Facing a deadline
By : Chris Rivituso
Seen from a distance, the Huta Katowice steel mill seems to loom menacingly over the innocent visitor.
The steamy vapor emanating from the facility's three massive cooling towers indicates that, while gasping, the mill still lives. To survive in the future, however, Huta Katowice must undergo massive surgery in the form of restructuring and privatization a process expected to be completed this year.
And to prosper, the mill must decisively move forward on its privatization and decide a key issue of contention with strategic investors whether to split off different operating units and sell them individually or to force any bidders to take the mill in one large piece. That issue alone is blocking outside investment from coming to the troubled mill, preventing it from becoming competitive or switching its product base to meet new market needs.
Poland's largest steel mill has experienced heavy losses in recent years, with 1998 being the one year spent in the black. The mill reported a slight profit of zl. 15.5 million ($4.43 million) in 1998; that number hardly makes up for the zl. 384.75 million ($120.2 million) Huta Katowice lost in 1997. According to Jaroslaw Zwolinski, chief information officer at Huta Katowice, 1999 losses came to approximately zl. 197 million ($50.5 million), a number he attributed to deteriorated export markets still suffering from the Russian and Asian crises.
While the company has been considering taking on a strategic investor for at least five years, any potential deal remains a long way off, despite continued interest from companies throughout Europe, including France, Belgium, the United Kingdom, Germany, Austria, the Netherlands and Italy. The problem is that all interested companies simply want to buy pieces of Huta Katowice's business, not the mill as a whole.
Despite past foot dragging, 2000 is supposed to be the year Huta Katowice is finally sold. "This privatization should be over this year," said Miroslaw Wrobel, president of the board and general director of Huta Katowice.
Any sale needs to happen fast, though, if Huta Katowice is to thrive. The mill already must face the daunting, and many say likely impossible task, of meeting European Union (EU) requirements for steel production, as well as the lifting of protective trade barriers between Poland and the EU. Failure to reform would mean that unrestrained competition and heavy regulations would slowly strangle Huta Katowice.
Relic of the past
Opened in 1976, the mill was originally charged with producing 9 million tons of steel a year, although actual production has never topped 5 million. Covering almost 10 square kilometers, the mill focuses on all areas of steel production, from blast furnaces that create the initial product to workshops that meld the metal into a final product. The mill even has its own railway. Almost a city in itself, the mill had total assets of zl. 3.8 billion ($974.35 million) and fixed assets of zl. 2.6 billion ($666 million) at the end of November 1999. "But on the market side, its value is much lower," Wrobel said.
Nobody at the steel mill could estimate how much Huta Katowice is actually worth. Allan Coats, European steel analyst for Merrill Lynch in London, said he expected the mill's value to be "very, very nominal" which means probably less than the sum of all the parts combined. He also said the mill's heavy losses made it difficult to come up with any concrete figure.
Coats said many European steel mills took at least a decade to bring themselves up to what are considered rather stringent EU standards, particularly when it comes to the environment. Huta Katowice, however, will likely have much less time. "It has never really been done before," Coats said.
Looking ahead, Huta Katowice's management is trying to shift the mill's production line to more popular and value-added products. Wrobel said the mill has begun focusing on producing more sellable flat products, thin steel sheets with a thickness of slightly more than one millimeter. While Huta Katowice has in the past focused on the production of long products such as industrial beams and rails, flat products could be used to build white goods such as refrigerators and automobiles goods whose sales have leapt in recent years.
According to Huta Katowice, the implosion of the Russian and Asian markets had an impact on the Polish steel industry. About 60% of what Huta Katowice produces is export bound. In the first quarter of 1999, steel production throughout the country was down roughly 36%. The second quarter saw a year-on-year decline of as much as 33%. But the situation improved in the second half of 1999, with a decline of only 9% in the third quarter and an increase of 31% in the fourth quarter, Coats said.
Dried-up markets were only half the problem, though. Steel makers in the EU were also faced with a surplus, and they looked east for new markets. "Poland was the worst, and I guess the EU-ers were trying to attack Poland," Coats said.
But as economies begin to stabilize in 2000, Huta Katowice is expecting its sales to come back as well. For 2000, the company is planning to produce up to 4 million tons of steel.
Shifting product lines is only part of the solution. The other part is downsizing. While other heavy industry sectors, such as coal, only began restructuring in 1997, Huta Katowice has actually been gradually slicing workers for the past 10 years. At the beginning of the 1990s, the steel mill employed more than 24,000 workers.
"Even two years ago, as I took over, there were 15,500," Wrobel said.
He said the mill really only needs 1,000 people for each 1 million tons of steel it produces. The factory intends to maintain its annual production rate of 5 million tons, which means 5,000 employees. Although the steel mill employs some 7,000 people now, that number is expected to drop to 5,000 within the year. "This is a world standard," said Zwolinski, who did not express great concern about the difficulty of downsizing.
Many redundant workers have ended up at companies spun off from Huta Katowice, such as the housing and repair company Zaklad Mieszkaniowo-Remontowy, which was hived off the steel maker in 1997, and the recreation and tourism service provider Partner, which separated from Huta Katowice in 2000.
Zwolinski said some of those companies are even expanding their workforce. Other laid-off employees took compensation packages offered by the Finance Ministry.
While it would seem likely that efforts to slash employees further would meet opposition from mill unions, labor officials seem to have accepted the workers' fate. "We are not in a position to further develop technology," said Jerzy Goinski, vice chairman of the Solidarity Union, about the restructuring and need for a strategic investor in Huta Katowice.
But he said that further downsizing must happen "civilly."
Talks with strategic investors have only been conducted on the most basic level. Goinski, however, said the union was not intimidated by the thought of the mill being sold. "I think an investor who comes in here has certain experience," he said.
He added that the ideal solution would be for an investor to come in and promise a certain level of job security.
Many of the workers at the steel mill were unwilling to speak and one went as far as threatening the WBJ's photographer for simply taking pictures of the facilities. The general mood among them seemed to be of pessimism and uncertainty about the future despite their union's upbeat tone.
"We don't know if it will be better or not," said Ryszard, a 53-year-old employee who refused to give his last name.
He said salaries and conditions at the mill are bad, with many workers earning about zl. 800 a month. "At one point I was happy, now I am not," he said.
"This is such an illusion," said another worker, who refused to identify himself or say what section he worked in. While working conditions might be normal, he said he did not feel that the overall situation at the steel mill would get any better. When asked why, he smiled wryly and answered "politics."
Looking for a match
Despite talks with a number of different foreign steel companies, from British Steel to Italy's Danieli, Treasury Ministry officials have come no closer to finding a match for Huta Katowice.
The company has been looking for a strategic investor since 1995. The first suitor was Belgium's Sidmar, which held discussions with the Polish government until 1997.
"The whole talks failed," said Zbigniew Sindera, head privatization specialist for Huta Katowice. He said Sidmar cited high production costs and a too-low return on investments as reasons for dropping out of the privatization process.
The mill began to look for a partner again in 1998, shortly after the board decided to switch Huta Katowice's product line to flat steel. This time, the mill was specifically interested in finding investors for a new project, Zintegrowana Odlewnia i Walcownia Blach (ZOWB), which was set up to produce flat steel products.
The steel mill's board approached British Steel, Danieli, France's Duferco, Germany's ThyssenKrupp Stahl and a group consisting of Austria's VA Stahl and Holland's Koninklijke Hoogovens. Two months later, in June 1998, Huta Katowice invited British Steel, Danieli, and VA Stahl and Hoogovens to bid for the project. But all companies made offers for more than what was for sale with the ZOWB. The companies wanted to delve into other parts of Huta Katowice's business, such as the production line. The foreigners were also interested in lumping together steel mill Huta Sendzimira and Huta Katowice to create a larger entity.
The offers, however, got lost in bureaucratic red tape. It took the government until April 1999 to select a financial adviser, Chase Manhattan Bank, for the steel mill's privatization. Executives at Chase Manhattan were unwilling to comment on the situation.
By January 1999, the Austrian-Dutch investment group withdrew from privatization plans, citing an unclear privatization strategy from the government's side. In October 1999, Huta Katowice offered potential investors a stake of 10-80% in the steel mill. But none of the bidders were interested in buying Huta Katowice outright. Instead, all wanted to hive off certain parts of the company's business or production lines.
"The foreigners are just looking for technology," said Michal Mierzwa, analyst with COK Banku Handlowego.
Another interested party, the Corus group the result of a 1999 merger between British Steel and Hoogevens just wants to acquire production lines for long-steel products.
"We have told the Polish government we are interested," said Michael Hitchcock, head of media and investor relations for Corus. Hitchcock said that while the company did look at Huta Katowice's proposal to get involved with the ZOWB project, the group chose to focus on long products instead. Hitchcock said it would take too much money to go into flat-steel products as well. "That requires many millions of pounds," he said.
Industry watchers estimate such a move would require about $500 million.
Danieli did express interest in becoming involved in flat products, but wants to take only 10-15% of the ZOWB project and is planning to work with other companies, said Robert Borsi, flat products sales director for Danieli. But Borsi declined to name the other companies involved, and said that Danieli was only looking to get involved in the project on a temporary basis.
"We at Danieli intend not to stay in any steel company for an indefinite length of time," he said. He added that the company would like to exit the ZOWB project by eventually taking the venture public. "It will have a tremendously high value," he said.
For the time being, it not known what Huta Katowice, which the government authorized at the end of 1999 to conduct talks with candidate investors by itself, will decide. However, Wrobel said a decision on Corus' offer would be reached by mid-year, and on Danieli's proposal by the end of the year.
Huta Katowice's board has also drawn up plans to make Huta Katowice a holding company consisting of basic components such as HK Grupa Kapitalowa, HK Stal, HK Long, and HK Flat. Other parts will consist of companies like Partner, which have been spun off to form HK Grupa Kapitalowa and the railroad.
Analysts have not been positive about the steel mill's privatization plan. "I don't know anybody who has bought part of a steel site and done well with it," Coats said. He also warned that if one part of the steel mill does well, while another is failing, it could potentially cause internal conflicts and labor problems for the rest of the mill.
Ultimately, the government should probably stick to its objective of maintaining Huta Katowice as one complete entity and work out a deal with bidders, Mierzwa said. He suggested that the government give tax breaks to investors willing to take on all of Huta Katowice, while requiring those just taking pieces to maintain a certain work force.
"I feel there must be a compromise between the strategic investor and the government," Mierzwa said.
