Cracks in Mittal steel project

TONY Blair's decision to give his backing to the purchase of the Romanian steel company Sidex by tycoon Lakshmi Mittal shows a fundamental ignorance of the current state of the global industry.

Helping the nations of Eastern Europe escape from the centrally planned economies of the past is one thing. Encouraging cash to be poured into the black hole that is the international steel industry is another.

Even a cursory glance at recent headlines should have informed Blair and the gatekeepers of Downing Street that this is not the moment, low wages or not, for any nation to be investing in steel.

The worldwide economic slowdown means that demand for steel, one of the building blocks of construction and manufacturing, has slumped. Here, at home, the Anglo-Dutch steel group Corus has painfully cut back capacity, despite the fact that it is one of the most efficient producers in the West. Mittal's last venture into European steel - the purchase of Ireland's state-owned industry at a distressed price - ended in failure when he closed down the plant.

Anyone doubting the depths of the problems of the global steel industry need look no further than across the Atlantic. Much of America's steel industry, including such higher-profile producers as LTV, Bethlehem and more than a dozen others, are presently in Chapter 11, seeking to reorganise and fight their way out of bankruptcy.

They have been brought to their knees by emerging market manufacturers in Korea, Brazil and Mexico. No doubt these producers are under threat from even lowercost producers in China, Vietnam and Mittal's native India.

Over the short run, the Romanian-steel plants may find it possible-to sell steel into Britain and Western Europe by undercutting local producers. But, over the longer haul, it is impossible to imagine that Romania will be able to compete with the Asian producers, even in a recovering world economy.

This begs the question as to why 23 directors of the 'glistening bank', the European Bank for Reconstruction and Development, voted to support the Mittal-backed privatisation of the Romanian plant with £70m of finance, only the American director dissenting. This has the distinct smell of 'log-rolling' the process under which directors trade off voting support among each other so that when their own pet projects come around they, too, receive support.

The jury remains out on whether 'steelgate' is another example of Labour sleaze. What is absolutely clear is that supporting Romanian steel makes no economic sense at all and that the government and the EBRD should not be supporting such a wrong-headed project.

The Marshall effect
DESPITE his advancing years, it is difficult to keep Lord Marshall down. Last week, he was busy signing off on a reshaping of British Airways, where he is chairman. This week, it is the turn of Invensys, where he is also chairman, to feel the pain.

New chief executive Rick Haythornthwaite announced that the engineering group would seek to tackle its debt mountain of £3.3bn by selling off two key divisions for £1.5bn. As at BA last week, there was some relief on the market that the company is not following the BT and ICI route by launching a rights issue.

The new chief executive apparently regards the merger of old engineering group Siebe with BTR as a mistake. He even went so far as to describe his inherited company as 'a sprawling conglomerate'.

Who was responsible for creating this behemoth? Step forward Lord Marshall, who as chairman of Siebe brought it together with BTR to create the new Invensys and then compounded the error by adding ailing European electronics group Baan to the mix.

He has proved the master of building debt and dissipating equity. Small wonder then that, after an initial burst of enthusiasm for the recovery plan, the shares slipped sharply. There is no more obvious sell signal than the sight of Marshall at the controls.

The Eddie effect
SIR Eddie George's speech to the Euromoney Bond Conference in London, in which he sought to ease concerns about higher interest rates, had the desired effect. Soon after the Governor of the Bank of England had spoken, the futures markets adjusted.

They now see base rates at 4.5% by mid-year and 5% at year-end, against the 5.25% predicted at the start of trading. Nevertheless, with the housing market still strong, as measured by the Royal Institution of Chartered Surveyors, one cannot totally discount the need for the Bank to take early action to curb the growing imbalances in the economy.