Grinding Down Steel

By JAY BRANEGAN BRUSSELS

IN ITS HEYDAY, THE VAST EKO STAHL steelworks was the life-force of Eisenhuttenstadt, a utopian socialist city of 50,000 southeast of Berlin and the pride of the German Democratic Republic. Today the complex of six factories is a hulk dominated by a single operating blast furnace. It glows over an industrial wasteland near the Polish border where thousands have lost their jobs. Since unification, Eko Stahl has cut 85% of its eastern German work force as it closed or restructured its inefficient and overstaffed - plants. The number at Eisenhuttenstadt has shrunk from 12,000 to 3,500, and the remaining workers are threatened with layoffs unless the government is allowed to spend $478 million for modernization so the plant can be sold.

Critics consider that to be throwing good money after bad. The proposal to revitalize Eisenhuttenstadt has run into stiff opposition from the western German steel industry, the European Commission in Brussels, and E.C. countries, which must unanimously approve new state subsidies -- at a time when Europe's steel industry as a whole is awash in excess capacity and red ink. Italy wants to salvage 2,000 of 5,800 imperiled jobs at Taranto, in the impoverished Mezzogiorno, while Spain is struggling to cushion the blow in the politically troubled Basque region, where 9,700 steelworkers are targeted for dismissal.

Controversy over the three subsidy plans last week caused an E.C. industry ministers' meeting to break up in disarray. The officials had hoped to clear the way for a crucial $11 billion restructuring scheme that aims to cut European steelmaking capacity 20%, or 30 million tons a year -- and in the process throw at least 60,000 people out of work. The stakes are high for an industry that lost $4.5 billion in 1992. "If we do nothing," says a Commission official, "the whole industry will be bankrupt in two years."

Steel consumption in recession-racked Western Europe dropped 4% in 1992 and may fall an additional 8% this year, while forecasts through the year 2000 show little growth even after recovery. The steel crisis is a textbook case of mismanaging the decline of a capital-intensive industry. For much of the 1980s, the Commission dictated steel production quotas that kept prices high but also emerged as "a great machine for slowing down the exit of the high- cost producers," says Jonathan Aylen, a senior lecturer at the University of Salford in Britain. Under steel's curious economics, it is sometimes cheaper to keep a plant running unprofitably than to close it completely. In a total shutdown, the company must write off the entire value of the factory, make heavy outlays to dismissed workers, and pay to dismantle the mill and clean up the site.

The chief cause of the industrial tragedy is a consistent policy of subsidizing losers, usually because of national pride. Europe's 1951 coal and steel treaty prohibits such state aid, yet about $75 billion in government money has been lavished on steel producers since the mid-1970s through waivers and loopholes, while the sector was losing more than 260,000 jobs. Even as France, Germany and Britain were shuttering mills, the heavily subsidized Spanish industry built new plants that boosted national capacity 35%, while Italy hiked its potential 16%.

Prodded by private steelmakers feeling squeezed by such unfair competition, the European Commission this year vowed no new subsidies without permanent production cutbacks. Spain won Commission permission to spend $3.3 billion to pay for consolidation and layoffs connected with a 2.3 million-ton-capacity cut at Ansio, provided that Madrid found private financing for a new 1 million-ton mill in the Basque town of Sestao, which the government had earlier planned to build itself. Just before last week's meeting, Commission officials approved a plan to sell Eisenhuttenstadt to Italian steelmaker Riva and save existing jobs, if Bonn scaled back its original $650 million subsidy proposal for upgrading. Because that plan would feature a new 900,000-ton hot rolling mill, the Commission wrung nearly 500,000 tons of compensating capacity out of plants elsewhere in eastern Germany.

But last week Italy angrily rejected the Commission's final demand on the Taranto works, threatening the entire rickety deal. The Eurocrats asked for 1.2 million tons of production cuts; Rome, which sought to spend $2.9 billion on the complex in hopes of selling it, declared that unacceptable. Other ministers then balked at the German and Spanish deals.

The subsidy accord is crucial to the rescue operation, for private companies will not cut back unless their state-owned competitors are brought to heel. Europe's private steelmakers have warily agreed -- in principle only -- to a $1.1 billion shutdown scheme that the E.C. and member states plan to sweeten with $3.1 billion more for unemployment benefits and retraining. After last week's fiasco, officials pleaded for more flexibility from Rome. But either way, the lesson is clear: the longer the delay, the more painful the cure.

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With reporting by Denise Claveloux/Brussels and Nomi Morris/Berlin