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Out of Kosice?

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  • Martin Votruba
    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
    Message 1 of 1 , May 5, 2004
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      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.


      Martin

      votruba "at" pitt "dot" edu

      x x x


      EU Accord Curbs U.S. Steel's Plans om Eastern Europe

      WSJ, 5/4/04

      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
      biggest employers.

      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
      the area.

      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
      year.

      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
      off workers.
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