Steel sector braces for shut downs

Hutas Katowice, Sendzimira, Florian and Cedler may have to close down sometime between May and September because they lack the means to purchase supplies, according to company insiders.

Sources told the Business Journal that Polskie Huty Stali - the holding that brings together the four steelworks - is short of an estimated €46.2 million (zł. 200 million) for obtaining raw materials and maintaining production. But even this is just a fraction of the holding's total needs; it would take an estimated €138.6 (zł. 600 million) to resolve the company's basic financial problems.

Ironically, even though PHS cannot afford supplies, on paper it has enough orders to survive. "We will have to start rejecting customers soon," said one of the insiders.

"If production is turned off, it will not be easy to restart it again," said Edward Nowak, former vice minister of the economy, who worked on the steel sector restructuring programme under the previous government.

The obvious question is who will provide the money the company so desperately needs? The government can be ruled out for at least two reasons: European Union regulations and the budget crises. Outside financing seems to offer little or no hope, since PHS, with debts amounting to €1.2 billion (zł. 5 billion), is considered insolvent. So the company's management and employees are pinning their hopes on a strategic investor.

A tender is currently underway, but the prospects of success seem distant. Mirosław Wróbel, a former president of Huta Katowice, doubts if there will be any fast sale of the company.

"The government is still thinking how to satisfy its own needs, and not in terms of a return on the investment," he said.

Nowak supports Wróbel's opinion. "I would have sold PHS for one zloty as soon as possible, but in return I would have obliged the investor to pump money into technology," he said.

According to experts, the main problem of Polish steelworks in general is that their products have a low level of processing. They turn out mainly raw steel or long elements, for example rails and wires, rather than the metal plates that are used for example in the production of cars and household appliances that bring higher added value.

The Business Journal attempted to contact deputy treasury minister Andrzej Szarawarski, who is in charge of the privatisation of the steel sector, to ask if there is another plan if the tender fails. His press office said that Szarawarski was too busy to answer questions from journalists.

Despite the difficulties of PHS, three of the world's biggest steel makers - US Steel, British-Dutch LNM, and Arcelor - have still declared their readiness to become the strategic partner of the company that produces 70% of the country's steel. US Steel and LNM are interested in a majority stake in PHS, while Arcelor has said it is willing to take over a minority stake.

Currently, they are awaiting the resolution of the tender. LNM, which was originally expecting an outcome to the privatisation a year ago, has now conducted due diligence on PHS, as has US Steel, and Arcelor's experts are expected to finish their work at the company's offices on April 7. The treasury has said it will announce a shortlist in the middle of April, but no-one at the ministry was available to announce the date on which the tender's outcome would be announced.

The history of the privatisation of the country's steel sector goes back to the early 1990s, when a consulting firm from Canada did a study on restructuring. It was chosen because the Canadian steel sector was not considered in any way a competitor of Poland. The conclusion of the study was unequivocal: Poland's steelworks would have to be consolidated before being privatised. The main reason was that Huta Katowice and Huta Sendzimira, two of the biggest steelworks in Europe, were in direct competition with each other.

At the end of the '90s, after a number of unsuccessful attempts were made to privatise the steelworks separately, Edward Nowak, the vice-minister of the economy in the AWS-UW government, pushed through the idea of consolidation.

"I came into government with one goal - restructuring the steel sector," Nowak said. He moved responsibility for the steel sector from the treasury to the economy ministry, which was supposed to choose investors for privatising the steelworks. "I always thought that the idea of how to privatise the steel sector should be combined with long-term thinking on the role of the steel-making sector in the Polish economy," he said.

Nowak and his team at the economy ministry worked out a plan for consolidating the sector. He also started negotiations with potential investors, among them LNM and Arcelor. "US Steel for a while was not interested," he said.

One fruit of their work was a new law that came into force in August 2001, but the ideas of the new coalition government about privatisation were very differed from those of Nowak. The gateway to quick privatisation had been opened, but this did not suit the new coalition's plans, even though it was only a few months previously that Nowak's plan had been passed by parliament with only a few abstentions.

Nowak's successor at the end of 2001, Andrzej Szarawarski, suspended talks with investors and started work on a new law. He announced a new tender. However, the idea of consolidating the four plants was not questioned. So in May 2002 all the steelworks - Katowice, Sendzimira, Florian and Cedler - were brought under one president, Jerzy Posiadło.

On December 31, 2002, the consolidation from the legal point of view was completed, when a court in Katowice registered PHS. The new law worked out by Szarawarski will come into force in mid-April, and after that the formal negotiations on a sale can start. They will be held under the auspices of the treasury, which is, under the new law, once again responsible for the privatisation of the steel sector.

Boxes full of documents will have to be shipped back to the treasury. "Clerks will have again to spend a lot of time learning what is going on, before they prepare a decision," said Rafał Zagórny, an opposition deputy and former vice-minister of finance. But time is pressing for PHS, says company spokesman Andrzej Krzyształowski. "The situation is not so dramatic, but it is still difficult," he said. He insisted that the company has enough orders to survive until the restructuring is completed and an investor is chosen. And he enumerated the successes that have led to the consolidation.

But they are not impressive. Polskie Huty Stali ended 2002 with a loss amounting to €160 million (zł. 691 million) compared with €231 million (zł. 1 billion) the year before, but this was against a background of relative prosperity on the steel market. The new company's operating costs in January and February were 1% lower compared to those of the four independent companies a year before, and amounted to zł. 1 billion. The net loss for the same period shrunk by less than 7% and amounted to €9.3 million (zł. 40.3 million).

Nowak considers that the changes were too superficial, especially in comparison with his propositions. "The government did nothing but waste time," he said.

But Krzyształowski said that PHS, if it overcomes its current difficulties, has good prospects for the future. The business plan prepared by the management foresees the company having an operating profit within a few months. A net profit would come in 2006, according to the management, if certain conditions are met. But would this be enough to attract an investor, who will have to find at least €577,000 (zł. 2.5 million) cash from his own pocket? Only the future will prove who is right.