Blackfriar: Firms ready to show their steel when recovery arrives

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At first sight the news out this week from Yorkshire steel producers Severfield-Rowen and Billington Holdings looks pretty depressing.

Indeed, shares in Severfield-Rowen fell 14 per cent on Tuesday after the structural steel company said annual profits fell by a third and there is no sign of an imminent UK recovery.

The Thirsk-based company said 2011 was a year of slow demand and tough trading conditions.

Underlying group pre-tax profits fell from £15.3m to £10.1m in the year to December 31.

Revenues rose marginally to £267.8m, but this was wiped out by high steel prices.

Severfield, which supplied the steel for prestigious projects such as the London Olympic stadium and the Shard skyscraper at London Bridge, expects limited growth prospects for 2012. The problem is that steel prices have boomed, but the market for structural steel has halved over the past few years as a result of the economic downturn.

Over in Barnsley, smaller rival Billington Holdings described 2011 as “without doubt the most difficult trading year in the history of the group”.

Billington reported an overall loss of £1.7m for the year to December 31, down from an £800,000 profit the previous year.

Again pricing was to blame. A 27 per cent increase in revenues to £53.9m was offset by a combination of an increase in steel prices and a highly competitive market.

Following a strategic review the group is taking on more niche work. It won’t be so involved in the cut-throat market and it will be more selective. The reorganisation involved the move to a single pattern of shift working.

Unlike Severfield, Billington is hopeful that it may see a pick-up in the latter half of 2012.

Billington said that a slight improvement in trading conditions during 2012, together with the “unfortunate loss” of a number of competitors in the structural steelwork sector give it a degree of confidence. Unlike many of their rivals, both Yorkshire steel firms have managed to keep their heads above water.

Going forward, Severfield sees great opportunities at its fledgling Indian business.

The Indian order book stands at £43m, covering almost all of the production plans for 2012.

Severfield believes the opportunities in India are immense and every sector is buoyant. The Indian joint venture is expected to become profitable in 2012, with the group recovering from a significant loss to a small profit.

So, bearing in mind the huge growth opportunities in India and the fact that the UK market will be “lacklustre” over the coming years, is Severfield thinking of reducing its exposure to its home market? Apparently not, chief executive Tom Haughey believes that when the UK market does pick up, Severfield will be very well positioned.

Both Severfield and Billington have worked on prestigious projects in the UK and while they operate at different ends of the market, both are highly respected. Once the UK economy does recover, both are ready to lead the charge.

Catchy it is not.

The Government has replaced last year’s failed attempt at financial wizardry – Project Merlin – with something a little less exciting-sounding.

The National Loan Guarantee Scheme launched this week with the aim of boosting credit for small and medium-sized enterprises (SMEs).

Merlin was widely criticised for missing targets on business lending, and failing to increase the flow of credit to companies which claim they are being starved of cash. In addition, it proved largely impotent at curbing banking bonuses.

So Merlin has been quietly dumped and replaced with the NLGS.

Blackfriar likes some elements of the new scheme, also dubbed credit easing. It aims to boost lending to firms with turnover of £50m or less, the small companies which form the lifeblood of the economy. Some £20bn will be available, in tranches of £5bn.

The Government is using its ability to borrow at very low rates on the international markets, and passing this on to businesses.

In essence, companies which borrow from one of the five participating banks will get a discount of one percentage point on their loan, compared with the rate they would otherwise have received.

But the scheme does not force banks to lend – and nor must they loosen their post-credit crunch strict lending criteria.

So while small firms will get a discount on the rate at which they can borrow, the bank manager is still unlikely to lend to them if he doesn’t like their business plan. Thus the NLGS may not help many new, growing businesses, which tend to be higher risk in the first place.

Ingenious efforts to boost the flow of credit to small companies deserve some credit.

But Blackfriar isn’t surprised the latest scheme has earned such a deliberately forgettable title.