The Investment Column: Prices fears temper steel profits

When a company breaks through the billion pound profit barrier for the first time, management could be forgiven for expecting a little more than a ha'penny rise in the share price. But such is life in the steel sector. British Steel has been riding the cycle and the market had been expecting a strong performance. The share price reaction shows that the market is predicting the best may be over and worse yet to come.

Chief executive Sir Brian Moffat accepted yesterday that since the steel industry was at the top of its cycle, profits for the current year would be adversely affected, though he still anticipated a "satisfactory performance".

Quite what that means largely depends on your view of how far steel prices will fall in the next two years. Some analysts are predicting a "soft landing" following the difficulties in the second half last year, which spilled over into the first quarter of 1996. But the bears are predicting significant falls in steel prices. They are also wary of British Steel's ability to manage the decline.

All this is harsh on a company whose shares had a good run earlier this year. Profits were struck at a record pounds 1.1bn compared with the previous year's figure of pounds 578m.

The results were boosted by the contribution of Avesta Sheffield, the Swedish stainless steel group, in which British Steel increased its stake to over 51 per cent. They also include a full-year's contribution from British Steel Engineering Steels, British Steel Forgings and Scunthorpe Rod Mill, all of which became wholly owned in March 1995.

Even with capital expenditure topping pounds 320m, there was a cash inflow of pounds 561m, which took net funds as at 30 March to pounds 690m. There has been talk of a share buy-back but the company said yesterday that it was more likely to spend the cash pile on acquisitions.

British Steel shares have enjoyed a strong run in the last few years, rising from a low of just 47p in 1992 to almost 200p earlier this year. But the price has come off in the last couple of months, reflecting concerns over de-stocking and the steel price. Sir Brian indulged in a fresh outburst against state subsidies, though British Steel has responded in an aggressive manner to produce more to try and improve short-term profitability.

The big question is whether the newly privatised European steel industry will change its past habits and rein its production back. In the past they have, like British Steel, made the dash for volumes to support their overheads as the cycle turns.

With analysts forecasting profits of pounds 578m this year, the shares, at 178p, are on a forward rating of 8. Avoid.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
Life and Style
love + sex
Arts and Entertainment
Victoria Wood, Kayvan Novak, Alexa Chung, Chris Moyles
tvReview: No soggy bottoms, but plenty of other baking disasters on The Great Comic Relief Bake Off
Sport
Ashley Young celebrates the winner for Manchester United against Newcastle
footballNewcastle 0 Man United 1: Last minute strike seals precious victory
Life and Style
Tikka Masala has been overtaken by Jalfrezi as the nation's most popular curry
food + drink
Arts and Entertainment
Seth Rogan is one of America’s most famous pot smokers
filmAmy Pascal resigned after her personal emails were leaked following a cyber-attack sparked by the actor's film The Interview
News
Benjamin Netanyahu and his cartoon bomb – the Israeli PM shows his ‘evidence’
people
ebooks
ebooksA special investigation by Andy McSmith
Arts and Entertainment
80s trailblazer: comedian Tracey Ullman
tv
News
i100
Life and Style
A statue of the Flemish geographer Gerard Kremer, Geradus Mercator (1512 - 1594) which was unveiled at the Geographical Congree at Anvers. He was the first person to use the word atlas to describe a book of maps.
techThe 16th century cartographer created the atlas
Arts and Entertainment
Stephen Tompkinson is back as DCI Banks
tvReview: Episode one of the new series played it safe, but at least this drama has a winning formula
News
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Graduate Application Support Analyst

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Reach Volunteering: External Finance Trustee Needed!

Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

Christine McCleave: FP&A Analyst

£36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Day In a Page

War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

Baghdad fights to win back Tikrit from Isis – but then what?

Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable
Living with Alzheimer's: What is it really like to be diagnosed with early-onset dementia?

What is it like to live with Alzheimer's?

Depicting early-onset Alzheimer's, the film 'Still Alice' had a profound effect on Joy Watson, who lives with the illness. She tells Kate Hilpern how she's coped with the diagnosis
The Internet of Things: Meet the British salesman who gave real-world items a virtual life

Setting in motion the Internet of Things

British salesman Kevin Ashton gave real-world items a virtual life
Election 2015: Latest polling reveals Tories and Labour on course to win the same number of seats - with the SNP holding the balance of power

Election 2015: A dead heat between Mr Bean and Dick Dastardly!

Lord Ashcroft reveals latest polling – and which character voters associate with each leader
Audiences queue up for 'true stories told live' as cult competition The Moth goes global

Cult competition The Moth goes global

The non-profit 'slam storytelling' competition was founded in 1997 by the novelist George Dawes Green and has seen Malcolm Gladwell, Salman Rushdie and Molly Ringwald all take their turn at the mic
Pakistani women come out fighting: A hard-hitting play focuses on female Muslim boxers

Pakistani women come out fighting

Hard-hitting new play 'No Guts, No Heart, No Glory' focuses on female Muslim boxers
Leonora Carrington transcended her stolid background to become an avant garde star

Surreal deal: Leonora Carrington

The artist transcended her stolid background to become an avant garde star
LGBT History Month: Pupils discuss topics from Sappho to same-sex marriage

Education: LGBT History Month

Pupils have been discussing topics from Sappho to same-sex marriage
11 best gel eyeliners

Go bold this season: 11 best gel eyeliners

Use an ink pot eyeliner to go bold on the eyes with this season's feline flicked winged liner
Cricket World Cup 2015: Tournament runs riot to make the event more hit than miss...

Cricket World Cup runs riot to make the event more hit than miss...

The tournament has reached its halfway mark and scores of 300 and amazing catches abound. One thing never changes, though – everyone loves beating England
Katarina Johnson-Thompson: Heptathlete ready to jump at first major title

Katarina Johnson-Thompson: Ready to jump at first major title

After her 2014 was ruined by injury, 21-year-old Briton is leading pentathlete going into this week’s European Indoors. Now she intends to turn form into gold
Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot