Trouble at the mills

Poland's steel industry urgently needs foreign investors to provide capital for modernisation to enable it to fight off competition from western Europe and supply the fast growing domestic market.

"We have asked ourselves: are we to have a Polish steel industry or a steel industry in Poland?" says Janusz Steinhoff, the economy minister. "Our answer is the latter - a steel industry in Poland," he adds.

Talks are continuing with British Steel and Voest Alpine of Austria who are bidding to invest in Poland's two main mills. The British are interested in Huta Katowice and the Austrians in Sedzimir in Krakow. But at the same time a punishing round of negotiations with the EU over the future of the industry continues to overshadow Warsaw's membership talks with Brussels.

In the steel talks several member countries are questioning Poland's assertion that the country will need a production capacity of 13.2 million tonnes in 2005. The EU critics are also arguing that Poland's plans to cover all but 15 per cent of home steel demand industry through domestic production are wildly unrealistic. The EU members also want a pledge from the Polish government that state aid to the industry will stay at levels tolerated by the EU itself.

These talks were sparked last year when Poland decided to keep tariffs on steel in place for two years more than it originally promised in 1991 when it signed the country's EU association agreement. Now a 3 per cent tariff is to stay in place till the end of next year. Brussels has declared this was a breach of the agreement. It also demanded that the industry be privatised and restructured if the breach was to be accepted.

The Polish side is growing increasingly bitter at the EU stance which it sees as unfair. The Poles say that steel restructuring plans in the member states in the past were invariably slower and more costly than anything the Poles are being asked to understake.

"Every tonne of Polish steel capacity is a tonne too much for some EU member states," explodes one Polish negotiator tired of explaining that his country's economy is expanding at 5 per cent a year and will continue to grow at a fast pace.

But even though last summer it seemed that an agreement with the EU was within their reach the Poles have had the misfortune to see the talks with the EU run on into the autumn as calls for protection from US and EU steel makers facing competition from cheaper Asian and central European imports are mounting.

Nevertheless the chances are that the Poles will brazen it out. Voest Alpine appears genuinely interested in taking over the Sedzimir mill which needs investments worth $1 billion to bring it up to scratch. An investment by the Austrians in Krakow would enable them better to face competition from the Thyssen-Krupp group whose rival offer to invest in Polish mills has been rebuffed.

Similarly in Huta Katowice, British Steel is holding out hope of improving the quality of the mills long products and helping to finance the construction of a $500 million rolling mill which would supply Poland's burgeoning motor car industry.

Andrew Kotas from Beddows, a steel industry consultant, makes the point that the key to the industry's problems lie in privatisation and radically improving the quality of its products. He says that last year a mere 24 per cent of the industry's output was of good quality. This led to imported steel capturing 23 per cent of the domestic market compared to a 14 per cent share four years before. Sales of Poland's steel mills to strategic investors "must be one of the surest routes to success" he says.