Polish Steel's Factory Fears

It's a painful transition for the mill town of Nowa Huta

The European Union is rushing to embrace the new Eastern Europe--but no matter what it does, it will be difficult to wipe out all the remnants of the old Soviet economy. Thousands of workers in the East still toil in crumbling state-controlled Soviet-era factories that struggle to match the productivity of more modern plants in the West. Finding a place for these workers in the new economic order will prove a huge--if not impossible--challenge.

A test case could be the giant steel town of Nowa Huta, Poland. Just 10 km from a reenergized Krakow, Nowa Huta is still dominated by the belching steel mill that has defined its existence since its founding as a model communist factory town in 1950. Today the state-owned Sendzimir mill in Nowa Huta, home to 200,000, remains inefficient, heavily indebted--and thoroughly unattractive to private investors.

To be sure, the state has made an effort to restructure Sendzimir. Its workforce has been slashed from 27,000 in 1990 to just 9,100 today, and further layoffs are planned. In May, it was taken over by a new state-owned holding company Polish Steel Holding, that also owns three other ailing steel mills and is now responsible for producing 70% of Poland's steel output of 12 million metric tons a year. According to Deputy Economics Minister Andrzej Szarawarski, the formation of PSH will make it easier to manage Sendzimir's $1.1 billion debt, continue streamlining the money-losing company, and prepare it for privatization next year.

Life is plenty tough now at the Nowa Huta factory. But when Poland joins the European Union in 2004, it will be worse. The EU is staggering under the weight of an annual 30 million metric ton steel surplus and is demanding that Poland and other future member states curb their output. The Polish government has agreed to reduce output by 901,000 metric tons by 2006--with the bulk of the cuts coming from Sendzimir. Brussels is not satisfied. But Polish officials argue that deeper cuts would threaten the country's fragile economy, which is predicted to grow by just 1% this year. Romuald Talarek, chairman of the steel industry chamber of commerce in Katowice, points out that steel production fell by 11.3% in the first quarter of 2002. "That's one of the biggest drops in the world," he says.

Not surprisingly, the workers at the mill in Nowa Huta fear for their jobs. Unemployment in the town is running at around 15%, estimate local officials, against 8.3% for the entire Krakow district. Anxiety has mounted in recent weeks because the mill got neither $15 million in promised government subsidies nor state guarantees for a $45 million bank loan needed to overhaul the rolling stock department. At the end of October, four union activists staged a one-week hunger strike to pressure the government to release funds to modernize the plant. One of the strikers, Janusz Bieron, who is 30 and the father of two, fears that the government is readying Sendzimir for closure. "It would be a tragedy for us," he says. One that EU membership will do little to avert.

By Bogan Turek in Nowa Huta and David Fairlamb in Krakow

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