Steel is put to the sword

Krupp's bid for its German rival Thyssen may herald the final phase of a painful shake-out across the industry. Richard Halstead reports

Gerhard Cromme looks young for 53, speaks English and French fluently in addition to his native German, and smiles a lot. He likes to think of himself as a very approachable boss. However, the chief executive of the German steel and industrial giant Krupp Hoesch is a deeply unpopular man at the moment. Thousands of workers at rival steelmaker Thyssen believe he is the devil incarnate, the man who has come to steal their jobs and throw them on to Germany's unemployment scrapheap - now measured at 4.7 million, and counting.

They have been taking advantage of his "approachability" with gusto: barracking him on his way to work at the undistinguished-looking Krupp headquarters in Essen, throwing eggs and fruit and mobilising political leaders to lobby him personally.

To that end, they appear to have succeeded. Almost as soon as Mr Cromme announced Krupp's Dm13bn (pounds 5bn) hostile bid for Thyssen, its much larger steelmaking neighbour in Germany's industrial heartland, the Ruhr, last week he was forced to back down. The combined forces of federal economics minister Guenter Rexrodt and Johannes Rau, premier of North Rhein Westphalia, Germany's biggest state, bounced Germany's virtually sole corporate raider into "negotiations" with Thyssen.

The fact that the Krupp boss has a Harvard Business School education behind him, plus his adherence to western business philosophies of cutting costs and glossing over "social responsibilities", has hardly endeared him to German workers and politicians alike, who dislike such ruthless Anglo-Saxon behaviour.

With negotiations looking as though they might lead to a link-up of sorts, if not a full-blown merger, the politicians were beginning to see the wisdom of having a combined Krupp-Thyssen, whose capacity of 13 to 14 million tonnes of steel a year would almost equal that of British Steel, the European market leader and third largest steel producer in the world.

Having initially voiced concern about the deal, Mr Rexrodt gave it qualified backing on Friday. "The goal must be to strengthen the competitiveness of the German steel industry and to secure jobs. Germany must keep its steel base," he said.

Mr Cromme's actions symbolise the need to tread carefully in the slow rationalisation of German industry, and to get both the banks and the politicians onside first. But the portents run deeper: industry observers believe the proposed merger heralds the third age of the modern European steel industry, the age in which it grows out of its troubled adolescence to become a normal business.

It is an analysis given added weight by the prospect of 10,000 more job losses at British Steel as it strives to remain Europe's lowest-cost producer.

Like previous metamorphoses, this one promises to be painful. Analysts believe there are more mergers in prospect, bringing with them up to 70,000 job losses across Europe and diplomatic tensions as more takeovers are contemplated in an industry whose nation-based producers are hamstrung by their past lives as state-controlled industries. "National prejudice has been a bad thing," says Terence Sinclair, steel analyst at Salomon Brothers in London. "The German merger makes sense for the companies concerned, but it only makes sense for the industry if it is accompanied by job cuts and closures."

British Steel itself may also be thinking of participating in cross-border mergers (though the company denied this on Friday), ostensibly to alleviate the problems of a strong pound, but in the longer term to retain the competitive edge that has allowed it to become the dominant force in European steelmaking. "British Steel must return to being a low-cost producer," says Peter Fish, an analyst at Meps, a Sheffield-based steel consultancy. "They will be looking for more flexibility among the workforce, and better management."

A bit of history is needed to see the whole picture. There is agreement that the first age of modern European steel occurred in the early 1980s, when a crushing world recession compounded by deep cuts in the manufacturing industry and worker unrest drove the state-supported steel industry into crisis. Into the breach stepped EC commissioner Etienne Davignon, who organised a pounds 24bn rescue plan to restore the industry to financial health. To qualify for subsidies, European steelmakers had to cut capacity severely and turf out large swathes of their workforce.

In Britain's case this turned out to be the closure of loss-making steelworks at Consett and Corby, and capacity reductions elsewhere. Sir Ian MacGregor, then chairman of British Steel, oversaw 40,000 redundancies, over a third of the workforce then. The mass shake-out was felt throughout Europe: from an EC-wide workforce of 900,000 in 1977, the number of steelworkers fell to 500,000 by the mid-1980s, and has declined ever since. Today just 265,000 people work in the European Union's steel industry.

The second age began when British Steel was privatised in 1988. As soon as it was out of state hands, the company had to cut its costs much further and at the same time compete with state-owned steelworks in Europe. The upshot was that the company managed to turn itself into one of the most efficient steel producers in the world, at a further cost of 15,000 redundancies and the closure of the Ravenscraig steel plant in 1992. At the same time, it had to compete in a market distorted by state subsidies of inefficient suppliers. British Steel led a long, bitter and ultimately successful campaign to halt subsidies it felt were unfair and won pledges in the EU's Steel Aid Code to outlaw any state aid without capacity reduction.

The steel firms themselves were returning to the private sector, a few through flotations but most via trade sales to existing players. In 1994, 80 per cent of Europe's steel production was in state hands; now it is just 17 per cent, and will fall further when Spain's CSI is privatised later this year.

The last to receive a subsidy was Irish Steel in 1995 and its pounds 39m of aid provoked outrage from British and German steel lobbies. Since then the European Commission has shown remarkable backbone: last December it refused pleas for aid from Clabecq, a stricken Belgian steelmaker, causing its workers to riot. The company has since sought court protection from its creditors, and is looking for a buyer for its inefficient smelting and more promising rolling-mill operations. Analysts believe a buyer for the whole company is unlikely, however, with more violent protests likely.

"The state is not involved in steel in anything like the way it used to be," says Ian Rodgers, policy director of the UK Steel Producers Association. "Europe's politicians have woken up to the fact that if you want to maintain an indigenous steel industry in the EU, it has to be world-class, investing in new technology and reducing costs."

Which brings us back to Mr Cromme, Mr Rexrodt, Krupp and Thyssen. Industry observers believe this deal will be a watershed in the industry's development from a subsidy-dependent economic basket case to a self-sufficient and world-class producer, with the economic benefits (and penalties from job losses) that brings.

According to Eurofer, the Brussels-based steel producers' association, the EU "now has an industry that is quite well managed and internationally competitive. However, the restructuring process has become permanent, with costs having to be cut at every turn to maintain competitiveness. It becomes a question of either producing more steel or reducing the number of employees. At the moment the odds are we are not going to increase production significantly."

It is worth remembering that steel production has remained broadly static for most of the 1980s and all of the 1990s, yet that figure is now produced by a third of the labour required 10 years ago. This third age of steel will probably not be as traumatic as the previous two, and will merely complete a process started nearly 20 years ago. But that will be of cold comfort to those about to lose their jobs as a result of Mr Cromme's efforts, those of Sir Brian Moffat of British Steel, or indeed any other European steel boss. The only bright note is that it could have been much, much worse.