Since the start of the 1990s, Poland's steel industry has undergone steady change. As a result, today the sector is partially modernized and predominately privatized, and it also enjoys better prospects with the latest improvement in business cycles. Much depends on how long the favorable trends in the steel market can last.

Due to the business cycle in the steel sector-which is now in a phase of growing demand-and an insatiable appetite for steel on the part of the rapidly growing Chinese economy combined with recovery in Europe, Polish steel mills have caught their breath after a difficult previous decade, and are reporting increasingly better financial results. The International Iron and Steel Institute reports that in the first half of 2004, a total of 503.3 million tonnes of steel was produced worldwide, 7.9 percent more than in the same period of 2003.

The Metallurgical Chamber of Industry and Commerce predicts that this year's production in Poland will return to its 2000 level, when it stood at 10.5 million tonnes. This would mark a clear improvement over last year, when production was 9.1 million tonnes. In 2003, steel consumption in Poland totaled 7.4 million tonnes, 6 percent more than in 2002, with imports covering 42 percent of the economy's demand for steel products.

Steel producers are rubbing their hands with glee, while buyers from the construction and shipbuilding sectors are worried since, due to increased demand, the prices of metallurgical products increased by 50 percent from January to April 2004 and are still at a high level. The profitability of metallurgical production is growing. On the other hand, the prices of raw materials used by the steel sector-including iron ore, coal, coke and ferroalloys-have also grown. In December 2003, a ton of scrap metal, necessary for electric furnaces, cost 100-120 euro in the European Union while in March the price was 220 euro.

Some manufacturers of steel products have started signing short-term contracts with buyers instead of long-term contracts, enabling better use of the upward trend in prices. The net profit of Ispat Polska Stal IPS, the country's largest steel producer, is projected at zl.1 billion in all of 2004, which means it would actually be double the amount stated in earlier forecasts. As far as the prices of steel are concerned, IPS sets the pace, accounting for 70 percent of domestic sales.

In private hands
Early on in the process of transition, the government decided that the Polish steel industry would be privatized because the state did not have the money for modernization. All the steel mills were transformed into Treasury-owned companies, which was to precede their sale to investors. Five steel mills were incorporated into National Investment Funds. In 1992 the Italian corporation Lucchini took over 51 percent of the stock in Huta Warszawa, but this was the only such transaction. The Italian investor's methods confirmed the superiority of private ownership over state ownership. The Italians not only modernized the Warsaw steel mill-removing dirt that had accumulated on the buildings for years and replacing broken windows in the process-but also imposed strict cost controls, something that formerly no one in the Polish steel sector had cared about.

The remaining steel mills continued to belong to the state. Their owner was the Ministry of the Economy, which was responsible for all the strategic decisions regarding this sector. Over the last 15 years of transformation, most steel mills have been privatized in various forms. The Ministry of the State Treasury currently oversees those assets which are still in state hands.

Ownership changes in the steel sector were stimulated by Poland's approaching accession to the EU. Officials in Brussels made public assistance-which is necessary to complete the process of restructuring in the Polish steel sector to make it fully competitive-conditional on the preparation of a consistent reform plan providing for a reduction of Poland's production capacity and cuts in employment. The EU decided that if, in the 1990s, the manufacturing capabilities of Western European metallurgy were reduced by almost a third, and employment was slashed by 40 percent, in Poland changes should be headed in a similar direction. Under a restructuring strategy for the steel industry, approved by the Council of Ministers in 2002 and covering the period until 2006, the net production capabilities of Polish steel mills (MMP-maximum possible production) should be reduced by 901,000 tonnes annually. In 2002-06, public assistance should not exceed zl.3.3 billion. It is estimated that even after Polish steel mills are completely privatized, their capacity will not be enlarged.

Privatization in the sector accelerated in 2002 when four steel mills-Huta im. T. Sendzimira, Huta Katowice, Huta Florian and Huta Cedler-were combined into a single corporation called Polskie Huty Stali. The government promised to help reduce the debts of the steel mills making up the corporation. Their investments will be supported from the national budget through credit guarantees for some of the loans these mills have incurred.

In 2003, PHS was bought by the LNM corporation, leading to the establishment of Ispat Polska Stal, a company that controls 70 percent of the Polish market. The entry of LNM, a company with Indian-British-Dutch roots that operates in 12 countries, cost an estimated zl.4.2 billion together with investment commitments. Ultimately, the investor is to hold 75 percent of PHS, leaving 25 percent in state hands.

A second metallurgical center is to be created around Huta Częstochowa. "I don't think it's a good policy to sell all the steel mills in Poland to a single investor," says Ireneusz Jabłoński, an expert at the Adam Smith Center. "When there is a second investor, the market will be divided, which will benefit the steel mills themselves and the competition. Two investors will maintain greater production capacity. This means more production, more jobs and more revenue for the [national] budget." This second candidate for investment in the Polish steel sector is the Industrial Union of Donbas. It wants to buy Huta Częstochowa and on this basis expand the metallurgical corporation in Poland, which as an EU member, would be its beachhead in the EU.

In keeping with the restructuring program, the steel mills will rid themselves of their losses, modernize their production departments and reduce employment. After privatization, they should operate more efficiently on the competitive market. In the future, public assistance will only be admissible in exceptional situations. It is estimated that in 2006 about 500 products will be sold annually in the Polish steel sector per employee. For long-product rolling mills, the indicator will be 750 tonnes per employee and for sheet-coating lines-300 tonnes per employee.

Consolidation
During the 1990s consolidation began in the Western European steel industry. Steel mills, both state-owned and private, cut costs and looked for savings. They also merged into stronger entities and modernized their production facilities. At the same time in Poland, the reverse process was in progress: the managers of the steel mills which the government granted considerable management autonomy after 1989, evidently believed that small is beautiful and preferred to act single-handedly. At the start of the previous decade, there were opinions that the entire steel sector needed to undergo reform: the two largest steel mills should be merged, unprofitable plants shut down, excessive employment reduced and the remaining plants modernized.

Efficiency could be improved by modernizing the steel mills and cutting employment. Over nearly 15 years, both these goals were attained in the sector, but even better effects could likely have been secured-if, instead of allowing the steel mills to act on their own or doubling their capacity in some cases-the authorities had listened to the advice of Canadian experts right away. Their report, prepared on the basis of market analyses-an innovative approach in Poland at the time-and announced in 1992, called for restructuring in the entire sector and primarily for a combination of the capacity of Poland's two largest steel mills: Huta Katowice in D±browa Górnicza and Huta im. T. Sendzimira in Cracow, as well as the closure of six steel mills. According to the report, the domestic market should be the main buyer of steel products. An assumption was adopted that if Poland was in need of modernization for many factories, coupled with the construction of freeways and production of new consumer goods, steel mills should primarily be oriented toward the domestic market. Accordingly, about 80 percent of production was to reach the domestic market and the remaining 20 percent sent to export markets. The report suggested that it would be necessary to lay off 80,000 people. The cost of the program was estimated at $4.5 billion, of which the employment reduction alone was to cost $300 million.

In the following years, many steel mills modernized themselves. Steel mill managers claimed they did not benefit from any public assistance, yet many of their obligations toward the state were either canceled or deferred. Steel mills also took advantage of state credit guarantees.

Speeding up
Privatization was intended to guarantee an influx of capital necessary to the steel sector for further modernization. Experts predicted that privatization would increase the flow of funds for the development of steel mills and facilitate domestic producers' access to international distribution networks for steel products.

But only the prospect of EU accession and the intransigent position of the European Commission on reforms in this sector convinced the Polish government to act more efficiently. The modernization of the Polish steel sector has yet to be completed, but now that Poland is an EU member, public assistance may only be granted to the steel industry under strict control and in specific situations.

Polish steel mills are no longer a technological museum. Huta Częstochowa, struggling with financial problems, is a modern plant along the lines of U.S. mini-steelworks. Huta L.W. produces chiefly high value-added quality steel: for bearings, screws and springs. Thirty percent of output is exported. "In terms of productivity, Huta L.W. can safely compete with other specialized-steel mills in Europe and the world," said Ewa Karpińska, press spokeswoman for the mill. "It makes exclusively products from special steel intended chiefly for the auto, bearings and machine industries."

The latest crisis on metallurgical markets-not only in Poland, but elsewhere in the world-has not spared Huta L.W., which sustained losses for a few consecutive years. "Now the situation on the market is improving," Karpińska said. "Huta L.W. has more orders and restructuring is producing visible results in the form of improved efficiency and competitiveness. This is confirmed by monitoring conducted by European Commission experts."

Today foreign investors have a presence in several steel mills in Poland. LNM has taken over the company Polskie Huty Stali, which includes the leading mills: Huta Katowice and Huta im. T. Sendzimira. CMC Zawiercie has an American owner. Spain's Celsa has invested in Huta Ostrowiec.

Like the West
All around the world, distributors are the indirect link between steel producers and users. About 70 percent of the trade in steel products is done through distributors. Those buyers who regularly place large orders with steel producers-such as the shipbuilding and automotive industries-buy directly from steel mills.

"The network of agents nationwide is a giant warehouse," says Andrzej Ciepiela, director of the Polish Association of Steel Distributors (PUDS). "It is a shock absorber for producers, who produce with varying intensity and varying quantities. We can absorb this steel and enable producers to have relatively regular and stabilized production." The PUDS brings together 70 or so distribution companies. Information obtained from distributors-independent or linked with specific steel mills-is of key importance for the producer. "It is no big problem to produce steel today; the trick is to sell it," Ciepiela says.

The distribution market has been developing for the last 15 years. Previously, it was monopolized. In 1990, the market was deregulated and more players appeared on it. Initially, many small companies were active; they later turned out to be rather unprofitable and it was not so easy to operate in the sector. Many companies dropped out. Later strong companies with foreign capital began to appear, creating strong competition. With time the market is bound to undergo consolidation: to meet competition head on, companies will have to join forces through mergers and the creation of joint ventures and purchasing groups. A similar trend has been noted all around Europe.

A tempting market
The attractiveness of Polish steel mills to investors is determined not only by the large domestic market, but also by growing steel consumption promoted by faster economic growth and EU membership.

Romuald Talarek, president of the Metallurgical Chamber of Industry and Commerce, says that manufacturers of long products, which account for about 60 percent of the Polish output, are well prepared to compete on the EU market. Sheet producers are worse off.

Kazimierz Kowalski, vice-president of the chamber, says the situation in the steel sector, thanks to favorable business trends, is much better than two years ago. The metallurgical industry is nearly 90-percent privatized; employment has decreased radically, leading to greater efficiency. Now the greatest challenge for steel mills is to complete technological restructuring. In the 15 "old" EU countries, the proportion of more profitable and sought-after flat products to long products is 60:40; in Poland the reverse proportion is noted. "That's why, on the one hand, we should be happy that we are a leader in long products, but on the other hand we should be aware that we have major arrears in flat products. The investments planned by Ispat Polska should improve this situation," says Kowalski. Another challenge is the development of postindustrial areas.

The direction of change in the Polish steel industry will determine the development of other sectors as well. Unless production of automotive sheet increases, motor corporations are unlikely to open factories in Poland. The European Commission has appealed for an increased output of high value-added flat products in Poland. On the other hand, experts say that Poland, with its well-developed steel industry, should look for narrower specialties. These could include bearing steel or marine steel.


In keeping with the restructuring program, the steel mills will rid themselves of their losses, modernize their production departments and reduce employment. After privatization, they should operate more efficiently on the competitive market