View from City Road: British Steel remains a hefty gamble

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The Independent Online
Anyone with the nerves to buy British Steel shares last November, when the ailing privatised steelmaker passed its interim dividend, has been amply rewarded as the price has since more than doubled.

Nerves have become a little frayed of late in the face of this gravity-defying performance. Driven predominantly by US investors, the share price hit a peak of 106p taking it within shouting distance of the 125p at which British Steel was sold to the UK public back in 1988.

Up 0.25p at 98.75p yesterday the shares remain a hefty gamble. The upbeat case is that a combination of the European Commission, national governments and cash-strapped mainland European steel producers will be forced to cobble together a pounds 5bn agreement to cut raw steel capacity by 20 per cent or 30 million tonnes at the politically sensitive cost of more than 100,000 jobs.

This, so British Steel fans hope, will signal the end of a vicious price war led by European producers - many subsidised by national treasuries. The fight cost British Steel pounds 160m last year, swamping pounds 57m efficiency gains arising from the final closure last year of Ravenscraig, and dragged the company from a trading profit of pounds 17m to losses of pounds 113m in the year to 3 April.

The bounce in British Steel shares has been helped by the announcement of average price rises of 9 per cent in the UK taking effect from April onwards and so far appearing to stick. The rises cover about 45 per cent of British Steel's turnover, and should take the company from losses of pounds 149m to pre-tax profits of pounds 100m in 1993/4. News that Usinor, the French company, was also planning to lift prices in the third quarter and again in early 1994 has been seen as another encouraging portent.

But the odds on getting the recalcitrant Spanish and Italian governments to agree on a steel restructuring plan this summer look as long as ever. Demand is also crumbling in Europe, which provides almost 30 per cent of British Steel sales.

In the UK, where, post-devaluation, British Steel is sensibly determined to build on its dominant market share - up 3 points to 56.2 per cent last year - demand remains fragile and may have been inflated in early 1993 by beat-the-price-rise orders.

British Steel is in a position to lift its dividend from a severely slashed 1p to 2p if indeed it makes pounds 100m this year. But a yield of 2.6 per cent is looking well beyond that and reinforces the gamble in the share price.