Steel market for sale
By : Bogda zukowska
Faced with the insolvency of the country's largest steel mill, Huta Katowice, the government is pushing to sell a majority of the industry to foreign investors by February 2001.
Seeing privatization as the only way to end the sector's ailments the steel industry has debts of zl. 9 billion ($1.9 billion) the Treasury Ministry in December invited 20 foreign investors to submit bids for four of the country's main steel mills: Huta Katowice (HK), Huta Tadeusza Sendzimira (HTS), Cedlera and Florian. Together they account for 70% of the industry's output and 50% of domestic sales.
Despite the hefty chunk of the industry being put on the auction block, analysts said the government may have a hard sell on its hands. "These are not attractive assets and the Polish government should be prepared for knockdown prices," one London-based industry analyst said, who refused to be named.
The treasury has no estimates for how much money it expects to see from the sales, partly because it is willing to sell portions of operations at existing mills.
The treasury restarted the sector's privatization after Huta Katowice declared it was insolvent and would not be able to pay outstanding bills at the beginning of this month, although the mill has continued to pay salaries. A separate company, HK Stal, which is owned by the treasury's Industry Development Agency, is expected this week to begin talks with banks about arranging loans of zl. 150 million ($32 million) to be used for Huta Katowice's working capital. Therefore the treasury agreed to transfer stakes in nine companies, eight of which are listed on the Warsaw Stock Exchange (WSE), to HK Stal. Those fresh assets will be used as collateral for the zl. 150 million ($32 million) in loans.
Huta Katowice debts of zl. 2.3 billion ($500 million) account for 25% of the steel sector's entire debt. The industry has stumbled under the weight of those debts and has been further hemmed in by declining world steel prices. In Poland they fell roughly 30% in 1999. But several mills started to turn their operations around, trimming net losses for the sector to zl. 157 million ($12.7 million) in the first half of 2000, compared with a full-year total of zl. 410 million ($91 million) in 1999.
For individual mills, 2000 is expected to end a much better year. About 12 companies, or half of all mills, are expected to be profitable this year, compared with only two in 1999. As a whole, however, much of the sector is still hungry for fresh capital as suppliers threaten to stop deliveries for non-payment. Analysts said problems are compounded by the unwillingness of banks to lend to mills, seeing them as a bad risk.
"The steel industry is not an attractive partner for banks," said Andrzej Powierza, an analyst with Wood&Co. "But the final decisions fall case by case."
Huta Katowice already has one failed privatization attempt under its belt. Anglo-Dutch group Corus was interested in taking over a portion of Huta Katowice's assets a year ago and using them in a joint venture, called HK Long. The idea was for HK Long to produce long-steel products such as wires and railroad ties. But Corus backed out of the deal in November because financing fell apart. Janusz Steinhoff, deputy prime minister and economy minister, recently said in an interview that the bankers for the project walked away from the negotiating table. While he refused to say specifically who walked away, the European Bank for Reconstruction and Development (EBRD) was HK Long's financial partner in the deal.
"The EBRD quit. It did not see the project as financially feasible," said a source who was familiar with the negotiations. "And neither Corus nor HK (Huta Katowice) were able to provide enough money to cover their share in the joint venture."
The EBRD contributes 50-60% of the financing for such projects, with the remainder provided by private investment.
Huta Katowice's huge size it is the largest steel manufacturer in Poland, producing 3.7 million tonnes of steel and bringing in revenue of zl. 2.8 billion ($600 million) annually has kept it from being able to restructure quickly. By contrast, the industry's second-largest player, Huta Sendzimira, now manages to turn a profit after racking up significant losses in 1999. Huta Sendzimira reported net profit of zl. 103.7 million ($23 million) in the first nine months of this year, compared with a loss of zl. 130 million ($28.9 million) in 1999.
The remaining two mills on the block, Huta Cedlera and Florian, are considered to be financially stable. These two mills rely on supplies from Huta Sendzimira and Huta Katowice and are expected to be sold jointly with their larger counterparts.
While the government hopes investors will be encouraged by its willingness to sell off such a large portion of the industry, observers said foreigners may still be scarred from the last privatization attempt. Investors eventually dropped out of tenders for Huta Sendimira and Huta Katowice. They were afraid the government was unwilling to make concessions for the significant amount of investment the sector needed, the environmental cleanup involved or the massive layoffs restructuring would require.
"Despite all the weak points, chances for successful privatization are better this time," said Piotr Janeczek, president of the managing board of Huta Sendzimira. He said that putting the majority of the industry up for sale will embolden investors.
