Serbia to Keep Zelezara Open to Save Jobs as Esmark Talks Fail

Serbia’s government wants to turn around the country’s sole steelmaker Zelezara Smederevo DOO after failing to sell it to Esmark Inc., putting at risk a loan agreement with the International Monetary Fund.

Serbia will look for another partner for the state-owned steel plant, Prime Minister Aleksandar Vucic said. The state will now change managers, cut costs and boost sales to end Zelezara’s more-than $100 million annual drain on the public finances. The steelmaker is one of the biggest of 500 companies the state needs to sell or close to narrow the budget gap and rein in public debt.

“We’ve been working for months to save Zelezara, to save what used to be an engine of the Serbian industry, to increase gross domestic product along with the difficult measures for fiscal consolidation,” Vucic said.

Vucic needs to persuade the IMF and the World Bank his government can handle unprofitable companies, which eat up $1 billion in taxpayers’ money each year, as conditions for a three-year, 1 billion-euro ($1.14 billion), stand-by loan. The IMF board will decide on the agreement on Feb. 23, as Serbia faces a second year of recession.

“Given the fact that” unprofitable companies’ “restructuring is one of the key fiscal consolidation measures, any delays or halted processes would raise investors’ eyebrows and could pose risks to securing the IMF deal,” Hypo Alpe-Adria-Bank said in an e-mailed note. “Such scenarios could cause adverse effects and increase fiscal slippage risks.”

Output Increase

The failure to reach an agreement with Esmark won’t affect the IMF deal, Vucic said. Serbia plans to increase steel output at Zelezara by the end of March and the plant will fire up the second blast furnace by year-end, Vucic said.

Esmark Europe BV submitted the only valid bid in a tender for 80.01 percent of Zelezara. Conditions called for an investor to keep the stake for 10 years, use Zelezara’s one active blast furnace at full capacity and fire up the other by 2016.

Esmark didn’t provide guarantees it would sustain production and won’t abandon the investment after using up Zelezara’s stock of raw materials, Vucic said.

The two sides also couldn’t agree on Esmark’s expectation that Serbia backs a $200 million loan for investments and upgrades, Vucic said. The talks failed even as the government offered to assume Zelezara’s liabilities.

Zelezara Debts

Zelezara had a $186 million loss and capital of $21 million at the end of 2013, according to Privatization Agency data. It owes around 260 million euros to banks, 120 million euros to suppliers and 145 million euros for raw materials.

Last month, Esmark said it would invest $400 million in the plant over five years to repair and upgrade one of the furnaces, a steel shop and a sinter plant. It also said it would keep the entire workforce of 5,000.

United States Steel Corp. controlled the steelmaker for about eight years before selling it back to the state for $1 in 2012. Zelezara never operated at full capacity of 2.2 million tons a year, and its output has been at less than a fifth of that since 2013.

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