Steelworks smolder, plagued by heavy debts and inefficiencies

First named after the Bolshevik revolutionary Vladimir Lenin, Huta Sendzimira steelworks was built to supply the Soviet bloc, regardless of the cost. But the collapse of communism more than a decade ago destroyed its markets, forcing the sprawling mill near Kraków to slash its workforce by two-thirds to 9,000, shut three of its five furnaces and beg for funds to finance its modernization. "What a bustling place it was," recalled Mieczysław Gil, who has worked at Huta Sendzimira since 1963. In the late 1970s, the mill produced 6.7 million metric tons of steel annually, four times as much as now. "We used to sell to 41 countries across the world, and now all has grown quiet," said Gil, a former foundry supervisor who is now the company's spokesman. "People fear to see what will happen to us." The steel industry was once the pride of Poland's communist rulers. But years of wasted investment have left it unable to produce the high-quality sheet steel that local manufacturers need to make dishwashers, cars and ships. Employment in the industry has dropped to just above 30,000, or one-fifth of the number of workers employed in the early 1990s, while production capacity has halved to about 10 million metric tons.

But despite numerous rescue schemes, the industry remains inefficient and debt-ridden - a threat to public finances that casts a shadow over Poland's bid to join the European Union, expected in 2004. Poland, the EU's largest candidate country, lags in the region in revamping its steel mills. Competitive products from neighboring Czech Republic and Slovakia already flood the home market, undercutting domestic producers. Under pressure from Brussels, the government is about to consider creating a last-chance plan to revive its four main steel mills - recently merged into the Polish Steel (PHS) group - to enable them to compete with their Western European rivals. Foreign giants - Britain's LNM Group, Luxembourg-based Arcelor and U.S. Steel - are waiting for the plan, which will combine substantial state aid with capacity limits, before deciding whether to press on with privatization bids. Poland must reach a compromise with the European Commission on steel restructuring to close key negotiations on competition - one of 31 chapters, or policy areas, that need to be agreed on this year. So far, the country has closed 26 chapters. "No one wants to have a bad player in the European market," said Bruno Dethomas, the EU's ambassador to Poland. "We also remember how difficult, both politically and financially, it was for our member states to restructure their own steel industry." The commission wants Poland, which plans to join the EU with nine other mainly post-communist countries in 2004, to work out a strategy that will render the industry viable by 2006.

"The government has to come up with a technical solution for the industry," said a source close to the talks. "Technical does not mean investment in capital equipment, but also adequate financing, marketing, organization, everything." A bone of contention has been the size of public aid to be granted through a write-off of debt owed to state agencies in exchange for closing redundant and obsolete production capacity. "The objective is not to just close anything for the sake of it," said the source, who is close to the EC. "It is to shut what is not productive and costing companies money. And it has to be a finished product capacity." The commission wants to be sure that after granting state aid worth an estimated zł. 3 billion ($714 million), steel producers will not ask for more help in the future. "Paradoxically, the commission wants us to grant more state aid than we had proposed," said Economy Minister Jacek Piechota. "The problem is that the state can hardly afford it."

The world's biggest players have long sniffed around to buy into the ailing sector, but a lack of a clear strategy and haggling over investment have discouraged foreign giants from committing major funds here. Loss-making PHS, weighed down by about $1.2 billion in debt and ambitious investment plans, poses a major challenge even for the mightiest multinational. But despite its inefficiency, Huta Sendzimira offers some potential as a part of PHS, thanks to its exposure to flat products sought by the region's growing automotive, packaging and construction industries. Its planned investment in a rolling mill, which should improve its competitiveness in the fast-growing flat products market, accounts for half of the PHS group's $350 million capital expenditure program to be financed from private funds in the coming years. - Reuters