The Investment Column: Courtaulds shows fibre as cyclist

Courtaulds, the chemicals group, has been hung out to dry on the raw materials cycle over the past year. Few industries could cope easily with costs that have nearly tripled and then halved again in the space of 12 months, but that is what Courtaulds has had to face with acrylonitrile and woodpulp, key ingredients in its acrylic and viscose businesses. It is hard to disagree with Sipko Huismans, the outgoing chief executive, that the Courtaulds of the 1960s and 1970s would not have survived in such conditions. So profit cut 13 per cent to pounds 131m in the year to March was a highly creditable performance in the circumstances.

But Courtaulds continues to be dogged by this cyclical image, which is a shame, given its performance elsewhere. It has made a conscious effort to expand in the Far East, particularly in powder coatings. Demand has already outstripped supply from manufacturing facilities in China and Korea, where new plants are under construction.

Meanwhile, the group should also do well from the growth of the aerospace market, to which it supplies coatings and a new lighter sealant enabling aircraft to carry heavier payloads.

But the main excitement remains Tencel, the revolutionary fibre into which the group has sunk around pounds 300m in the past 10 years. The move into "very modest" profits in 1995-96 from "significant" losses previously helped offset the collapse in acrylics and viscose profits last year. Despite having doubled capacity, all the output has already been sold and turnover could be hitting $400m by the end of next year. Courtaulds reckons it could be 20 per cent of the business by early next century.

Given the higher-than-expected margins and the group's leading position in the market for Tencel, that would add an element of stability to the business. But with no plans for further big disposals, the prospects for Tencel will be overshadowed by Courtaulds' exposure to the chemical cycle.

The group and the market now believes that the worst of the recent volatility is over, which goes a long way to explaining yesterday's 7p bounce in the shares to 422p. The problem is that after such a mauling, customers are understandably still fearful about stepping back into the market.

Success in continuing attempts by Courtaulds to persuade suppliers to link raw material costs with selling prices would enhance the quality of earnings. Until then, after seeing margins wiped out last year in acrylics and viscose, the big question is when the bounce-back will come and how far it will go.

Profits of pounds 170m this year would put the shares on a forward p/e of 16. That discounts the expected recovery. Hold.