Out of Kosice?
- An article in the Wall Street Journal says people in Kosice are worried
that U.S. Steel may leave. According to the WSJ, USX has failed to create
the kind of presence in Central Europe it was hoping to, and has been
hurt by the expansion of the EU. The article also gives some details of
the clash between U.S. Steel and Bratislava about the EU accession
agreement. The story is below.
votruba "at" pitt "dot" edu
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EU Accord Curbs U.S. Steel's Plans om Eastern Europe
Entry into the European Union may be a dream come true for Slovakia, but
it has been a rude awakening for U.S. Steel Corp., one of Slovakia's
A disputed deal that Slovakia cut with the EU as part of its admission --
limiting steel output in exchange for being allowed to subsidize its
struggling steel sector -- is forcing U.S. Steel's Slovak unit to cut
production just as competitors in the region gain clout. In turn, the
unpleasant surprise could delay the unit's plans to aggressively court one
of its most profitable potential customers: the auto makers moving into
Meanwhile, the desperately poor area of Kosice Slovakia, where U. S.
Steel's 15,000 jobs have brought hope to an area with 23% unemployment,
fears the company's woes could prompt it to leave. "There's not a family
in town who doesn't have someone working in the mill," says Zuzana
Bobrikova, chief of staff for Kosice's mayor.
U.S. Steel officials, insisting they are committed to the area, are
putting the best face on the situation. "It's kind of a short-term
inconvenience for a long term improvement," says Christopher Navetta
chairman of U.S. Steel Kosice. For example, he notes that Slovakia's
entry into the EU will open trade with ether countries and bring more
foreign investment which means greater demand for steel.
Those benefits prompted the company to settle a fight with the EU in March
over how soon it would have to meet production limits. The agreement
requires the company to pay $32 million of extra taxes and give up
subsidies valued at more than $70 million but avoided a drawn-out legal
battle and cleared the way for Slovakia's EU membership.
"We're not happy," Mr. Navetta said in an interview. "But at the end of
the day, I think it was important for us to move on. ... The EU has a lot
of power. Slovakia is the new kid on the block. It's very concerned
about getting off on the right foot, and we had to do our part."
U.S. Steel's operations in Kosice are highly profitable. The plant
produced 4.7 million net tons of steel last year, up from 4.4 million tons
in 2002. The company is four year's into a commitment to invest $750
million in the plant, while also helping Kosice to recover from the brink
of default. "Just U.S. Steel's presence here increased confidence in the
town. It told other investors that this town is safe to come to and safe
to invest in," says Ms. Bobrikova. Already other companies have invested
$60 million in the Kosice region.
Still, U.S. Steel's production limit, combined with aggressive
acquisitions by competitors, have left U.S. Steel with just a fraction of
the capacity it once envisioned in the region. With mass being a critical
factor in steel pricing power and in purchasing raw materials, the
company's inability to acquire more assets in central Europe is clearly a
setback, especially since acquisition opportunities are no longer abundant
and purchase prices have soared.
U.S. Steel saw Eastern and Central Europe as a land of opportunity in the
late 1990s. After a sweep through Asia and Europe, a special team of
company engineers who act as scouts hailed the region's low-cost,
fast-growing, newly independent countries. A plan called for U.S. Steel
to dominate a region running from Poland through the Balkans, according to
John Goodish, one of the engineers and now vice president of operations in
the company's Pittsburgh headquarters. The company hoped to eventually
produce between 10 million and 15 million tons of steel in the region each
Analysts say the company paid a bargain price in November 2000 for the
former Kosice Iron Works, a series of gray, crumbling buildings erected
virtually overnight in the Soviet-era 1960s. U.S. Steel paid $60 million
and assumed debts of about $325 million, and committed to invest $750
million over 10 years.
As part of the treaty to admit Slovakia as a member, the EU had agreed to
let the government give fiscal assistance to its steel sector -- in this
case, U.S. Steel -- providing it also capped steel production in the
country. The agreement limited production growth to 3% a year based on
2001 output of 4.05 million tons.
U.S. Steel's problems started last year, when the EU said Slovakia had
exceeded that ceiling. U.S. Steel had boosted production 8% in 2002 and
11.5% in 2003, but said it thought the production cap came into effect
when Slovakia officially joined the EU. The EU argued the limit went into
force in 2002 -- triggering a series of high-level meetings between the
EU, Slovakia and company officials.
In March, U.S. Steel agreed to pay $32 million of taxes over the next two
years and give up $70 million of its $500 million tax credits through
2009. "We did nothing wrong ." says U.S. Steel's Mr. Goodish. But, he
adds, "there is no point making attorneys wealthy."
Meanwhile, the region's growth has attracted competitors, especially the
Anglo-Dutch LNM Group, the world's second-largest steel producer after
Luxembourg's Arcelor. LNM and its companies eventually purchased steel
operations in the Czech Republic, Romania and Poland.
And Slovakia's biggest advantage, low-cost labor, is bound to disappear as
wages converge with those of the West. That is especially problematic
because U.S. Steel, as part of its purchase agreement, pledged not to laz