Recasting Irish Steel

IRISH Steel will break even this year, and will begin to show a profit next year, the new chief executive of the formerly troubled company, Mr Richard Armstead has forecast. Mr Armstead says Irish Steel, which was recently taken over by Indian steel group, Ispat International, can be turned around through a combination of cost-cutting and increased efficiencies and output. "We will be reasonably profitable within five years," he said.

Ispat took full control of Irish Steel this month, following protracted negotiations with the British Government which had objected to the company's plans for the Cork plant. Strict limits have been imposed on what the plant can produce and where it can sell its products.

These limits will cease to apply after five years, following the deal worked out between the Irish Government, Britain which threatened to veto the rescue plan and the EU.

Mr Armstead says the Ispat philosophy is simple: "We want to operate the facility at the right volumes, cut the cost base where the opportunity presents itself and use economies of scale."

Under the deal the Government has given the company the equivalent of £38.2 million. Of this sum £17 million is a writeoff of debt stretching back to 1985. The balance is a direct grant of Irish taxpayers' money.

Ispat will have to discharge a £19 million debt, of which £10 million is a loan from ACC Bank and the remainder an EU loan.

Ispat will invest £30 million in the plant over the next five years. The investment comprises £5 million in working capital and £25 million in capital development and fixed assets.

Mr Armstead says the equipment in Cork is "basically sound, if a little inefficient - probably because of lack of investment."

In the year to the end of July last, Irish Steel lost £6.3 million. He says Ispat acted with due diligence in the acquisition and concluded that while there were a lot of inefficiencies there was also a lot of potential in the Cork plant. "If it was 99 per cent efficient and was losing that sort of money, then we wouldn't have bought it."

Mr Armstead says the cost base will be reduced by what Ispat pays for its "consumables" and raw materials. Ispat has a good record on reducing such costs, he says.

He confirmed that the company is in negotiations with Bord Gais and the ESB concerning its annual bills for gas and electricity.

For example, the company pays £10 million a year for gas and electricity and £1.5 million per annum for graphite sections which are used in melting the steel. A further £2 million is spent on refractories to line the furnaces each year.

Of the negotiations on utilities Mr Armstead says: "What we are looking for is an ability to plan our costs on a one, three and five-year basis. Stability is very important."

Steel production in Europe, the US and Japan is likely to fall by 5 per cent this year, as mills reduce output to cope with declining growth in demand, according to some industry forecasters.

Mr Armstead says Ispat has factored in issues such as declining demand and falling steel prices in its projections for Irish Steel. The price of steel has fallen from £250 per tonne to £220 per tonne, but he believes that steel prices are falling less quickly than previously.

"The first quarter of 1996 will remain dull," he says, "but we believe the second quarter may be stronger depending on whether construction takes off." Irish Steel must sell 90 per cent of its product - it produces finished rolled steel mainly for the construction industry - in the EU. The remaining 10 per cent can be sold on other markets.

Ispat owns seven other steel plants worldwide. Mr Armstead says Irish Steel as part of an international group, can benefit from negotiating more competitive rates on items such as freight costs.

An important part of Mr Armstead's Job will be pooling commercial information. "When you have been through the hoop of fire once, there is no point in going through it all again somewhere else," he says.

Irish Steel had already undergone much of the pain involved in restructuring before the Indian group became involved - a point readily acknowledged by Mr Armstead.

This involved around 200 redundancies and changes in work practices as part of an £8.3 million cost-cutting package commenced in September 1994.

"The restructuring brought about a culture change in Irish Steel," he says. "The workforce made a commitment to do things differently, in a much more flexible way."

Mr Armstead says that it was difficult for all those involved and it is important for Ispat to continue to build on the commitment and enthusiasm the workforce has already shown. He says there will also be a significant investment in training.

A pay freeze is in operation at the Cork plant until 1997. This, says Mr Armstead will give the company valuable breathing space. Under the deal, virtually all the existing 356 jobs are guaranteed.