Jeremy Warner's Outlook: With the turnaround complete, the real challenge is just beginning for Corus's Varin

Euronext: a doomed intervention; Inflation: up go car insurance premiums; Consumers lose as rate spreads widen
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The Independent Online

A job well done, or no more than you would expect given the extraordinarily powerful following wind of booming world steel demand Philippe Varin has enjoyed since he stepped into the chief executive's shoes at Corus three and a bit years ago?

In the intervening period, the Anglo-Dutch steel group has been transformed from basket-case into a once again solvent, credible and relatively profitable enterprise. By the end of this year, M. Varin will have delivered on all his restructuring plans as well as the promised £635m of cost cuts.

Net debt has been cut from a life-threatening £1.7bn at its peak to just £320m. True enough, fast increasing energy and raw material costs are again eating deep into bottom-line profits. What's more, the effect will be further compounded in the second half by a plant shutdown in the Netherlands for refurbishment.

Yet almost unbelievably for this stage of the business cycle, demand and prices are still rising, and, according to M. Varin, the outlook is for more of the same. The shares were down a bit on the results yesterday, but their longer-term performance tells the story of this remarkable corporate turnaround better than words ever can.

Just 19p four years ago, the shares today trade at nearly 400p. No wonder those canny few among the Port Talbot workforce who had the foresight to invest at the bottom are keeping quiet about it to their workmates. What a ride it's been.

Only one problem. What comes next? World demand is expected to keep growing at the apparently breakneck pace of 6-7 per cent both this year and next. After four years of the same, it seems barely believable. Yet raw material and energy prices are rising even faster, and, perhaps more worrying still, the Chinese have all of a sudden changed from being net importers of steel to net exporters. Who knows where that dynamic is going to end, or what it might do in the longer term to world steel prices?

M. Varin may be right to insist that better management of capacity in combination with the present wave of consolidation makes the industry less cyclical. Yet he readily admits that, even with the development of specialist, niche markets for steel, Western Europe is likely to remain a relatively low-growth, high-cost market for his company.

This is more particularly the case for the group's British production base, where energy costs are approximately double what they are on the Continent and four times what Russian producers, with inexhaustible supplies of cheap Russian gas, will pay.

The recovery phase in Corus's affairs may be complete, but the structural challenge remains as big as ever. M. Varin is looking to India, Russia and Brazil - all the reverse image of Western Europe in their low-cost, high-growth characteristics - for salvation, yet as Mittal's takeover of Arcelor shows, the balance of power in this industry has already shifted from the developed to the developing world.

Most of the companies M. Varin would like to acquire are already a great deal bigger than Corus. The City has him down as much more likely to be taken over than doing the taking over. Is M. Varin's access to European markets enough to attract them? There may not be a whole lot else going for these relics of a bygone industrial age.

Euronext: a doomed intervention

Is there finally an end in sight to the seemingly interminable saga of who hitches up with whom among the world's leading stock markets? Not if Chris Hohn, managing partner of TCI Fund Management, has anything to do with it. Euronext yesterday set a December deadline for shareholders to vote on its preferred merger partner, the New York Stock Exchange. Mr Hohn, with 10 per cent of Euronext's shares, wants Euronext to merge instead with Deutsche Börse, where he has 13 per cent of the stock.

He's already tried to force through this rival vision for the future of Europe's stock markets once, but was voted down. Now he proposes to do so again. Mr Hohn is right to insist the synergies would be much greater. Where he is wrong is in believing that the proposal will ever be acceptable to competition and financial regulators.

Not in a month of Sundays will Britain's Office of Fair Trading and Financial Services Authority ever allow Euronext's Liffe to be subsumed by Deutsche Börse's competing futures exchange. Strip away this aspect of the merger and many of the supposed synergies fall away. Deutsche Börse can never succeed in acquiring Euronext, even though the value of its offer is now nominally higher than that of the NYSE.

Inflation: up go car insurance premiums

Let Norwich Union quote you happy. Or perhaps not, to judge by news that the insurer is trying to push through price increases averaging 16 per cent in motor premiums. As the number two in the market, responsible for a claimed one in seven cars insured in the UK, Norwich is hoping that its pricing lead will encourage others to follow suit.

Few companies make decent money out of motor insurance, which has long suffered from chronic over-capacity. Norwich Union, part of the Aviva insurance group, reckons its pricing action will help reduce its claims ratio in motor from the present 105 per cent of premiums to well under 100 per cent.

Not everyone will pay a 16 per cent increase. Some will escape any increases altogether. Particularly high-risk customers, on the other hand, will pay a lot more. Nor will everyone follow suit; Norwich will almost certainly lose market share as a result of its pricing initiative. All the same, the overall effect is bound to be to drag up prices across the industry as a whole, perhaps not by as much, but certainly by well into double digits.

Motor insurance premiums aren't a huge component of the Consumer Price Index. The weighting is just 0.5 per cent. Set against gas and electricity bills, with a combined weighting of 3 per cent, the number looks almost insignificant. Yet for nearly all households, car insurance is another non-discretionary item of expenditure that is inflating away at an alarming rate. That next interest rate hike may come sooner than the markets expect.

Consumers lose as rate spreads widen

According to John Butler, European economist at HSBC Investment Bank, only around half the 1.25 percentage point increase in interest rates pushed through by the Bank of England in 2003 and 2004 found its way from the banks to the rest of the private sector. In other words, the banks didn't increase their overdraft, loan and mortgage rates by as much as the Bank base rate was rising.

That's apparently not the case this time around; most if not all of the effect of the present tightening phase is being passed on. The point Mr Butler draws from this change in approach is that the resulting consumer and housing market slowdown might be a lot more pronounced this time around than it was last time. This is more particularly the case as the latest round of rate increases is occurring against a backdrop of rising unemployment and already squeezed disposable incomes.

Some banks are also getting up to the old trick of using the uptick in interest rates to widen the spread between lending and borrowing costs. It is generally forgotten in all the gnashing of teeth about higher interest rates that there are millions of net savers out there for whom rising rates are a boon. Or should be, in any case. Yet many savings rates haven't shifted at all since the last increase in base rates, while others haven't gone up by as much.

By contrast, some variable mortgage rates have gone up by more. In one wonderful piece of sleight of hand, Alliance & Leicester cut its savings rates on the eve of the interest rate rise so as to be able to say that it had increased them again the day after. This surely deserves some sort of a prize for marketing. Still, the banks have to be allowed to offset rising bad debt experience somehow or other, haven't they?

j.warner@independent.co.uk

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