Steeling a March on Europe
The Steel Industry in Europe, Asia, and the USA
By: Sam Vaknin, Ph.D.
Also published by United Press International (UPI)
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The recent steel spat between the USA and, among others, the EU, is a classic case of suicidal protectionism. American steel producers ended up imposing quotas and tariffs on manufacturers they have only recently purchased in central and eastern Europe.
The battle is far from over. US producers of oil country tubular goods have just applied for relief under the infamous section 201. They blame Ukraine and Romania - as well as 11 other countries - of dumping. They demand to apply duties at the border on this steel product, so as to restore fairness and "equilibrium" to the market.
Last month Bush imposed tariffs of up to 30 percent in the first year of the new regime on $8 billion of steel imports, mainly from Europe, South Korea, and Japan. This is about one tenth of the global market. The tariffs are scheduled to decline to 24 percent in the second year and 18 percent in the third. Both Europe and Japan are challenging these measures in the WTO.
Bush was fiercely chastised for his decision by free-traders and economic liberals the world over. Many believe that this is merely the opening shot in an all-encompassing trade war. They fear a 1930's-style world depression.
The administration has already backtracked. It promised to consider more than 1000 requests to exclude up to $1 billion in steel imports from the tariffs. The gaffe-prone US Treasury Secretary, Paul O'Neill, said that this is done in order to reduce the "shrillness" of the conversation. More likely, it is aimed to prevent the emergence of an anti-American trade coalition.
One of the chief complainants to the American administration is US Steel, the largest American producer, now that LTV, National Steel, and Bethlehem Steel went bust.
The absurd is that US Steel is a major European steel producer as well. Two years ago it has purchased the continent's second largest steel mill, VSZ, in Kosice, Slovakia. It paid over $60 million in cash, assumed more than $320 million in obligations and agreed to invest c. $700 million in plant over a ten year period.
This was no small acquisition. VSZ has a capacity of 4 million tons (and a production run of 3.4 million tons) - to US Steel's 13 million tons. Next year, the Slovak factory will be upgraded with new tin-plate steel facilities and an automotive-grade galvanized steel line. This will boost its annual production by 15 percent.
Last year, US Steel lost $62 per every domestically produced ton. US Steel Kosice (USSK) made a profit of $55 per ton. USSK plans to purchase still mills in the Czech Republic as well. No wonder other American companies - such as Harsco - were drawn to invest in eastern Slovakia.
Non-American firms were slow to react to the American takeover of the European steel industry. The only notable acquisition was by LNM, the world's fourth-largest steelmaker. It purchased the Romanian Sidex, a loss leader with 28,000 workers. Its bid was backed by Britain's prime minister, Tony Blair, in a now-notorious letter to the Romanian government.
The unilateral slapping of tariffs by their biggest market - the EU - threw central European producers into disarray. Hungarian Radio announced that Hungary will impose import restrictions later this month "to protect the domestic steel industry and market". The EU was likely to institute import barriers against cheap Hungarian steel as well.
According to the April issue of "Rzeczpospolita", the Deputy Minister of Economy, Janusz Kaczurba, threatened to introduce import restrictions on foreign producers, if they attempt to bring the surplus of their steel output to Poland." His posturing was aimed mainly at Russian mills, now somewhat deprived on both the American and the EU markets.
Poland epitomizes the dilemma facing central European countries in the wake of the American action.
Exports from central and eastern Europe to the USA will not be adversely affected. Actually, they may yet increase. But steel imports to the region may explode. It is thus forced into protectionism by the hasty moves of other, much larger, market players.
Polish exporters are damaged by any European retaliatory move. Poland is the third largest steel exporter to the EU, after Russia and Turkey. The BBC reported that the Polish press quoted Polish experts in Brussels as:
"(Warning) that the EU protective measures (safeguard quotas and tariffs of up to 26 percent) may hit Polish exporters arguing that the import quotas will require exporters to implement swift and precise administrative procedures to win a chunk from the overall import pool which is to be distributed on a "first come, first serve" basis. They also warned that Polish steel exporters could be pushed out from the EU market by more aggressive rivals, such as South Korean steel concerns, that could offer more attractive commercial terms."
Poland is going through an agonized restructuring of its inefficient steel mills. The government actually pays these decrepit and rusty plants to phase out their production over a few years. EU competition policy officials have lodged vocal - and often petty - objections to the aid the Polish government plans to provide to the consolidating steel industry. Poland will submit a revamped plan to Brussels by April 20.
The US also spared other niche players, such as Slovenia. This tiny country's steel industry, geared to the needs of the now-defunct Yugoslav Federation, has dwindled from 15,000 workers to less than 4000 workers, according to the Financial Times. What's left of "Slovenske Zelazarne" will likely be privatized this year. Smaller steel mills have already been sold to Swedish and other European investors.
"Vecer", a Macedonian daily, estimated that the measures and countermeasures in the latest trade conflict will have no serious effect on Macedonian producers such as Makstil, and Balkanstil. The paper noted that the USA has exempted developing countries, members of the WTO, with less than 3 percent of the American market.
Countries like Macedonia and Poland may even see their exports to the US increase at the expense of larger fish. According to "Plus Biznesu", Poland, for instance, is allowed, under WTO regulations, to export up to 850,000 tons of steel products to the American market. It currently exports less than one eighth of this quantity.
"Vecer" expects Macedonia to negotiate a bilateral compromise with the USA. Macedonian exports to the EU are also sheltered under the Stabilization and Association Agreement signed last year. Most of Macedonia's $120 million in annual steel exports go to the EU.
Even Russian exports to the US will go largely untouched. No tariffs were imposed on the first 5.4 million tons of slab steel. Imports from Russia constitute one quarter of this tariff-free quota. Kasyanov, the Russian premier, went as far as supporting the American move. Quoted by Radio Free Europe/Radio Liberty, he said:
"One should not regard this [U.S. decision] as a step towards a trade war with anyone ... It is the right of any country. If there was a difficult situation with certain imports in the Russian Federation that would jeopardize a whole industry, I would not exclude the possibility of taking similar measures, in accordance with our laws ... Nevertheless, as I have already pointed out, the negative effect is evident."
The steel industry in central and eastern Europe is in dire straits. Over-capacity may have been exacerbated by massive investments enthusiastically promoted by multilateral financial institutions such as the EBRD.
The European Bank for Reconstruction and Development invested hundreds of millions of dollars since its inception in steel production from Kazakhstan to Macedonia. It awarded a $25 million revolving credit line to a privatized Ukrainian mill. The ill-timed loan was intended to help the plant increase its exports and penetrate new markets.
Another $100 million were lent to Sidex, the recently privatized Romanian producer. These funds are intended to help it reduce emissions. Magnitogorsk Iron and Steel Works in Russia received $105 million. The investment in Kazakhstan is envisaged at c. $400 million. Similar investments were made in Hungary.
The result is a glut of production capacity in some categories - mainly long and flat steel, rolled aluminum, and semi-fabricated copper.
Other desperate steel mills throughout the region are being nationalized.
The Czech daily, "Mlada Fronta Dnes" reports that the Vitkovice Steel Company was sold to Osinek, a subsidiary of the National Property Fund (FNM). Osinek was preferred to the likes of US Steel, Shiran (from Israel), and Trinec Iron Works. The state vouched to privatize the mill - but only in a package with Nova Hut, another tottering steel plant in Ostrava.
In Poland, the Treasury Ministry - in cahoots with a consortium of five banks - had to bail out Huta Katowice. One third of the mill's debt was written off and the Polish state issued bonds to guarantee the rest. HK will now be consolidated with other crumbling steel assets to form a holding company, Polskie Huty Stali.
While the manufacturing side of the business is being vigorously privatized and modernized - mining, smelting, and fabrication are still technologically backward and state-owned. According to Adam Stobart in his presentation to the Adam Smith Conference in Vienna in August 2000 - the main problem is developing and capturing markets. Central and eastern Europe has become a net importer from Western Europe of many steel products.
The old sales strategies in captive domestic and east European markets no longer work. Competition from Western Europe and Asia is awesome. Consumers - including branches of multinationals - have become more sophisticated and demanding. Some manufacturers adapted - but the majority haven't.
Stobart enumerates the advantages of steel producers in central and eastern Europe: good location, low labour costs, skilled labour and "enthusiastic managers", growing domestic markets, customers that are keen to buy locally. Will these be translated into a dominant market share? Not if free trade is thwarted by blatant politicking and rampant protectionism.
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