Outlook: The steel deal that could turn Corus into a Brazil nut

Hedge fund madness; Euro myths: part

The company that used to be known as British Steel until it was forged with Hoogovens is merging once again. The good news this time is that there will be no job losses (for now) and no attempt to run the business with joint chief executives. The bad news is that Corus is keeping its daft name while its shareholders are being asked to pay a thumping great premium to acquire Companhia Siderurgica Nacional (CSN), Brazil's fourth biggest steel maker.

The world's steel producers are shrinking in number all the time and if Corus pulls this deal off it will join the ranks of the big five. The Brazilians have been belting out their samba beat for months hoping to attract a dance partner. They have found an enthusiastic one in Tony Pedder, chief executive of Corus. He is offering to pay 87 per cent more than CSN was worth at the start of the week, valuing the company, including its debt, at £2.7bn. He justifies the fancy price by pointing to the big cost savings Corus will make once it gets its hands on CSN's source of cheap iron ore. First, however, Corus will have to spend heavily to triple production at CSN's mines if it wants to feed the blast furnaces in south Wales with Brazilian iron ore.

Vertical integration such as this went out of vogue a long time ago but Corus says is it being a pioneer in becoming the first big Western steel maker to own the source of its most important raw material. If it is such a clever move, it's a wonder someone else didn't think of it earlier.

The price being offered by Corus and the industrial logic of becoming a mining company both place question marks over the deal. The bigger doubts surround its timing. The Brazilian economy is on the ropes and the currency is in freefall. On top of that there is every possibility of Luiz Inacio de Silva's Workers Party winning the October election. Lula, as he is known, has promised not to default on Brazil's debt repayments. Otherwise virtually nothing is known of his plans for the economy. But it is a reasonable bet that it will be up the workers and down the 40 per cent profit margins that CSN boasts thanks in part to cheap labour.

Just as well that the heads of agreement Corus has signed with CSN is non-binding and contains no penalty clause should it decide to pull out. Mr Pedder may yet need a ladder down which to climb.

Hedge fund madness

It's a funny thing about hedge funds, but any remotely hostile article about them invariably attracts a wholly disproportionate welter of defensive e-mails and letters. Few other subjects for City comment prompt such a response. You know the sort of thing – you journalists haven't the faintest idea what you are talking about, you cannot short a fundamentally sound stock, what we do is not only entirely legitimate, but actually carries the nobler purpose of providing the market with extra liquidity, blah, blah, blah, tosh.

Everyone's entitled to their say, but the defence is mainly hot air. About the best that can be said for hedge funds is that unlike the rest of the fund management industry right now, they by and large make money for their clients. That's not an inconsiderably achievement. Unfortunately, they do it largely at everyone else's expense. Hedge funds like to think of themselves as frightfully respectable enterprises these days, but the truth of the matter is that their business is essentially that of being on the make and on the take. Many of them continue to register themselves offshore, to escape the long arm of FSA regulation and UK taxation and, through their shorting activities, they are helping to make a bad bear market much worse.

So dire are conditions in equity markets that a lot of brokers have come to rely on hedge funds for the bulk of their business, and invariably that business is short selling. The FTSE 100 bounced sharply yesterday, but how much of that is real, and how much is down to short sellers closing their positions, is open to question. The suspicion is that it is more of the latter than the former.

Some hedge funds are making huge sums of money for themselves and their clients, and in the process they are destroying the value of ordinary pensions and other savings products. Don't take our word for it. As one hedge fund manager recently told us, we may very well not know what we are talking about. But David Prosser, chairman of Legal & General, one of Britain's largest life assurers, presumably does. He's so incensed by the destructive effect of hedge fund activity that he's written to the Financial Services Authority suggesting a deterrent tax on shorting. The purpose of capital markets, he points out, is to match suppliers of capital with those who can find a profitable use for it. A certain amount of hedging activity oils the cogs, but we may now have reached the point where it has subverted the main function of markets.

The way things are going, it may yet come to a tax, but the major investment institutions could start by setting their own houses in order. Short selling relies on the related business of stock lending, because the system won't allow you to sell stock you cannot physically lay your hands on. The main suppliers of such lending are the holders of these stocks – the custodians for the big fund management groups. In return they get a fee, which is generally shared between the custodian, the fund manager and the client. For index tracking funds in particular, the fees derived from stock lending can cancel out the cost of fund management, so it seems like a good deal.

However, when the effect is to help the hedge funds trounce the value of your stock, then it plainly isn't. Since 11 September, L&G has ceased all lending activity for UK and US stocks, except where the client specifically requests it. If they want to bring the crash to a definitive end, others would be well advised to follow suit.

Euro myths: part 2

Continuing our occasional series exploding some myths about the euro in the run-up to consideration of the Government's five economic tests, we today consider labour mobility. One of the reasons the single currency can never work as effectively as the dollar, goes the eurosceptic argument, is that we don't have the same degree of labour mobility in Europe as the United States. In the US, high levels of labour mobility allows for the economic adjustment between states that a single interest rate denies. When the going gets tough in one state, large numbers of people decamp to a more prosperous one. In Europe it doesn't happen that way, because we are too attached to our local languages and traditions. True? Er, no. In 2000, only 0.1 per cent of the EU population moved between countries and 1.2 per cent moved between regions within one country for the purpose of work (that's excepting normal business travel, of course). Another 0.4 per cent were cross-border commuters. This 1.7 per cent rate is usually compared with the 5.9 per cent mobility rate within the US. But only 18 per cent of US moves were work-related, so labour market mobility is actually pretty similar in the US and EU, contrary to impressions.

jeremy.warner@independent.co.uk