Two years' pain in structural steel sector, says Severfield

SEVERFIELD-Rowen underlined the size of the challenge facing the UK construction industry as it warned of two years of pain in the structural steel market.

The Thirsk-based group, the UK's biggest structural steel fabricator, believes the market will reach its nadir this year, and next year will only see a mild recovery.

"We're still of the view that 2010 will be the trough," said chief executive Tom Haughey. "It's substantiated by views across the industry that for structural steel, the market is probably down by 50 per cent on two years ago."

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With project funding only trickling through, Severfield expects fewer projects in the commercial, retail, industrial and warehousing sectors where its steel forms the backbone of major developments.

It still sees potential in transport, health, power and education, but accepts even these may be squeezed as a new Government looks to cut spending after the General Election.

"The market is not good for this year but we've already got about two thirds of our required output which is a very healthy position," said Mr Haughey.

Severfield yesterday reported a five per cent dip in 2009 underlying profit before tax, to 49.8m. Revenue slipped 11.4 per cent to 349.4m.

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But stock broker FinnCap said 2009's results were largely irrelevant, and a 25 per cent cut in total dividend to 15p per share reflects the tough outlook for the group. The dividend cut came despite Severfield finishing the year with 11.6m cash.

FinnCap analyst Les Kent said: "The reason for the dividend decision is that the order book currently stands at 219m, against 308m at the half year and 455m last year, which confirms the worries expressed in last week's dataBUILD following the statistics from the Office for National Statistics – new orders for the construction industry where industrial and commercial order flow is down a staggering 42.8 per cent. This is Severfield-Rowen's arena."

During the year the group worked on a number of high-profile projects including the Shard of Glass skyscraper in London, and the 2012 Olympic Stadium.

However, it is large projects such as these which are drawing to a close, with new ones failing to materialise.

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To compensate for the fall-off in big projects, Severfield is moving down the food chain by targeting smaller jobs, a move which is helping it win market share.

While previously it specialised in projects involving thousands of tonnes of steel, now it is pricing jobs as small as 500 tonnes.

"The margins are tight on these smaller projects," said Mr Haughey. "It's very competitive."

The group reduced its capacity by 20 per cent last year and cut its workforce by 15 per cent, to leave it with about 1,040 staff.

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Senior staff also took a 20 per cent pay cut, which along with other measures helped cut costs by 10m. "We are confident that we have got the company in a good shape to go through 2010," said Mr Haughey. "Hopefully we will then consequently see a small recovery in 2011."

Severfield is also diversifying its earnings to spread the risk globally. A joint venture in India will start up this year, and at full capacity, it should produce 35,000 tonnes of steel annually. This will target a 100bn construction market, which is growing at about nine per cent annually. The group hopes its expertise in high rise, big retail and power stations will prove invaluable.

Severfield is also trying to grow exports, but has seen prices weaken in its core Middle East market as competition intensifies.

Henry Boot suffers loss

Construction company Henry Boot believes the property market is beginning a slow recovery.

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The Sheffield company yesterday plunged to an annual loss, driven down by the falling value of its property portfolio.

Henry Boot made an 11.9m pre-tax loss in 2009, compared to 19.3m profits a year earlier, thanks to a 22.4m revaluation loss.

Income fell 40 per cent to 116.5m as a result of fewer transactions and weaker development activity.

"We're not going to be out there speaking incredibly bullishly about the market," said finance director John Sutcliffe. "The level of funding for the property market in general is still quite tight."

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Yesterday it announced the sale of a retail development in South Shields to Royal London Mutual Insurance Society. An unsolicited sale, the group said the 11.5m price tag and 5.8 per cent yield reflected the increasing appeal of prime property.