View from City Road: ECC wounded in price war

DEVALUATION or not, English China Clays expects to have a tough time in Europe this year. Demand for coated paper - the main market for its clays - has continued to rise by about 2 per cent a year despite the recession, but capacity has been growing almost three times as quickly, and manufacturers are fighting each other to force suppliers' prices down.

So fierce has the price pressure been that even a 30 per cent drop in sterling against the dollar has not allowed ECC to force a price increase through. It has more than 50 per cent of the European market, compared with about 20 per cent for American imports. 'But devaluation does not change the fact that our customers are all losing money,' said Andrew Teare, chief executive.

The price war cut operating profits at ECC International, the china clays division, from pounds 97.7m to pounds 90.5m last year, despite a robust performance from Georgia Kaolin in the US. The damage would have been worse but for ECC's determination not to cut prices to maintain volumes.

Instead, it tried to hold its market share by introducing lower-cost products of similar specification - begging the question of how it will persuade customers to revert to higher-margin products in future - which pushed margins down from 16.7 per cent to 15.3 per cent for the year as a whole, and 15 per cent in the second half.

That performance was relatively robust compared with building materials and construction, where profits fell by 37 per cent to pounds 15.3m and 42 per cent to pounds 8.3m respectively. They were also responsible for a pounds 14.3m exceptional charge that left pre-tax profits down by a quarter at pounds 86.2m. The exit from housing, which raised pounds 18.6m in cash, remains well behind schedule.

ECC's results were presented under the old accounting format. The accounts however, will use FRS3, which means a pounds 14m disposal profit will move above the line, pushing taxable profits up to pounds 100.2m.

Analysts expect a similar result this year, giving earnings of about 25p, compared with 21.87p in 1992. That puts the shares, up 5p at 458p, on a fairly full multiple of 18.2. But the commitment to maintain the dividend at 20p once again means the shares are underpinned by the 5.8 per cent yield.

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