Bright young things emerge from history RUSSIA AND EASTERN EUROPE: Well-run businesses have emerged from the wreckage of the Sovietbloc although there are still some old-fashioned plants, write Marianne Brun-Rovet and Peter Marsh
In Herge's classic childrens cartoon Tintin in the Land of the Soviets,
the boy reporter found that Russia's apparently booming industry was
essentially the product of Soviet propaganda.
Nearly 15 years after the fall of communism, a large number of outmoded,
inefficient steel plants still litter the industrial regions of Russia and
other parts of the former state-controlled economies of eastern Europe. But
some relatively well-run businesses have emerged - including Severstal in
Russia, and Anglo-Dutch LNM and US Steel in the former Soviet satellites.
These companies are helping to re-establish eastern Europe's place in
the world steel industry. But, aside from the rising price pressures placed
on the rest of the industry, eastern European companies still face a number
of challenges specifically linked to the Soviet legacy.
Russia - and other parts of the world where steel consumption per person is
relatively low - is likely to be one of the main users of the metal in the
next 20 years as the industrial development of such regions takes off.
In the past few years, China - which this year is likely to produce and use
nearly a third of the world's steel output of 1bn tonnes - has shot to
prominence as the world's biggest steelmaker. In the early 20th century,
Russia was always considered a steel heavyweight although it lost ground
during the communist period. But since the fall of communism, several private
Russian steel businesses, among them Severstal, have emerged as credible
operators.
It is believed that Severstal wants to use the Rouge steelworks in Dearborn,
Michigan, as a bridgehead for gaining ground in the US. In particular, says
Charles Bradford, a New York steel consultant, Severstal could send to the US
semi-finished "slab" steel from its Russian operations and convert
this at the Rouge plant into higher quality products for use in construction
or vehicles.
Russian steel entrepreneurs have also been making significant inroads into
the global industry by taking advantage of the weaknesses of former western
giants, such as Anglo-Dutch Corus. Last month Alisher Usmanov, the Russian
businessman who owns 11 per cent of Corus, the world's sixth-largest
steelmaker, presented the group with a new set of demands to increase his
influence at the company unless he was given a seat on the board.
Corus, which has been a corporate disaster since it was formed from a merger
of British Steel and Hoogovens of the Netherlands in 1999, seems an easy
target for Mr Usmanov and Oleg Deripaska, another Russian magnate. Mr Usmanov
is well connected in Russia's metals industry owning majority stakes in
Russia's Lebidinsky Iron OreMine, Nosta Steel and Oskolsky Special Steel
and is believed to want to encourage some element of partnership between
Corus and his own iron and steel interests.
The chief attraction for Mr Usmanov and Mr Deripaska - who have built a
combined stake in Corus of 11 to 14 per cent - is probably Corus's large
steelworks on Teesside in north-east England. Corus intends to spin the works
off and they could be integrated relatively easily into the Russians'
existing interests.
The story illustrates how in today's steel industry many of the big
companies of the past are in danger of being overtaken by newer, nimbler
rivals. Many of the younger companies are based in developing areas of the
world and have been helped by assimilation of western steelmaking technology,
lower labour costs and closeness to the biggest future markets for steel.
Mr Usmanov and Mr Deripaska could feed semi-finished or raw materials to
Corus's plants, and use technology from these operations to improve
production processes in steel plants inside Russia.
Former Soviet block countries and western steel companies have recently
developed a strong interdependence. Outside Russia, Slovakia encouraged US
Steel to develop its interests in the country so aggressively that the
European Commission threatened to fine the country. Slovakia has allowed US
Steel's unit in Kosice to produce more steel than was permitted under
Slovakia's accession treaty signed in April 2003. Slovakia last month
agreed a compromise deal with the European Commission in the dispute over
Dollars 500m of state aid it granted to US Steel.
UK-based LNM Group has come to the fore through taking over former state-run
steel businesses. It is poised to become the dominant producer in eastern
Europe by completing a Dollars 1bn deal in October to take over the bulk of
Poland's steel industry.
The Polish government agreed to sell its majority stake in Polskie Huty
Stali, which manufactures about 70 per cent of the country's steel, to
LNM following a 10-month privatisation process. LNM, chaired and owned by
Indian entrepreneur Lakshmi Mittal, has expanded rapidly by acquisitions in
the past five years and is now the world's second-biggest steelmaker
after Arcelor of Luxembourg. It will double its assets in the region.
But the PHS acquisition illustrates one of the many challenges faced by the
eastern European steel industry, state-controlled until very recently. It was
agreed despite the failure of LNM and local unions to strike a deal on a
social benefits package, the first time that a Polish privatisation has taken
place without such an agreement.
Although LNM and the unions have narrowed their differences since, there are
still disagreements on privatisation bonuses and employment guarantees. LNM
plans to cut both the 15,500-strong workforce and the steelmaking capacity at
PHS, in line with a restructuring package agreed by the Polish government and
the European Union.
The European Union's enlargement in May might also be a threat to
eastern Europe's steel industry. In February, Russia told the European
Union it would support the EU's enlargement only if Brussels agrees to a
list of demands aimed at securing Russia's economic interests in central
and eastern Europe.
Moscow wants the EU to delay the introduction of higher import tariffs on
"sensitive" Russian goods, to lift restrictions on Russian energy
exports, accept higher grain import quotas and ease market access for Russian
steel producers.
On top of this, eastern European steel is facing similar pressures to the
rest of the European industry. Many steel industry executives point out that
costs have risen substantially in the past year, because of an increase in
prices of commodities such as iron ore, driven by the strength of the
increase in steel production in China, and this will pressure margins.
Steel product prices in Europe - even if they have risen strongly in the past
year - are still below the figures in other parts of the world, industry
experts say. The steel industry in Europe also faces the environmental
pressures of operating large plants that are highly obtrusive, use a lot of
energy and are potentially highly dangerous on account of many complicated
high temperature pressures.
Over-zealous environmental regulation could damage the capability of the
European steel industry to compete on a viable basis against other
steelmakers in the rest of the world. All the more so in the former Soviet
block, where even the most nimble new entrants still have to work with the
50- to 60-year-old plants Tintin saw in the land of the Soviets.
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