Select Committee on Welsh Affairs Minutes of Evidence

Examination of Witnesses (Questions 320 - 339)



Mr Livsey

  320. I have heard you complaining on a number of occasions about currency fluctuations and the impact of that on your business. Could you give us some idea, if the UK had joined the Euro on 1 January 1999, whether that would substantially have improved the profit situation? I know you have been making a considerable loss recently, but would you have actually been substantially in profit if we had been in the Eurozone for the past two years?
  (Sir Brian Moffat) No, our cost base would have been too high at the rates then obtaining, which I think, from memory, in deutschmarks were about DM3.10 or something like that. I cannot tell you in Euros.

  321. Will the restructuring and the consequent reduction in output inevitably lead to the loss of some customers in the EU, given the current evidence that the Euro is beginning to rise against other currencies?
  (Sir Brian Moffat) Yes, we are going to do without business in the EU because we cannot make money out of it.

  322. Is that because you cannot compete in that marketplace?
  (Sir Brian Moffat) Yes.

  323. Is that because your cost structures are out of line with other competitors?
  (Sir Brian Moffat) Aggravated in the UK by an average cost per tonne of about £35 to get it there for ordinary commodity flat products.

  That is the problem. A very thin margin for the trade in Europe and then £35 per tonne on top of it. We are remote from that with a higher cost, so we cannot make a margin and we have £35 per tonne on top of that. That is why there are such significant losses.

  324. Are you stating quite outspokenly that this is the right time to be abandoning many of your Eurozone customers?
  (Sir Brian Moffat) As far as the UK is concerned, we have little choice. What we are going to try to do is substitute to a degree business which is offshore business, offshore Europe, out of our plant in IJmuiden and satisfy those customers direct as against exports to the rest of the world and enrich the mix that way.

  325. We know that steel is sold in Euros on the European market but you are purchasing raw materials in dollars, I understand.
  (Sir Brian Moffat) Yes.

  326. What currency would you be selling in those other markets? Would it be US dollars?
  (Sir Brian Moffat) US dollars.

  327. Does that mean that the input/output ratios in terms of currency are more predictable?
  (Sir Brian Moffat) Yes, because as you know the pound has trailed the dollar far more significantly than other currencies over many years now. We are not exposed therefore to currency fluctuations in the sense we can match purchases and sales to a large degree and cover any exposure we have in the currency. The problem is in many markets of the world that prices, until very recently ... Mrs Williams just mentioned that some hot roll prices have stabilised and people are trying to increase prices, but this is the first time for just about a year that that has happened. In the process prices have weakened very significantly and in the States themselves 13 steel companies are now in Chapter 11; it was 11 when we last met. That is how significant the pain is.

  328. If you are therefore not going to make a big throw for the Euro market, you surely have massive competitors like Brazil and other countries which have pretty low cost inputs which can make greater margins than yourselves in other parts of the world market.
  (Sir Brian Moffat) It depends on the product. In commodity products margins are so thin that for countries like Brazil to ship into Europe is not a valid long-term situation; the cost of doing so is relative to the margin. The US is a more attractive market to them because it is relatively close, although many of them have been dumping there and in fact some of them have just been anti-dumped recently to significant amounts. Markets are quite tough at the moment.

Mr Edwards

  329. What do you say to those people who say that the UK should never join the Euro? What do you say to those people who think that the UK should withdraw from the European Union?
  (Sir Brian Moffat) To start with the last point, it would be a disaster for us because like most companies in the UK generally we have benefited from a single market situation. Whether we like it or not, we are European. I would not favour that and would talk against it. Ideally and at the right rate, we should join the Euro. Hopefully through a referendum we can persuade people when the time is appropriate to say yes to that because as long as we join at the right rate it would be helpful. It would have to be a significantly better rate than we have at the present time. We have said consistently of the order of DM2.50 to DM2.60 to the pound would be a very sensible rate.

  330. You think those people who believe that we should never join the Euro and those people who believe we should withdraw from the European Union are not talking in the interests of Corus, the steel industry in Britain, are misguided.
  (Sir Brian Moffat) For UK industry fullstop. Yes, that is my personal view. It is not a corporate view, it is my personal view.

  331. And people are misguided.
  (Sir Brian Moffat) I would not go that far necessarily but privately I would probably agree with you, yes.

Mr Paterson

  332. You said this last time and then you contradicted yourself. The Treaty of Amsterdam, Article 118 and 123.4 says that we have to join the Euro at the central rate of the basket of currencies which is 2.95 on the deutschmark. You have said again and you repeated what you said last time, that 2.50 would be your ideal rate for selling.
  (Sir Brian Moffat) Yes, 2.50 to 2.60.

  333. So if we went in at 2.95 you are 45 pfennigs wrong on your selling.
  (Sir Brian Moffat) Yes.

  334. So there is no selling advantage to you at all. Correct?
  (Sir Brian Moffat) Yes.

  335. If we had gone in at that rate, we would have sunk with the Euro against the dollar and we would have had a dollar exchange rate of about $1.30 to the pound. You said you buy your raw materials and your energy and I think you said that actually 28 per cent of your cost base was in dollars. So you would have been absolutely hammered on your purchasing. How much would your losses have been increased if you had had a $1.30 exchange rate which would have been imposed upon you if we had gone into the Euro at the Treaty rate?
  (Sir Brian Moffat) You are making an assumption that the dollar would act in sympathy with the European currency. I think it has shown that it does not necessarily do that because people cannot properly understand why and none of us can properly understand why. The thing which will drive the dollar is the well-being of the economy basically in the US and as far as the dollar is concerned our industry. It is about commodity prices in the world, depending upon demand. Most of those commodities do not come out of the US, but they are denominated in US dollars. So it does not necessarily follow. We had a taste of the currency at 2.95 and we had to come out of the situation. Basically nobody in industry in the UK could live in it and make money and that pertained to British Steel at the time, with the lowest cost base then in Europe. We could not make money at 2.95. We cannot go in at any price, but I do agree that if we got the right conditions, logically we are part of it. It is a big market, we ought to be able to participate in it and compete in it properly and that is what I should like to do. The other thing is that we are an Anglo-Dutch company largely and that would obviously benefit us too.

Ms Morgan

  336. In your March news release you said that Corus had an operating loss of £1,152,000 in the 15 months to the end of 2000. Of this, £1,033,000 were costs associated with restructuring. Is that correct?
  (Sir Brian Moffat) Correct.

  337. I wondered how you get the figure of the loss of £1 million a day. Is that related to these figures?
  (Sir Brian Moffat) It is related to the UK. Remember we have profitable assets offshore in Holland, we have a profitable aluminium business and a profitable stainless steel business, all of them are offshore with the exception of part of the stainless business which is in Sheffield; largely it is offshore.

  338. So it is taking those into account and you get £1 million a day.
  (Sir Brian Moffat) Yes.

  339. Are the absolutely massive costs related to the restructuring all in the UK?
  (Sir Brian Moffat) Yes, all in the UK.

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