Investment Column: Sterling dents British Steel

British Steel is the ultimate cyclical stock, riding the twin roller-coasters of the economic cycle and the foreign exchange markets. The gyrations it experiences as a result have made the company a dismal long-term investment but a great opportunity for anyone who fancies they have a short-term economic or financial crystal ball.

Although the shares are no higher than they were in 1989, buying at the end of 1992 would have increased your investment five-fold in the following four years.

Profits of pounds 143m for the six months to September were well ahead of expectations although almost halved from last year's pounds 262m, and the shares, now 40 per cent owned by bullish American investors, nudged 3.75p higher to 148.75p in response.

The company had warned six months ago that the full impact of sterling's appreciation had yet to be felt and it was right, only a little less than expected.

Demand for the company's steel is actually pretty buoyant just now, with the car and construction industries in fine fettle - volumes were 4 per cent higher and prices have started to firm in local currency terms.

All the benefit was eroded by the effects of the soaraway pound, which has risen by around 30 per cent against the mark over the past two years. Almost all steel in Europe is traded in marks, making British Steel less competitive against European rivals in their markets and more vulnerable to imports at home.

One of the reasons British Steel's shares are so volatile is that small movements in currencies can have a dramatic impact on forecasts. One analyst yesterday hiked his estimate for the year to next March from pounds 220m to pounds 400m.

If that is achieved, the company will have weathered the current downturn a lot better than the previous slump in the early 1990s and its big discount to the rest of the market, underpinned by a 6.7 per cent net yield, might look unjustified.