Steel makers see advantage of nat'l conglomerate

Private steel makers said the creation of conglomerate Polish Steel (PHS) and its sale to a strategic investor will benefit the industry by improving the quality and reliability of domestic supplies and aiding the industry's relationship with banks.

A strategic investor for PHS will be selected before next February and the firm will be operating by June 2002, Deputy Economy Minister Andrzej Szarawarski said last week at a conference marking the 10th anniversary of the Metallurgical Chamber of Commerce and Industry (HIPH) in Katowice.

The creation of PHS will merge five steel mills: Huta Tadeusza Sendzimira (HTS), Huta Katowice (HK), Huta Cedler (HC), Huta Florian (HF) and Huta Częstochowa (HC), together which account for more than 70% of Poland's steel production. But before the merger can take place, the government must choose between two potential strategic investors for PHS: steel conglomerate LNM Holdings, registered in the Dutch Antilles, and Euroconsortium, comprising Arbed of Luxembourg, Usinor of France and Germany's Thyssen Krupp Stahl. The government then plans to complete the creation of PHS in consultation with the chosen strategic investor.

"By dealing with the biggest problems in the Polish steel industry, the privatization of PHS will benefit smaller mills such as the metallurgical plant belonging to Huta Stalowa Wola (HSW) holding," said Stanislaw Sztaba, a member of the board of Huta Stalowa Wola (HSW), responsible for about 2% of domestic steel production. "This would allow smaller steel producers to survive by increasing their effectiveness in their own markets." He added that the company would buy from PHS if it produced steel of the appropriate quality cheaper than its own mill.

Szarawarski said LNM Holdings wants a joint venture in which the government will trade a 51% stake in PHS in return for $400 million worth of investment in technology, allowing the company to focus on products with high profit margins such as flat products for the white goods and automotive industries.

The Euroconsortium proposal will see PHS shares divided equally between the consortium, the treasury and state sector creditors such as Polish State Railways (PKP). Szarawarski said the consortium has offered to put up ?300 million, which will form the initial capital of PHS, and that it wants to end production of raw steel at HTS, leaving the mill to process steel produced by HK. Market observers said the closure would mean the loss of around a third of the 9,500 workforce of HTS.

While the debts of HTS and HK, the country's largest steel producers, exceed zł. 2.5 billion ($625 million), the government's most urgent task in creating PHS will be to rid the steel mills of short-term debt. HK owes a consortium of Bank Handlowy, Bank Przemysłowo Handlowy, Powszechny Bank Kredytowy, Kredyt Bank and Bank Pekao about zł. 200 million ($50 million) and problems with repayments have caused interruptions to production at the mill this year, while HST's short-term debt has left the mill in receivership.

The government plans to resolve the problem by issuing bonds worth zł. 600 million ($150 million) through the Industrial Development Agency (ARP), raising about zł. 400 million ($100 million) to rid PHS of short-term debt. According to Szarawarski, HC and HF will be merged while the government deals with the debts of HK and HTS.

A strategic investor in PHS would aim to increase profitability by ensuring consistent steel quality levels and shortening delivery times, said Piotr Wolnicki, vice chairman of Polish steel consortium Colloseum, which owns a 62% stake in the Huta Pokój (HP) steel mill and 5% of Huta Ferrum (HFE). Current quality and delivery problems at HTS and HK mean that HP and HF import nearly 100% of their raw steel from Huta Koszyce and Nova Huta Ostrava in Slovakia and Huta Nowolipieck in Russia. "A new supplier would give Ferrum another leg to stand on," Wolnicki said, adding that Huta Pokój would benefit from competition between HK and other suppliers in Russia, Slovakia and Ukraine. "A greater number of suppliers would create competition for delivery times."

But analysts argue that the creation of a supplier of consistent quality steel will not suffice to prepare Poland's steel producers to compete with the Western European steel industry, already largely restructured and privatized. "Product quality is one issue but service is another: the right packaging, right certification and delivery to schedule," said Andrew Kotas, a former steel privatization adviser to the government and CEO of steel industry portal steelonthenet.com. "This means sophisticated production planning and control, with complete customer focus. No Polish company is addressing these service aspects and this is an increasingly competitive and progressively global industry."

Greg Goodale