AnalystWatch CorusInvestors who have stuck with Corus over the past five years will have developed nerves of steel. Shares in the Anglo-Dutch company, formed by a merger of British Steel and Hoogovens of the Netherlands in 1999, fell to 4p (5.9 cent) at one stage in 2003, recovered to peak at 63p at the beginning of this year, but have since fallen back to 45p.
In 2004, Corus made its first full-year profit since the merger, but many analysts are already discounting the next downward swing in the global steel market. Several have downgraded their ratings in recent months.
Merger speculation has provided some underpinning for the share price, but this has yet to be translated into action. As the deal that led to the creation of Corus demonstrates, mergers in themselves are no guarantee of success in the market.
China's rapid economic growth has sucked in large volumes of steel in recent years, but expansion is unlikely to continue at present rates, while the Chinese develop their own manufacturing capacity.
The merger that created Corus brought together Hoogovens' highly efficient plant near Amsterdam and a clutch of British Steel plants of less than optimal size. It provided a welcome rationalisation of the sector, but the company's subsequent attempt to merge with Brazilian steelmaker CSN fell apart.
Four months later, a split developed within Corus over plans to sell its Dutch aluminium operations to Pechiney of France. Corus's Dutch supervisory board objected to the sale on the grounds that the proceeds would be used to prop up the ailing British business.
Corus's share price collapsed and Tony Pedder, chief executive, paid for the miscalculations with his job.
The arrival of Philippe Varin, a long-serving Pechiney executive, as chief executive in May 2003 ushered greater harmony and faster progress in solving the company's problems. Jobs were cut, UK operations were concentrated on three main plants and productivity was increased.
Varin had his share of luck. Strong worldwide demand for steel prompted a 70 per cent rise in the European steel price to near-record highs. The company made a first-half profit in 2004 and the shares bounced back and were reinstated in the FTSE 100 index.
Around this time, in late 2004, ThyssenKrupp, the large German steelmaker, revealed it was keen to take the lead in a further consolidation of the European steel industry. A Corus/Thyssen-Krupp combination would be the world's third-biggest steelmaker.
But the steel price cycle looks set to turn again, with many analysts forecasting a 30-40 per cent fall in the second half of 2005. Michael Sones, analyst at ABN Amro, points to rising Chinese output and a failure in Europe to make capacity cuts as negatives for the steelmakers.
"China is posing an increasing threat to the stability of global markets," he warns. "At the same time, European production remains relatively high. April data showed output down only 160,000 tonnes year-on-year. Pullbacks of this magnitude do not suggest a dramatic response to slowing real demand."
Sones has Corus on an "underweight" rating, compared with the "hold" the bank had in place in early 2004.
Other analysts have made even more radical adjustments in their views of Corus. ING Financial Markets has gone from a "buy" to a "sell", while UBS has moved from "buy" to "neutral".
There are analysts who take a contrary stance, however. Michael Shillaker at Credit Suisse First Boston is impressed by the company's restructuring and disposal of non-core assets. He rates Corus as an "outperform", but wrote in a recent note that "the work is only half done".
"Much has changed within Corus over the past three years, and the group is now getting itself back on track, so we should slowly but surely be seeing a structural improvement in the group's profitability, on top of the cyclical tailwind that is, for now, still blowing.
"However, ... like its European peers, Corus will need to seek a long-term solution to steel- making [ outside] Europe."
If Corus does not establish a viable strategy it could lose its independence, Shillaker warns.
Cash-rich Russian steelmakers are looking to expand abroad, while Brazilian steelmakers could use their highly-rated paper to make acquisitions.
Despite the fillip provided by takeover speculation, Corus's shares are trading at well below half the replacement cost of its steelmaking capacity. Years of restructuring have done little to shift the harsh judgment of the market.
