Steel maker Corus delivers warning on UK energy costs

Corus, the Anglo-Dutch steel maker, warned yesterday that high UK energy prices would keep it at a long-term competitive disadvantage, undermining attempts to close the gap with its continental rivals.

The warning came as the company unsettled the market by forecasting a bigger-than-expected increase in its raw material costs this year, which will largely wipe out the benefits of higher selling prices. Corus expects raw material costs to rise by £400m this year to about £2bn, with £140m of that increase attributable to higher gas and electricity prices.

Philippe Varin, the chief executive of Corus, said its electricity charges would be £60 a megawatt hour in the fourth quarter of the year - more than twice the amount paid by continental rivals and four to five times what Russian steel makers pay.

M. Varin added that he saw this "structural disadvantage" lasting for at least the next three years. Corus is one of the country's biggest energy users, and is on course to achieve its three-year target of reducing operating costs by £680m by the end of this year. But the lower production costs which other steel makers have enjoyed have prevented it closing the "competitiveness gap" as much as planned.

The warning on raw material costs took the shine off a set of second-quarter figures in line with market expectations and further progress in reducing the group's debt burden. Corus shares fell by 2 per cent. Group operating profit for the three months to June halved from £267m to £129m.

But Corus said its underlying debt levels, once the £570m proceeds from the sale of its aluminium division were included, had fallen to £320m from a peak of £1.7bn five years ago while the overall trading environment for the second half of the year was expected to improve. The company has secured an increase in selling prices of 7-12 per cent for the third quarter and it has announced a further rise of 5-10 per cent for the fourth quarter. Despite this, Corus said it expected the benefit of higher prices to be largely offset by high input costs and lower steel production due to the relining of a blast furnace at its Ijmuiden plant in the Netherlands.

M. Varin refused to be drawn on the status of its joint venture talks with other steel makers. Corus has made no secret of its desire to forge an alliance with a steel maker in a low-cost, high-growth market such as Russia, Brazil or India. Following the Mittal-Arcelor merger there has been speculation that Corus itself might be taken over, with a number of Russian steel groups mooted as possible predators.

"We are actively pursuing the opportunities available to us. Whatever we do will take into account shareholder value," said M. Varin.

Although China will become a net exporter of steel for the first time this year, M. Varin said he did not expect a huge explosion in Chinese steel exports which could unsettle Western markets and depress prices.