View from City Road: Sterling fails to reinforce steel

ANYONE labouring under the impression that the 11 per cent devaluation in effect of sterling in recent weeks will prove to be a bonanza for exporters need only reflect on yesterday's news of production cuts at British Steel.

In theory British Steel should be a classic beneficiary of sterling's decline. About 55 per cent of its sales go into the domestic UK market, which has been under relentless attack by importers, and most of the rest of its output heads in the direction of Germany, France and the Benelux countries.

To these direct benefits you could add the indirect bonus to British Steel of increased activity among UK customers, spurred on by a more competitive currency and lower interest rates.

Sadly, the reality is that pricing weakness in the steel markets of Europe is likely entirely to blunt any competitive edge to British Steel on new sales from sterling's fall.

The weakness in prices - latest monthly price lists suggest a 15 per cent fall on some products compared with a year ago - reflects the long-running problem of over-capacity. This has been made worse by a fall- off in demand as the recession lingers on.

To that extent a 20 per cent cut in current quarter production by British Steel, which largely mirrors similar recent reductions by Thyssen and even the state-owned Usinor- Sacilor, may not have the much-needed positive impact on prices.

The stock market is reconciled to losses at British Steel approaching pounds 120m in this financial year to March 1993 after a pounds 55m loss last year.

What it is not sure about is the likely level of dividend payment this year, although news of production cuts two weeks before the company's interim figures looks like a pretty broad hint.

Last year the payment was almost halved to 4.5p. This year the outcome is really anyone's guess.

To judge by the market reaction in the shape of a 6.5p fall to 56p there appears to be some confidence that the company will use its strong balance sheet, with gearing of just over 10 per cent, to pay a 3p dividend, implying a prospective yield of around 7 per cent.

This may be optimistic and short of EC steel import quotas the shares remain risky.