Union policy-makers agonise over future of coal and steel

Date: 20/07/2000

As discussions begin on what regime should govern two of the EU's oldest industries after the European Coal and Steel Community expires in 2002, Bruce Barnard examines the state of both sectors and assesses their future prospects

COAL and steel, forgotten industries in a Europe obsessed with the 'new' economy, are about to make a comeback.

Neither sector is facing an imminent crisis. The Union's steel industry is on a roll, with production surging 8% to 69.1 million tonnes in the first five months of this year as mills worked flat out to meet buoyant demand. European coal consumption is set to rise by 10 million tonnes to 185 million tonnes this year, with heavily subsidised domestic output sharing the benefits with imports.

But while coal traders and steel executives enjoy the good times, European policy-makers are agonising over how to handle the two key challenges facing the industries: the expiry of the European Coal and Steel Community (ECSC) in July 2002 and the enlargement of the Union, taking in large but inefficient steel industries from central and eastern Europe.

The ECSC, the predecessor of the Treaty of Rome which established the European Community, has broadly achieved its goal of rationalising the steel industry through a mix of quotas and state aids in return for capacity cuts: the industry's payroll has been slashed from 870,000 in 1975 to 270,000 in 1999 and 63 million tonnes of capacity has been taken out in the past 20 years. An industry which was once synonymous with state ownership and intervention has also been largely privatised.

The Union's coal industry, by contrast, has almost been wiped out, except in Germany, where it is kept afloat with subsidies worth billions of euro. It also survives as a niche activity in Spain and the UK.

Europe's steel industry is globally competitive, thanks to a wave of mergers, partly prompted by the arrival of the euro, which exposed the wide price differences across national markets - running as high as 15% between neighbours Germany and Denmark. The coal industry, meanwhile, is on a gentle downward slope of terminal decline.

That does not get policy-makers off the hook. They must decide how to respond to the two main problems posed by the expiry of the ECSC: what to do with the funds amassed since 1952, mainly through a levy on steel and coal producers, and how to maintain the current tight controls on national state aids to steel mills.

But the problem should not be exaggerated: there is nothing now done under the ECSC treaty which could not, with small adjustments, be brought within the scope of the Treaty of Rome.

The Union's steel industry has undergone a 'makeover' thanks to mergers, plant closures and increased competition - and consolidation is not over yet. Last year's Anglo-Dutch merger of British Steel and Hoogovens, creating Corus, the world's third largest steel firm, probably will be eclipsed this year by a hotly tipped Franco-German alliance between Usinor and Thyssen Krupp, creating the world's biggest steelmaker ahead of South Korea's POSCO and Nippon Steel of Japan. That would prompt a probe by Commission competition officials as the combined company would have a dominant position in high-value flat steel products and in stainless steel. This is the big story in European steel, not the expiry of the ECSC.

The industry is also embracing the 'new' economy, with the four largest European producers - Arbed of Luxembourg, Usinor, Corus and ThyssenKrupp - which collectively make 160 million tonnes of steel a year, setting up two e-commerce businesses to sell steel to customers and buy raw materials like iron ore for their mills.

But the sector still faces tough times when the business cycle turns. "I wish you luck. You will need it," were former Industry Commissioner Martin Bangemann's parting words to industry executives last year.

Meanwhile, the flurry of dumping complaints by Union steel makers against east European imports has underlined the destabilising potential of enlargement. The steel industries in the applicant countries are supposed to use their privileged access to Union markets to finance the restructuring to equip them for membership, but there are doubts as to whether they have sufficient time to reach west European standards. However, Corus' interest in setting up a production base in eastern Europe, most probably in Poland, and US Steel's planned €735-million investment in VSZ, Slovakia's high quality steel maker which it is acquiring for €168 million, have raised hopes that western firms will help to bridge the gap.

A downturn in the steel market accompanied by tougher east European competition threatens to re-ignite the row within the Union over state aids which has pitted the free-market UK against interventionist Germany.

Compared to steel, European coal is a drowning industry which would go under overnight without subsidies to narrow the difference between domestic production costs and world market prices. The British government is about to approve a subsidy of around €160 million to help privately owned RJB Mining, the country's largest producer, compete against cheaper imports.

Even with subsidies, Europe's remaining coal producers can barely scratch a living. That is why Ruhrkohle, a unit of German coal producer Deutsche Steinkohle, is expanding abroad, taking over the coal assets of America's Cyrpus Amax last year in a €1.15-billion deal which boosted its annual production from 10 million tonnes to 72 million tonnes, way above the 42 million tonnes mined by its parent.

With Germany's multi-billion-euro subsidies tapering off, importers are making inroads into Europe's biggest coal market, and in time Ruhrkhole could be shipping its American coal into Deutsche Steinkohle's home turf.

Energy Commissioner Loyola de Palacio has pledged to support plans to maintain subsidies to the coal industry after the ECSC Treaty expires to "help guarantee EU supply".

But this could conflict with the Union's obligations under the Kyoto protocol on climate change to reduce emissions of greenhouse gases sharply by cutting its reliance on fossil fuels. Coal is the most obvious target as it is the most carbon-intensive fossil fuel, releasing 29% more carbon per unit of energy than oil and 80% more than natural gas.

The only comfort for the Commission is that as every month passes, the Union's coal industry dies a little.

Major feature. As discussions begin on what regime should govern two of the EU's oldest industries after the European Coal and Steel Community expires in 2002, article examines the state of both sectors and assesses their future prospects.