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