Slowdown in Chinese demand triggers Cookson profit warning

Cookson issued a profits warning yesterday, blaming the economic situation and the cutbacks in China for weak market conditions it expects will continue into 2009.

The industrial materials group – which is exposed to both the downturn in the steel industry, through its ceramics division, and in consumer spending, through its electronics and precious metals businesses – saw its shares plunge 24.4 per cent to close at 130p yesterday.

Overall performance for this year will still be "significantly ahead" of 2007, boosted by the acquisition of the Foseco foundry business in October 2007 and by currency translation gains. But the results will not meet management expectations, the group said.

"In recent weeks the group has started to see clear evidence of the global financial turmoil impacting its end-markets, particularly global steel production," Cookson said. "Trading performance in 2009 will be dependent upon the depth and duration of the global economic slowdown."

The global market for the company's Steel Flow Control and Linings businesses, for example, was down 3.2 per cent year-on-year, in September, largely because China's steel production was down by 9.1 per cent that month. Although there are not yet figures for October, steel companies across the world have been cutting production and de-stocking inventories to support prices.

Despite the collapsing stock price, not everyone is pessimistic. Harry Philips, at Evolution Securities – who has a "buy" recommendation on the shares – says the market price is assuming a covenant breach that only becomes an issue with a 20 per cent drop in steel production. "The reality is that the company trades comfortably within covenants," Mr Philips said.