bad news for BT, but nor, I fear, will it offer the freedom from bondage this company so desperately needs.

Sir Phil Watts

Abrasive bruiser that he is, Sir Phil Watts, former chairman of Shell, has decided not to take the Financial Services Authority's strictures over his pivotal role in the oil giant's reserving fiasco lying down. As is its wont, the FSA gave Sir Phil no right of reply or representation at all before issuing its final notice on the affair in which it accused Sir Phil and the company of deliberately misleading investors. To Sir Phil's mind, this was both an abuse of process and it has fatally prejudiced any defence he might have in future actions.

Well no doubt he's got a point, and who am I to deny Sir Phil his six weeks before a public tribunal? The press, at least, will have a field day. Yet if I were Sir Phil, I'd lie low and save my redundancy cheque for the welter of class actions that are already being heaped upon him. He's on a hiding to nothing defending himself against the FSA, for even if he does show abuse of process, he won't escape blame for this shameful episode. If Sir Phil's not to blame, who on earth is?