View from City Road: Steel investors could be left stranded

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The Independent Online
British Steel may be relying too much on a positive outcome to this Thursday's wrangles at the European Union over state subsidies to loss-making steel producers. There is a danger that if nothing happens, the prospect for further price rises or a British Steel acquisition in mainland Europe will remain cloudy.

Shareholders could then find themselves stranded. British Steel shares have risen twice as fast as the stock market in the past year under the impact of buying by American investors, who now make up about a third of the share register.

At stake at Thursday's meeting is an agreement to cut 6 million tonnes of capacity from loss-making, state- owned producers in Spain, Italy and former East Germany.

Without that agreement, there will be little progress in cutting out a further 23 million tonnes of capacity by way of a 'self-help' scheme organised by private steel companies.

Reduced steel-making capacity will underwrite future price increases. So far in its current financial year, British Steel has secured rises of 2.6 per cent - 1 per cent in the UK and 3.5 per cent in export markets - behind the shelter of the pound's devaluation and a 56.6 per cent share of the domestic market.

These factors, combined with a 4 per cent cut in operating costs, swept British Steel back into the black to the tune of pounds 27m in the six months to 2 October, despite a fall in the company's sales volumes in mainland Europe. One per cent on prices means pounds 40m on profits. Since the company is talking about 7 per cent price increases next year, a jump in profits from pounds 100m this year to more than pounds 300m in 1994 is feasible.

A likely dividend yield this year of only 2 per cent recognises this possibility, but limited progress on European restructuring could undermine the appetising arithmetic.