It's in crisis, but Corus isn't at the end of the line

As the loss-making steel group fights for its life, Clayton Hirst helps it make the tough decisions

The business brains at McKinsey & Co will tomorrow start to ponder a conundrum that has eluded the bosses of Corus for the 15 years since Britain's steel industry was privatised.

How can the Anglo-Dutch company make a profit when it is competing against cheaper foreign rivals, when demand for steel is falling and when the relative strength of the pound is eating away at any advantages it might have?

The blue-chip management consultancy was hired last week by Corus's chief executive, Tony Pedder, after the £543m sale of the steel company's aluminium business to France's Pechiney stalled. Not only does this starve Corus of much-needed cash, it also puts the breaks on talks with its banks for a vital new loan – potentially threatening the company's future.

Corus says McKinsey will conduct a "quick, high-level review" of strategy, possibly in time for its annual results on 13 March. But McKinsey, whose former clients include the BBC, Railtrack and Enron, doesn't offer its services cheaply. A senior partner will typically charge £1,000 for a day's work and it is estimated McKinsey will invoice Corus for up to £180,000.

But at The Independent on Sunday, we can offer Corus our own "blue sky" thinking for a fraction of the cost. For just £1.20 we present a four-point plan, minus the management consultancy jargon. So, to Corus's most pressing issue: the sale of its aluminium assets. The main obstacle is Leo Berndsen, chairman of Corus's supervisory board in the Netherlands, who has blocked the deal. Mr Berndsen is worried that the sale proceeds would be ploughed back into Corus's loss-making UK operations at the expense of more efficient plant in Ijmuiden.

He has a point. Corus's core UK carbon steel business has lost nearly £1bn in the last three years. But Mr Pedder believes it represents Corus's future, as the market in aluminium and stainless-steel production is already sewn up by foreign rivals.

For Corus's focus on steel to have a chance of succeeding, the company must sell its aluminium assets. This brings us to the first recommendation: to placate Mr Berndsen, Mr Pedder should guarantee that a proportion of the aluminium sale proceeds will be invested in the Netherlands.

Failure would put in jeopardy critical talks with Corus's lenders, ABN Amro, Credit Suisse First Boston and HSBC. A £1.2bn loan facility will expire next year and Corus is desperate to renew it, but the banks are bound to be nervous, given that Corus's credit is now rated as "junk". If Corus doesn't sell its aluminium business, its banks could refuse to renew the credit. It may then have to turn to the bond market for money. The investment bank Morgan Stanley estimates that because of its credit rating, Corus may be forced to pay an interest rate of up to 14 per cent on a new bond.

It is, therefore, essential that Mr Pedder makes peace with his Dutch colleagues.

Assuming the aluminium sale goes ahead, Corus must then turn its attention to steel. Worldwide demand is falling and the UK market is especially poor. As a result, Corus's margins are wafer thin. While this is mainly down to higher UK labour costs, Corus must take some of the blame. Philip Tomlinson, an analyst at CRU Group, a consultancy specialising in the metal industry, says: "Corus is suffering from a legacy of low investment. Historically, the company has taken more out in dividends than its continental European rivals, although no dividends were paid recently."

So, to the second recommendation: Corus must close or reduce capacity at its less efficient UK plants. Last week, Corus refused to comment on speculation that it was planning to make 1,500 workers redundant. Insiders insist there won't be a return to 2001, when Corus cut 6,000 jobs. But to survive it may have to at least trim its 25,000-strong workforce. Mr Tomlinson predicts that Corus's Teesside and Llanwern steelworks may have to take the brunt of cuts.

After it has stemmed its losses, Corus needs to specialise. Despite its problems, it has built a solid reputation in certain areas: making girders, producing metal for the rail industry and manufacturing pre-painted sheet steel.

Now, the third recommendation: to build on its strengths, Corus should explore joint ventures with foreign steel companies. Re- kindling its former merger with Brazil's CSN is probably unwise. Corus backed out of the deal last year, and there are too many financial issues at stake to make a merger work.

But Corus's financial crisis may make it prey to a bigger rival. Albert Minassian, an analyst at the investment bank JP Morgan, says: "Although a turnaround may not be that simple, there is ... a likelihood that a competitor could extract more value."

London-based LNM, owned by the one-time Labour Party donor Lakshmi Mittal, is a potential predator, having grown by acquiring businesses in the US, the Czech Republic and Romania. A bid by LNM for Corus would be a huge embarrassment to the Government after last year's "steelgate" row, in which Tony Blair was revealed to have supported LNM's takeover of a Romanian company.

And the final recommendation: if all else fails, Corus should put itself up for sale for the sake of its long-suffering shareholders. This could best be done by breaking up the company, selling off the aluminium assets and the Dutch and UK operations separately.

Under these circumstances, the UK plants may have to be wound up.

The investment bank UBS Warburg estimates that closing the plants would cost £625m, but this could be offset by asset sales. The book value of Corus's land and property alone is set at a conservative £300m. UBS believes that if Corus were broken up as a going concern, shareholders would get around 32p a share, compared to today's price of 16.25p.

So there you have it, Mr Pedder. It may be shorter and certainly blunter than the report you'll get from McKinsey, but there can be few other options left for Corus.