British steel plan under threat

British steel plan under threat

By Antony Barnett

LONDON: Turmoil in Asian financial markets is threatening to scupper a flagship US$800 million dollars investment plan by British Steel.

The company disclosed during the summer its intention to take a majority stake in an Indonesian project to build a large steel mill to supply Southeast Asia. The investment was seen as central to its efforts to reduce its dependence on UK production.

But the economic crisis sweeping the region has forced the company to rethink its long-harbored ambition to break into the Southeast Asian market.

The move would have helped British Steel reduce its sensitivity to movements of sterling on the foreign exchange markets. The rise in the pound over the past year has wiped more than pounds 100m ($160 million) off its profits.

According to sources close to British Steel, the board is "rethinking the numbers to see if they can still get them to add up".

City analyst Terry Sinclair, of Salomon Brothers, who urged investors to buy British Steel last week, welcomed the move. He said: "The long-term argument for buying in Asia is robust. With currency coming down, you are buying with strong money. But British Steel was building on a greenfield site and would not have had that advantage. The market will be pleased if British Steel now avoids the region."

The steel-maker, which is reporting its half-year results in just over two weeks time, would not officially comment. It announced this summer that it would take a majority stake in a steel mill to be developed in partnership with PT Bakrie & Brothers, the Indonesian conglomerate.

If the project went ahead it would add about 1 million tons of steel a year to the company's present output of 15 million tons.

While the fall in the Indonesian currency affects the financing of the new mill, British Steel's real concern is that financiers will no longer back infrastructure and construction projects that would have produced orders for the plant's output.

Last Friday, the International Monetary Fund announced a $23 billion package of financial aid for Indonesia. But, as a condition of the rescue package, the Indonesian government must cut back on investments in state-owned industries and curtail prestigious public sector projects.

The car market in the region, which depends on steel, has also gone into free-fall. While the car industry in Southeast Asia grew by 20 percent a year between 1993 and 1995, this year sales are forecast to fall by some 5 percent.

The turmoil in Asia will also hit Shell, which this week reports its third-quarter results. The oil company has significant operations in the region and City analysts will be looking at how refining and marketing are performing in the Far East and Asian Pacific.

One analyst said he expected the impact of Southeast Asian currency devaluations to have hit Shell "quite hard".

Apart from the obvious impact on Shell's foreign currency holdings, devaluations of the currencies of many Pacific Rim countries will have put margins in the region -- which were already weak -- under further pressure.

-- The Observer