Czechoslovak steel industry looks west

Wednesday, November 27, 1991

By Peter Annear
and Sally Low

KOSICE, East Slovakia — Across a flat plain not too far from the Soviet border, a rail line disappears over the horizon into the Ukraine. Its sole purpose is to carry iron ore into the Vychodoslovenske Zeleziarne (VSZ — East Slovakian Steelworks) and to carry finished iron and steel out. But recently, much of this two-way trade has been derailed.

Steel making is a dirty business, and this plant is no exception. Black and red smoke bilges out of stacks, scars the skyline and offends the nose as you move towards it on the outskirts of town. Built in 1959 as part of Slovakia's industrialisation, VSZ is the single largest steel maker in the country, producing one-quarter of national steel output.

The country's single most important steel producing area, though, is not East Slovakia but the badly polluted North Moravia region, where four enterprises contribute more than half of total national steel output.

With a total workforce of 25,000, VSZ is also the largest single diversified enterprise in Slovakia. It includes machinery, ceramics, engineering and sports goods makers, information, other services and hotels. In December, it became a state-owned joint-stock holding company and will be transferred next year to majority employee share ownership through government-issued privatisation coupons.

In the future, up to 30% will be sold to a foreign investor, raising an expected $US250 million. Company president Zoltan Berghauer says, hopefully, "This is enough for us to do well, and too little for the partner to control our production". Bids from France, Germany, Italy and Austria are currently under consideration.

Michal Michanca is personnel manager here. In his office, he talked to us about the company's plans, and then toured us around the large plant. With him was Jan Hrusik, head of VSZ's newly created ecology department.

Michanca said an early reform was ending political interference in the new company, especially the former Communist Party practice of appointing top personnel. "The ideology of the former regime was that all people are owners of factories, but in fact this was not true. It was said that 'everything belong to everybody' whereas in fact it belonged to nobody. Privatisation is now the means to address this problem."

Furthermore, the Lidove Milicia — the people's militia that had operated under CP control since 1948 — were disbanded at VSZ and their weapons handed over to the Czechoslovak army.

Jan Husik said more money will be invested in ecological improvements. It is planned to close a battery of coke ovens, reduce output of "dirty" products like rough iron, modernise certain areas of the plant and install pollution control machinery.

According to federal environment minister Josef Vavrousek, who visited nt in February, there will be a five-year period during which Czechoslovak factories must achieve "western" environmental standards, after which environmental sanctions will be applied.

Hrusik thinks that while "the present situation is not good, if the company controls its own financial resources rather than the state, the management can then make decisions about the use of these resources to correct the situation". Soon, the onus will be on them to do just that. But other problems loom.

Traditionally, the steel industry has contributed nearly a tenth of Czechoslovakia's national product, ranking in importance after engineering, food and chemicals. At one tonne per head of population, it has the world's third highest annual per capita output — an indication of the past concentration on heavy industry. Recently, however, mainly as a result of problems in the USSR and the decline of the Slovakia-based arms industry, iron and steel output has been falling by more than 5% a year.

Moreover, since the introduction of direct trade between enterprises in January, VSZ has amassed nearly 5 billion crowns ($US167 million) in customer debts, and nearly half its domestic buyers are incapable of paying their accounts.

To address these problems, the company turned to export markets in the west. Previously, 70% of VSZ's output was sold in Czechoslovakia, where the company was sole supplier to the motor vehicle industry, white goods and construction. Now 63% is exported to Germany, Japan, Taiwan, Australia and other western buyers.

Luckily, this transition to new export markets was made relatively easy by the company's low wage structure, a legacy of the former system. VSZ labour costs are roughly one-sixth those of western producers. Other costs, including energy, are somewhat higher than in the west, while Soviet ore exports to Kosice, which still provide 80% of the company's needs, are relatively low cost.

Despite the export success, rationalisation is on the agenda. Following privatisation, production will be cut by approximately 20% — mainly for "ecological reasons", management claim. In addition, they say it is possible to produce the current level of output with one-third the amount of labour. Consequently, the steel workforce will be cut from 15,000 to 10,000 over five years by a process of natural attrition, retirement and transfers.

Zoltan Berghauer claims the company will climb to the top of the European steel industry in three to four years. But this is likely only if the company preserves its present low wage structure, which allows it to undercut western competitors. And the company will soon face EEC limitations on its exports. It remains to be seen how well this big enterprise responds to the strictures of the "free market".

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