Blackfriar: Lessons to be learned from a tale of two steel companies

2012 was another difficult year with the industry flatlining at 800,000 tonnes per annum, almost half the peak of five years ago.

Back in 2008 no-one predicted the economic slump following the banking crisis would last for five years.

The big worry is that there are few signs of a pick-up. Steel giant Tata is predicting growth of one per cent this year followed by growth of two to three per cent next year, but this is far from certain.

In Yorkshire two listed companies dominate the sector – Thirsk-based Severfield-Rowen and Barnsley-based Billington Holdings.

Last month Severfield’s executive chairman John Dodds, who replaced former chief executive Tom Haughey in January, insisted the company was “not a basket case” after it launched a heavily-discounted £45m rights issue to fix its balance sheet and give it firepower for growth.

Severfield was forced to seek emergency funds after uncovering heavy losses on contracts including the Cheesegrater skyscraper in London.

The fundraising will dilute the Thirsk-based structural steel contractor’s shares by almost 70 per cent, with participating investors receiving seven shares for every three they hold.

Mr Dodds said: “We have a very good business that’s temporarily lost its way. I will ensure that the business re-finds its way. We have an ongoing and successful future.”

Severfield reported pre-tax losses of £23.3m for 2012, down from £6.8m profits a year earlier.

This week rival Billington said it will return to the black this year after successfully diversifying into new growth areas such as rail and energy.

The group reported an underlying loss of £100,000 for the year to December 31, an improvement on the previous year’s £1.7m loss.

The Barnsley-based group assumes the tough conditions of the past few years will persist and with this in mind it has entered a number of new areas and has secured contracts in transport and energy.

The group won two rail contracts in 2012. These included a new concourse and bridge across the East Coast mainline at Wakefield Westgate station and putting in disabled access at Thornton Heath station.

It is also working in the energy sector and has won a new contract with Drax Power Station in North Yorkshire.

The group’s Billington Structures division will supply a new pipe bridge at the power plant in Selby as part of Drax’s plans to convert three of its six generating units to burn sustainable biomass in place of coal. This will transform the business into a predominantly biomass-fuelled generator delivering low carbon, low cost and reliable renewable power.

Last month Severfield’s Mr Dodds said: “We can still turn around to our client base and point to the two tallest structures in London and say we built them.”

Perhaps this is the problem. Yes, prestigious projects in the capital add kudos but if they turn a company into a basket case they simply aren’t worth it.

Blackfriar recalls a chat with a Northern ice-cream producer a few years ago. The head of engineering at the firm questioned the chief executive’s decision to continue making a certain ice-cream for Marks & Spencer when the line was making a hefty loss.

The head of engineering was swiftly told that the line would continue however much money it lost. The chief executive’s mother always served the ice-cream at dinner parties and proudly told her guests that her son’s company was doing so well that M&S was stocking its ice-cream.

Such vanity is not affordable when the company in question is listed and therefore accountable to its shareholders.

Billington has made the decision to pull away from the competitive market to focus on more niche, added value, complex work.

“We’re trying to be more selective and take on contracts where we can add value,” said chief executive Steve Fareham. Making a new pipe bridge for Drax and a bridge across the East Coast mainline at Wakefield Westgate station are not the most glamorous of projects, but Billington is right to seek out lucrative niche areas where it can improve margins.

Following Billington’s results on Tuesday, analyst Matthew Davis at WH Ireland said: “Initiatives to diversify into new markets, for example in rail and energy, appear to be progressing with substantial new orders won.

“While the company has not been immune from the multi-year industry downturn, judicious decision making, coupled with a robust balance sheet, has enabled Billington to ride it out.”

Severfield should take note. In this environment prestigious but loss-making projects are an unaffordable luxury.