Lean, mean and looking to expand

YOU HAVE to pity Sir Brian Moffat, chairman and chief executive of British Steel. He has learnt the hard way that being a model of productivity is not enough in today's turbulent world.

He has cut costs to the bare minimum, making the company the leanest, meanest steel company on the planet. Since 1980, British Steel has shed more than two-thirds of its workers while maintaining productivity.

Yet the slump in Asia and the rise and rise of sterling this year have taken their toll. Last week, British Steel sent shockwaves throughout the UK manufacturing industry when it reported a 24 per cent fall in pre- tax profits, with the likelihood that the company would make a loss for the full year.

All year, things have been going badly for the company, which has been protesting like mad about the strength of the pound. As sterling soared, British Steel, which exports around 30 per cent of its products to mainland Europe, saw its profits slide. Its share price has halved over the past year.

It was a bitter blow for Sir Brian when in September British Steel - which last year had a turnover of pounds 7bn and a staff of 47,000 - dropped out of the FT-SE 100 index. It was replaced by one of its co-tenants in its Marylebone Road offices, the telecommunications company Colt. Colt has a staff of just 1,244. It is expected to make profits this year of pounds 210m while analysts are predicting that British Steel will post a pounds 60m loss.

While the strength of sterling has been a constant worry for the company, it was the slump in Asia that really knocked the wind out of British Steel's sales and depressed steel prices to their lowest levels in Sir Brian's career. The Far East used to take big imports, now it is a source of very cheap exports.

British Steel last week joined other European steel companies fighting the onslaught of cheap imports by asking the European Commission to investigate the dumping of Asian steel in the European Union. Dumping is a trade term meaning the sale of goods on a foreign market at lower prices than on the domestic one. But British Steel is going to need more than EU anti- dumping taxes on cheap imports to help it return to profit.

The company plans to cut 1,600 more jobs over the next six months. That means the only option still in its control is to buy its way into expansion. The company has around pounds 400m in cash and is the front runner to buy the Polish steel compan, Huta Katowice. The Polish government is expected to make a decision on a bid next year. The plant is big and will give British Steel the opportunity to be the main supplier to the country's rapidly growing car industry.

The downside is that the Polish plant is not that efficient and will need upgrading at a cost of more than pounds 300m over the next few years, according to analysts.

Paul Burgess, an analyst with brokers Henderson Crosthwaite, said: "Poland makes sense in that Eastern Europe is a growing area and likely to be steel-intensive compared with Western Europe."

British Steel is also looking to buy something in the United States.

A spokesman for the company said: "The strategy is to look at steel manufacture in developing markets - Poland is a good example of that - and to look at downstream operations in mature markets.

"Analysts in the US have pointed out that the US market offers potential in that regard, particularly as there are a number of medium-to-large independent steel distributors in the States, so that's a scenario that could evolve."

Another analyst said: "The impression I got was that they believed there were some better opportunities out there than there have been for some while, because prices have come down."

Mr Burgess, of Henderson Crosthwaite, said: "One has to assume they know what they are doing. They are very commercially orientated, so you have to see it as read that they will invest where it brings best benefit to shareholders."

Let's hope he is right.