Grinding steel down to size: EC partners are in disarray over capacity cuts, writes Russell Hotten

INDONESIA is the front runner to buy Ravenscraig, the British Steel plant that closed last year. If it succeeds, it will dismantle the factory and ship it wholesale to the Far East.

British Steel says talks are under way, although no conclusion is likely for a few months. But the prospective removal of an entire steel plant in this fashion underlines the confused and divided state of Europe's steel industry.

While the European Commission is seeking massive cuts in steelmaking capacity because of lack of demand, Ravenscraig could provide plant and machinery for what may become the largest steel mill in South- east Asia.

It is a bitter irony for the thousands of Ravenscraig workers who have lost their jobs that some of this steel could find its way back into Europe. 'If there is a demand for steel, then British Steel should be attacking those markets,' said an official of the Iron and Steel Trades Confederation.

But it is not as simple as that, because shipping costs add 20 to 25 per cent to the price of steel, making it uneconomical for European producers to serve distant markets. Far East exporters, however, have the advantage of cheaper labour costs, which is why attempts by the EC to reduce overcapacity include calls for tighter import controls. 'In any case,' the ISTC official said, 'why help your rivals set up in competition.'

British Steel talked to Chinese and Malaysian companies about the sale of Ravenscraig. But the Indonesian steel company, PT Gunawan Dianjaya, looks the most likely purchaser, possibly this summer. A reported price tag of pounds 542m is grossly inflated. Andrew Umbers, a BZW analyst, thinks British Steel would make only about pounds 45m from the sale.

This is still money it desperately needs. The company went pounds 55m into the red in 1991/92, a figure that could balloon to pounds 250m next time. Mr Umbers said: 'An extra pounds 45m for British Steel could be very useful. It could be a future dividend.'

Overcapacity in the European steel industry is estimated to be up to 40 million tonnes a year, though about 10 million tonnes of this could be removed through closures and mergers already announced. The EC wants to cut 30 million tonnes of crude steel capacity and up to 26 million tonnes of hot-rolled steel by 1994. It could lead to between 50,000 and 100,000 job losses in Europe.

The need for change comes against the backdrop of a 30 per cent fall in steel prices in two years because of the slowdown in European economies. Western Europe is also being squeezed on both sides, with the imposition of new US tariffs and a flood of cheap steel from the old Eastern bloc.

The closure of Ravenscraig last June with the loss of 1,200 jobs brought home the plight of the steel industry in Britain. But it was also graphically illustrated in Germany last week when Thyssen, the country's largest steelmaker, announced 4,500 job cuts. In December, Klochner, Germany's fourth- largest steel producer, was placed in receivership. All steelmakers acknowledge the need to make cuts, but the enormous social, economic and political costs mean that no one can decide where the axe should fall.

David Rae, of the British Iron and Steel Producers Association, warned of the consequences if the EC plan fails. 'If extensive government subsidies continue without productivity cuts, prices will be further depressed and large-scale jobs losses will result.'

To avert such an outcome, the EC has already pledged a pounds 700m package of grants to ease the burden of restructuring, but the final bill could be well over pounds 1bn. An EC official, Fernand Braun, with cheque book in hand, is currently on another Europe-wide tour of steel producers trying to persuade them to make cuts. But as Mr Umbers said: 'The EC can fund a certain amount of rationalisation, but a certain amount of the cost must come from the companies themselves.'

British Steel has made more cuts than most, becoming perhaps the most efficient producer in Europe. But although it has cut capacity by 6.25 million tonnes in the past five years, it may not escape further rationalisation. A spokesman said: 'We cannot rule out cuts. If European overcapacity cannot be resolved then we will all suffer. But I must stress that we do not see any requirement on us to make any further substantial cuts.'

Britain's smaller independent steel producers, which employ about 9,000 people, are also likely to suffer. They have offered to make further closures and to arrange mergers to help to push through the EC's plans.

UK steel production has now fallen to 21.6 million tonnes. British Steel thinks the main burden of restructuring should fall on Italy, Spain and Germany, where state subsidies are largest and restructuring slowest.

Yet, political in-fighting threatens to stall Mr Braun's plans.

One Brussels official said this week: 'It has reached the point of stupidity. Everyone knows that failure to agree would send the European steel industry into the abyss, but there is resistance to change.'

Italy's industry minister, Giuseppe Guarino, said he would not agree to an EC plan unless the Commission backed his government's proposals for a pounds 300m recapitalisation of Ilva, the state-owned steel producer. And Spain has pledged to maintain steel subsidies in the politically sensitive Basque area. Both countries are thought to have about 5 million tonnes of overcapacity.

France has cut back radically, and overcapacity is now thought to be about 3 million tonnes. Usinor-Sacilor, the French state-owned producer, has cut 8,000 jobs.

Germany faces the biggest pressure for rationalisation and could cut about 14 million tonnes of its 55 million tonnes of capacity. It is less resistant to change than some countries. Even so, some steelmakers argue that if Klochner's 3.8 million tonnes of overcapacity was taken out, that would be enough.

(Photograph omitted)