Outlook: How Asia has mugged British Steel

BRITISH STEEL used to be the stock market's favourite currency play. By way of a simple arithmetic formula profits, could be adjusted up or down by pounds 10m for every one pfennig that the German mark moved against the pound.

For the last three years this has allowed the analysts to plot British Steel's fall from grace and its exit from the FTSE 100 Index with an unusual degree of accuracy.

Sir Brian Moffat belly-ached like mad, of course, about the strength of the pound and the damage it was doing to the bottom line. All the while, however, he was ferociously trimming the cost base so that British Steel, already the most efficient steelmaker in Europe if not the world, could live with even the most ruinous exchange rate.

The latest hatchet job involves cutting heads by 12,000, of which 5,000 will have gone by the end of this financial year. By the time the programme is complete, British Steel will be a mean, lean beast indeed.

As a small bonus the exchange rate formula has at last begun to swing back in Sir Brian's direction. Sadly, just as this happened the business was mugged by the steepest decline in prices he can remember in his working life. The backwash from the Asian crisis has left the world swimming in unwanted steel.

Like iron filings to a magnet, it went first to the United States, where the Clinton administration promptly threatened anti-dumping duties. Now the tide has turned towards Europe. The result is that imports are at double normal levels and the price of hot-rolled coil has slumped by 30 per cent in the space of less than three months.

The impact on British Steel has been like an iron bar on the head. Profits were down by a quarter in the first six months and British Steel is facing a sizeable loss for the full year. Sir Brian has pledged to maintain the dividend but will have to dig deep into reserves to do so.

British Steel reckons the UK will be in recession next year notwithstanding the Government's belief that it will not. While there may not be much Tony Blair can do to avert this, he could help British Steel out by getting tougher on the dumping of steel from Asia and eastern Europe. For once, this is not a crisis in manufacturing that the Government can explain away by citing the productivity gap.