October 8, 2012 9:37 am

Steel slowdown will curb Cookson profits

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A slowdown in global steel production has had a knock-on effect on Cookson Group, prompting the industrial materials manufacturer to issue a profit warning.

The FTSE 250 company on Monday cautioned that its engineered ceramics division, which manufactures the pipes and valves used to control the flow of molten metal in steel mills, had been hurt by a contraction in steel production.

The division, which earns two-thirds of total group revenues, has been hurt by lower steel volumes in July and August, as producers destocked on fears of a further slowdown.

“As a result, full-year performance for the group as a whole is now expected to be materially below the board’s previous expectations,” warned Cookson.

The news dragged down Cookson shares 14 per cent to 529p, while analysts responded to the gloomy outlook by paring back their forecasts.

Alex Toms at Bank of America Merrill Lynch, Cookson’s house broker, cut his earnings per share expectations by 10 per cent to 61.4p for the 12 months to the end of December, and by 15 per cent to 60.4p for 2013.

According to the World Steel Association, average monthly steel production volumes in July and August shrunk by 3 per cent for the world excluding China, compared with the average monthly run rate in the first half of the year.

The downturn was most pronounced in Europe, which was down 11 per cent, while the US was 3 per cent lower.

“We usually see a weak July and August but this is normally followed by a strong bounce in September,” said Nick Salmon, chief executive.

“End market trends, most particularly in September, have been weaker than expected.”

The ceramics division, which also manufactures casts for engine blocks, has also been hurt by a slip in demand from truck and carmakers, wind turbine manufacturers, miners and builders.

The company has responded to the downturn by axing temporary workers and overtime, and said it was considering a more thorough restructuring should its markets deteriorate further.

Cookson is midway through a strategic review that could result in it splitting itself in two, demerging its ceramics division from its performance materials unit, which supplies parts for tablets and smartphones including Apple’s iPhone 5.

“Given that an announcement is expected in the next 1-2 months, we believe it may even be completed in December. Only a further significant weakening of trading would be likely to derail the process now,” said analysts at Citi.

Monday’s profit warning follows a shareholder revolt at Cookson’s May general meeting, when almost one-third of votes cast were against the executive pay scheme that awarded £20m in shares to its three most senior directors.

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