Malaise in sector could last into 2013, warns Severfield-Rowen

Shares in the Thirsk-based group, which supplied steel for Arsenal FC's Emirates Stadium and Wimbledon Centre Court's retractable roof, dived 18.9 per cent to close at 240p yesterday.

The update from Severfield, the UK's biggest structural steel firm, prompted a raft of City downgrades for this year and next.

Analysts said while Severfield should emerge strongly from the downturn, it may be that only the fittest survive in the structural steel industry.

To counter the market malaise, Severfield said it continues to look beyond the UK, announcing a new joint venture in Saudi Arabia. This is on top of an Indian joint venture opened last year.

"The general construction demand in the UK is probably looking at 2013 before it starts to turn," said Severfield chief executive Tom Haughey.

"But for our group there are specific sectors in construction that look more encouraging – that's London commercial, power and perhaps some industrial and warehousing coming back. The sectors that we are most interested in might come back (in 2012), slightly ahead of the general."

Mr Haughey said he expects a "30 per cent plus" rise in the price of steel in 2011, below some commentators' forecast of a 60 per cent increase. However, this may put some developers off starting new projects, he said, adding the price increase has mainly been driven by the surging price of coking coal following Australia's floods.

"It's a concern that people had a budget that they developed three months ago, and all the financing in place, and when they go to execute they find there's a significant cost inflation," he said.

However, Mr Haughey added the industry faces even bigger pressures from the UK's weak economy, constrained public sector spending and the construction hiatus. While Severfield's 2010 results will be in line with its expectations, with strong trading through the first half of this year, it sees the second half of 2011 tailing off. A number of commercial office projects, plus two power projects have been deferred to 2012, said the group.

Severfield added while tender prices have bottomed out, pricing will remain very tight in 2011.

Mr Haughey said these combined forces could push more of its rivals to the brink.

"The market has been difficult for 18 months to two years," said Mr Haughey. "The longer this goes on – and it's extending right through this year as well – then people are going to find it difficult to get through to the finish line.

"Ultimately, there's a better place when you get there (because) there's less competition."

Severfield's new joint venture in Saudi Arabia with Zamil Steel Industries will target the Middle East and North Africa with steel for stadiums, high-rise buildings, airports and power plants – typically projects requiring high engineering capability.

General steel will be built by Zamil, while complex pieces will be shipped from the UK by Severfield. Mr Haughey said it is too soon to give profit or turnover projections for the venture. "We've improved our ability to access that good opportunity with a strong local partner with a good blend of skills and shared ambition," he said.

Analysts at Altium Securities downgraded Severfield's profits hopes by 39 per cent for 2011 and 28 per cent for 2012. They moved to a hold recommendation but suggested buying on weakness.

"The downgrades to a larger degree reflect an element of uncertainty regarding the recent press comments and industry-wide expectations for steel price rises," they said.

"Figures for steel price increases of as much as 60 per cent in 2011 are being talked about and whilst the group attempt to have back-to-back steel price agreements for each contract this is not possible 100 per cent of the time.

"This is clearly very bad news for the rest of the industry and it is hard to see how the group's main competitors will trade profitably in 2011.

"This is the first company to warn of the impact of steel price rises and is unlikely to be the last. Nevertheless, it is well managed and should see a solid recovery in 2012."

Analysts at brokerage Peel Hunt downgraded their profits expectations for 2011 by 45 per cent to 10m and 2012 by 25 per cent to 18m. "We believe short-term disappointment will offer an attractive entry point to a sound long-term story," they said.

Aiming to build in india market

Severfield Rowen's new joint venture in India aims to tap into the country's booming construction sector.

Opened in August, it employs 250, has an order book worth 15m and is operating in line with expectations.

A 50/50 joint venture with India's third-largest steelmaker, JSW Steel, it should eventually produce 35,000 tonnes of steel annually when it reaches full capacity.

It targets a 100bn construction market, which is growing at about nine per cent annually.