Strong sterling gives Britain's exporters a headache

Britain's exporters were counting the cost last night as the pound continued its surge against the dollar and the Deutschemark, putting further pressure on manufacturers reliant on overseas markets.

Since the beginning of the year, sterling has appreciated by 12 per cent against the German currency and by 9 per cent against the dollar, squeezing exporters selling into continental Europe, North America and dollar-denominated regions such as Asia Pacific. Last night sterling closed at DM2.4607, up slightly more than three pfennings, and at $1.63, up two cents, while it is at its highest against the trade weighted index for two and a half years.

British Steel estimated that if the pound stayed above DM2.45, it would knock up to pounds 250m off profits next year because 30 per cent of its output went into Europe where steel is priced in Deutschemarks.

Analysts expect British Steel to make pre-tax profits this year of between pounds 500m to pounds 600m, but their estimates for next year vary from pounds 350m to pounds 750m.

A weak dollar has traditionally helped British Steel because it buys pounds 650m worth of coal and iron ore a year, both of which are priced in dollars. However, the growth in sales to South-east Asia, where steel is priced in dollars, has more or less cancelled out this currency advantage.

John Bowden, British Steel's investor relations manager, said: "The biggest negative factor for us is sterling's strength against the Deutschemark because of our revenues from Europe. We also feel the impact because it affects the competitiveness of our customers in the manufacturing sector."

ICI said that exports this year were down by 7 per cent, largely due to currency factors but in the third quarter the fall in overseas sales worsened to 11 per cent.

A spokesman said that trading profits were affected by pounds 5m for every cent that sterling appreciated against the dollar and by pounds 2m for every pfenning it rose against the Deutschemark.

"The worst-hit products have been industrial chemicals like chlorine and ethylene. About 70 per cent of production is sold in Europe and thee products are very price sensitive."

Kate Barker, chief economist at the Confederation of British Industry, said the longer the pound remained strong, the more manufacturers would begin to worry. "If sterling moved above DM2.50 and stayed there, there would be quite a lot of concern about it eating into profit margins and holding back exports," she said.

Ian Campbell, director of the Institute of Exports, said it was disappointed at the interest rate rise and maintained there had been no case for it on grounds of combating inflation.