PHS privatization: the heat is on
By Daniel Tencer
The state treasury is to decide this week who it will negotiate with in the privatization of Polskie Huty Stali (PHS), the consolidated steel mill group that accounts for some 70% of steel production in Poland. Following the withdrawal of Luxembourg-based Arcelor from the tender, two major steel manufacturers are left in the race to take control of PHS: Dutch consortium LNM and U.S. Steel.
Under the terms of the tender, purchase prices and other details are confidential, but it is widely expected that PHS will go for €230 million-€690 million (zł. 1 billion-zł. 3 billion). Last year the consolidated steel mills group recorded a loss of €160 million (zł. 690 million).
The state treasury delayed its initial deadline for choosing a partner for negotiations from May 21 to this week, as LNM had not yet made its official bid presentation as of the earlier date. Representatives of U.S. Steel, who have been pushing for a fast decision on privatization, expressed hope that the delay would be the last one.
"They (the state treasury) promised us it would be May 27," said Leonard Chuderewicz, a member of U.S. Steel's mission to Poland, in town last week for the bid presentation. "This is what we were told. We have trust in them to act as they said they would."
PHS was formed as a last-ditch attempt by the government to rescue four ailing steel mills: Katowice, Sendzimir, Cedler and Florian. With the mills' assets and an estimated €370 million (zł. 1.6 billion) in debts consolidated, the treasury set out earlier this year to privatize the concern.
Last week's deadline delay came amidst a flurry of publicly-aired concerns from U.S. Steel that the treasury was making unannounced last-minute changes to the tender. Representatives of the American steel producer voiced their concern about allegations that the treasury was planning to take a coke production facility out of the LHS group, as well as rumored plans that some of LHS's assets would be transferred to the Industrial Development Agency.
But according to Chuderewicz, the sparring was the result of a breakdown in communication that was resolved last week.
"We're in agreement as to where it stands right now," he said. "Our original understanding was that the coke facility would be taken away from the PHS, and we were strongly opposed to that, but it is our understanding now that it will be combined with another plant and kept as part of PHS."
Nonetheless, U.S. Steel is in no less of a hurry to move the tender process forward.
"It's important to do this as fast as we can, because (PHS) isn't getting any better right now," Chuderewicz said. "There are some conditions that are part of the EU (accession) agreement that need to be done by the end of the year."
The conditions that Chuderewicz referred to are part of a deal the government agreed to, allowing it to subsidize PHS for a limited period of time after Poland's accession to the EU, in exchange for which Polish steel production would have to be reduced by one million tons annually. PHS would have to cut its production by some 750,000 tons, but U.S. Steel representatives say that this does not put much of a damper on their investment plans, as many of their projects would not be implemented until after the reduction period ends in 2006.
Both U.S. Steel and its rival in the bid, LNM, have recently begun coordinated efforts to expand their operations into central Europe. Earlier this year LNM, which has steel holdings in 12 countries on four continents and bills itself as the world's second largest steel producer, finalized its purchase of Czech steel mill Nova Hut in a privatization tender. The company promised to spend E213 million ($249 million) on capital investment, and assumed the mill's E397-million ($464-million) debt.
This comes not long after U.S. Steel's purchase in 2000 of the Kosice steel mill in Slovakia. Two and a half years later, U.S. Steel Kosice is widely considered a success story of post-communist privatization.
"In the first quarter of this year we shipped to 64 countries out of Kosice," said John H. Goodish, U.S. Steel's executive vice president for international and diversified businesses. "(In Kosice) we built a powerhouse in Europe. It's amazing. The western Europeans are talking about Kosice and we're just a small mill - 4.5 million tons per year."
U.S. Steel, like all American steel manufacturers, has been suffering from the capital spending slowdown in the United States. In the first quarter of this year the company reported a net loss of €32 million ($38 million), compared with a loss of €71 million ($83 million) in the year-earlier period. Notably, U.S. Steel Kosice "achieved record first-quarter income from operations, reflecting increases in both prices and shipments," said U.S. Steel representatives.
A modernized and efficient PHS would be highly competitive on the world market, given the wide disparity in salaries between steel mills in western Europe and North America and their central European counterparts, but both U.S. Steel and LNM are counting - at least initially - on the strength and size of Poland's internal market.
"We figure our market is within 600 kilometers of the mill," Goodish said. "We'll focus on recapturing the home market because this is where you make a lot of money."
LNM Group Chairman Lakshmi Mittal agrees.
"The growing strength of the Polish market, the technical skills of the PHS workforce, the possibility of consolidating the Polish steel industry and the impending integration of Poland into the European Union are some of the reasons for our investment in PHS," Mittal said in a printed statement.
