Steelwork: A shaky structure?

Pessimists predict vicious scrapping over the spoils of a shrinking marketplace. Optimists suggest that the market will be flat, possibly into next year. But one thing is certain - uncertainty awaits the structural steel industry and dangers lie ahead.

Danger No 1: The strong pound is forcing structural steel exporters to pitch for projects in the UK, creating increased competition at home and shrivelling profits in some sectors of the industry.

Danger No 2: Structural steel firms, particularly smaller ones, could be lured into over-investing in technology to keep pace with the big boys. Many are borrowing in order to invest. Any contraction in their market - whether from lower demand or increased competition - could push them over the edge.

Some leaders in the sector foresee casualties as smaller companies, which have been tempted to expand in the mainstream market are encountering more competition than they bargained for from larger operators.

Perhaps the effect won't be as extreme as in 1991 when a general downturn in construction saw more than 200 UK structural steel companies go under, but many in the industry are braced for some blood on the carpet.

Back in 1989 consumption of constructional steelwork in the UK peaked at 1.42 million tonnes. By 1992, it had plummeted to a mere 814,000 tonnes. Since then there has been a steady climb back of 4-5 per cent annually to the point last year when 1.08 million tonnes was consumed.

But as industry gradually slows - and along with it a diminishing need for industrial structures like depots and warehouses - consumption is expected to dip by the end of this year and dip again into the first year of the new millennium. (See bar chart below).

volumes to shrink

British Steel, the major supplier to the market, expects volumes to shrink by 4 per cent over the next three years. Some of the biggest players, including Atlas Ward, Bison and Severfield Reeve, also concede that the pressure in the marketplace is growing.

To some extent their analysis is endorsed by the British Constructional Steelwork Association, which is so concerned about over-investment that it is distributing free software to its members to guide them through the investment process.

Already the strength of sterling has had its effect on the heavy end of steel construction - witness Kvaerner trying to sell off its Cleveland Bridge subsidiary. Ironically the company has received a memo of understanding from the Chinese government to build two more bridges - but not even this is sufficient for the Norwegian-owned giant to take down its for-sale sign.

But, there can be few starker examples than Atlas Ward. Just 15 months ago the company was picking up a Queen's Award for exports, but even as it did so it realised that it faced a slump in overseas profits because of the strong pound.

It was becoming increasingly difficult to supply European contracts cost-effectively from its North Yorkshire factory, and in Germany the company was forced to source contracts locally.

This left Ken Anderson, the MD, a dilemma - either cut jobs at the Sherburn plant, or find orders elsewhere. Anderson chose the latter route, embarking on a sales drive that lifted UK turnover by 40 per cent and group sales by 24 per cent.

commercial contracts

The main drivers for Atlas Ward are some juicy commercial contracts including two high-rise jobs at London's Canary Wharf, both for Credit Suisse Group; an 11-storey multi-cinema Virgin complex for contractor Kier in Glasgow, and steelwork and decking for a headquarters for the Scottish Media group. All of which is helping turnover climb to an estimated £55 million and giving competitors food for thought.

Anderson recognises that Atlas Ward may have contributed towards crowding the UK marketplace - "Eventually we are going to get to the point - and we may be there - where capacity has outstripped demand."

But he believes that the biggest spectre is over-investment. "Capacity in the UK fabrication industry has continued to grow as firms, coming out of recession have re-invested in capital plant."

Too many well-tooled firms needing high volumes to generate cash to cover interest payments on borrowings could lead to cut-throat pricing "to the point where worst-placed firms start going out of business."

That is unlikely to include his own because Atlas Ward's major investments took place in the 1980s, since when developments have been strictly controlled.

Meanwhile, the biggest sector - the industrial market - which uses of 560,000 tonnes of steel a year, appears to be the hardest-hit.

Alan Collins, the outgoing managing director of Bison says: "The shed market, for instance, is back to 1982 prices. Margins are basically non-existent. People continue to maintain volumes only because they are marking time with their overheads to wait for better days."

And while British Steel is predicting contraction of 4 per cent over three years, in statistical terms that is a relatively flat market. Therein, he says, lies the risk. "You can't demand more and more in a static market without putting someone's nose out of joint. Companies like Bison, with a niche in hybrid structures are secure but the guys slugging it out toe-to-toe in areas of squeeze are the most vulnerable."

On over-investment, Collins says: "At one time when technology was new and hugely expensive, only those with clout could afford it. Now the smaller operators are being encouraged to buy the kit that would allow them to compete on equal terms."

But more competitors even in a static marketplace mean that "margins and ultimately jobs would be affected."

Fraser Darrington, sales director of Severfield Reeve agrees that some areas of the market are crowded and that should it shrink there could be losers, particularly those saddled with investment debt.

His company had invested £9 million in five years on plant and machinery - it now has four separate industrial production lines at Thirsk, each with their own shotblasters and £2 million saw and drill - but it could afford it.

"We don't have large borrowings. We are fairly self-sufficient. But not everyone is in that situation and yes, there could be casualties particularly among those trading at near-to-the-knuckle margins."

not convinced

But not everyone is convinced. Geoffrey Taylor, sales and marketing director of constructional engineers Watson Steel, which has worked on the Millennium Dome as well as the world's tallest and fastest rollercoaster at Blackpool believes that there is a danger of over-generalising the problem.

He said: "An awful lot of smaller companies are family-owned and cash rich. I don't see a mass of people going under, or anything like the scale of the recession between 1990 and 1992."

And there is another optimistic note. Fears that steel imports could rise as a result of exporters turning to the UK market, adding to the deficit of around £1 billion in the construction industry can be discounted. The Italian firm Cimolei may have plucked major jobs in the UK like the Millennium Stadium in Cardiff but 'foreign' firms are actually losing ground here.

Derek Tordoff, director general of the BCSA, says although the industry, "has to be on the ball, imports of 50,000 tonnes experienced in the late 1980s no longer apply.

"Now we export 100,000 tonnes a year and import 10,000 tonnes. Now 99 per cent of steelwork in the UK is produced by UK companies, compared with 95 per cent then."