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Mittal’s Bosnia deal signals confidence

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Stoking the economy

An obsolte behemoth on the Bosna River

Seid Kapetanović

Paul Victor

In Bosnia and Herzegovina (BiH) the fire that went out of the steelmaking town of Zenica in 1992 is burning brightly again. In the largest foreign direct investment in the country’s history, global leader Mittal Steel has invested in the Zenica steel mill. Backed by EBRD environmental loans, the deal saves thousands of jobs and marks confidence in BiH’s future.

Relief is evident in Seid Kapetanović’s voice as he looks back at all the steps over 13 years that led to Mittal Steel’s purchase of what was one of the largest steel plants in the former Yugoslavia.

First, the plant’s general manager says plainly, the mill had to change. Stretching seven kilometres along the Bosna river and with a staff of 22,500, it was an obsolete behemoth unsuited to global competition when Yugoslav socialism unwound in 1989. Then the western Balkans war started in 1992, engulfing Bosnia and Herzegovina. The plant was bombed and staff scattered. Supplies were inaccessible thanks to ruined roads and railways and the fact that iron ore mines were on the other side of the front line. Working capital dried up.

“The mill was silent from 1992 until 2004,” says Mr Kapetanović.

Changing strategy

In 1998 the Kuwait Investment Authority invested $60 million in hopes of at least partly reviving the mill and attracting a strategic investor. But most of the money was consumed by salaries for the mill’s remaining 5000-strong workforce in a country heavily dependent on post-war foreign aid.

“By 2001 we had given up the idea of re-starting the entire integrated steel operation which would have required too much investment,” says Mr Kapetanović. “Instead, after three years of trying, we got a loan from a German bank, secured by Italian government insurance, to buy a 100 ton electric arc furnace and in 2004 we put it into operation.”

However it was not the new furnace that convinced Mittal to buy 51 per cent of the Zenica steel operation in 2004. The company was attracted to the abundant local supply of iron ore – a rarity in European steelmaking -- which it will use in reviving the mill’s integrated steel processes. Mittal was also impressed with the never-say-die attitude of the mill’s managers, many of whom are being kept on by the new owner.

“We have seen in the plant and its people a great interest and enthusiasm to restart operations,” says Paul Victor, Chief Operating Officer of Mittal’s BiH acquisition. “In six months time, most of the plant will be operational again.”

Employment rising

Employment at the mill, now at about 2,850, should grow by 1,700 more jobs when planned capacity increases are realised. “This is particularly important in a country with a high unemployment even by regional standards,” says Aygen Yayikoglu, head of the EBRD’s BiH office. “The availability of local steel will also feed into south-eastern Europe’s growth which last year attained 5 per cent.”

Production at Zenica is expected to grow almost 20 times from the 2004 level of 120,000 tonnes to 2.2 million tonnes once restoration of integrated iron and steelmaking is complete, roughly by 2007/2008.

To achieve this, Mittal will re-start the mill’s existing blast furnace, steel melting shop and other capital investments totalling $135 million over 10 years, plus $65 million in new share capital and working capital.

The EBRD, in turn, is lending $25 million to the project, mainly to improve energy efficiency. One generalised legacy of central planning across the EBRD region is the inefficient use of energy by heavy industry. EBRD is helping Mittal BiH achieve energy savings of 1.4 million gigajoules per year – roughly equal to the energy consumed by 70,000 BiH households. Annual reductions in carbon dioxide emissions (a greenhouse gas blamed for global warming) will be 200,000 tonnes, equalling that produced by 90,000 BiH households.

Bullish on Bosnia

“That a company like Mittal is investing so heavily in Bosnia and Herzegovina is testament to the fact the country is now well through the post-war reconstruction phase and is open for business,” says Olivier Descamps, head of the EBRD’s banking team for south-eastern Europe and the Caucasus.

“The peace dividend has paid off. Infrastructure has been repaired, thanks to the international community, as have efforts at encouraging Balkan regional cooperation,” Mr Descamps continues. “Thus Mittal will be able to achieve its goal of integrating the Zenica mill into its other Balkan operations.”

One of the mill’s advantages is its proximity to local supplies of iron ore in Mittal’s newly-acquired mines in the Republika Srpska side of BiH. Some Bosnian product will be shipped for finishing in the newly-acquired Mittal plant in Macedonia, also financed with a $25 million energy efficiency loan from the EBRD. Target markets are in south-eastern and eastern Europe.

While Mr Victor would like to see further improvements in infrastructure, particularly railways, to increase speed and reduce costs, overall he is bullish on BiH.

“Everyone knows the country’s history. Things are very promising here now. The people here are already experienced. I have no doubt about their skills and calibre. For example the marketing department is already quite aggressively capturing the Bosnian and surrounding markets.

“Bosnia and Herzegovina is a country that is up and coming and we view it very positively.”

By Kate Dunn, Senior Writer

Photos: A. Andjić

11 January 2006