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Steel industry modernizes while bending with crisis winds

Like a good piece of steel, Luxembourg's privately owned steel company, Arbed , has flexed, but not snapped from the pressures placed on it by the worldwide crisis in the steel industry.

Arbed has had to close older, less-efficient blast furnaces, dramatically shrink the size of its work force, and go four years without a profit. As a result of these measures, Arbed, Europe's third largest steelmaker, believes it is close to the production costs of the Japanese steel producers, the lowest cost manufacturers of the metal in the world.

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The price for reaching this efficiency level, however, has been high. Arbed's workforce has contracted from 28,000 in 1974 to 17,500 today. It's been four years since the company has hired new steelworkers.

Losses have amounted to a total of $408 million since 1975 and the company has not paid a dividend to its shareholders since then. Annual sales of Arbed have shrunk from about $1.750 billion in 1974 to $1.335 billion in 1978. For the total Arbed group -- including its Brazilian and Belgian subsidiaries -- sales have increased from $3.5 billion in 1975 to $4.9 billion in 1978. In its last profitable year, 1974, Arbet had a gain of about $65 million. Since that time, as part of an agreement with the unions and the government, the company has drastically increased its capital spending, building one of Europe's most moder blast furnaces at Esch, in southern Luxembourg.

Although the company may not report a profit in 1980, "it must make a profit by 1981 and compensate for the losses of the 1970s in 1983 and '84," stated Norbert Von Kunitzki, the financial director of Arbed, in an interview. "We hope in three years time," he adds, "to have a suitable level of profitability in steel provided someone in Europe is to be profitable in steel."

Arbed, in fact, is under some pressure to make money by 1981 because it will begin to lose its ability to carry forward its losses for tax reasons.

"Our big hope is not for big profits but for an extension of the carry forward for losses beyond the normal five years," says the financial director. Since Arbed used to be the largest taxpayer in the duchy, but now pays no corporate taxes, this is a touchy political question. Still, as the largest single employer in the country, Arbed's plight is watched closely by all the politicians.

Both Mr. Werner, the prime minister, and Mr. Helminger, the secretary of state, from opposing political parties, agree that Arbed must survive. If Arbed does not survive, they both state, the duchy is too small to be able to bail out the steel company. "I hope with its present production layout Arbed can survive even in a depressed steel market," states Mr. Helminger.

Joseph Kratochwil, the general secretary of OGB-L, one of the nationhs largest unions, believes that once Arbed reduces its employment to 16,500 people , the company "should be as competitive as the Japanese" no matter the status of the steel market.

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However, Arbed still has some prunning to do before it reaches that level. Although it has reduced the number of employees producing steel to 17,500 workers, it still has another 2,300 to 3,000 workers on its payroll who are doing projects for the state.

According to Mr. Von Kunitzki, the plan is to reduce employment by 1,000 workers per year. This is being done through attrition. Workers are given early retirement at age 57 and the state pays for the early pension.

This whittling of the company's payroll is not without its problems. Since Arbed has not hired any new workers since 1975, a "generation gap" is developing. "There will be an entire generation of Luxembourgers who don't know how to make steel," explains Mr. Von Kunitzki.

To remedy this, he would like to add 500 new workers per year while losing 1, 500 instead of 1,000.From the union's standpoint, says Mr. Kratochwil, this attempt to put some stability into the Luxembourg labor market is welcome. However, he adds, he would like the company to give some concessions tied to the per-worker tonnage of steel produced in exchange for the loss of certain union benefits.

In an earlier agreement worked out with the state and the union in 1975, the company agreed to increase its capital spending to $55 million the first year, $ 110 million the second year, and $175 million the third year. Another $145 million would be spent each year though 1983.

With large losses, Arbed had to borrow this money through 1978. but it financed half of its capital expenditures in 1979 with its own cash flow. In spite of a deterioration in its capital position, the company has retained its triple-A rating.

A major portion of this capital spending has gone into modernizing its blast furnaces. On a trip to Esch-Alzette, on the French border, one can see a huge new blast furnace that dominates the town's skyline. This new furnace, constructed at a cost of about $185 million and designed by a subsidiary, Paul Wurth SA, has replaced 12 older furnaces while using the same amount of labor as one of the older furnaces. The furnace also has reduced Arbed's use of heavy fuel oil significantly because of new technologies it uses.

Such improvements are necessary because Arbed gets its iron ore from the Lorraine region of France where the percentage of iron is a low 30 percent of the mixed ore. By taking out the carbon dioxide, water, and other impurities, Arbed is able to increase the iron content to 40-43 percent of the ore. That is still below the 65 percent iron in Brazilian ore.

However, to keep Frenchmen employed by Arbed, the French government is willing to change almost no tariff for the transportation of the ore on the French railroad. This ore, combined with coking coal mined in the Saarland of West Germany, is the raw material that makes up the steel.

A completely electronic control panel, equipped with computers, gives the operators of the new blast furnace precise control over the steel production. Although Arbed still does not have a continuous casting operation, it intends to build one which will make its production of steel as efficient as the Japanese.

In spite of its modernization, Arbed remains concerned that an anti-dumping suit brought against it or other European manufacturers will disrupt the marketplace for steel once more.

"When the world market is strong, the US is not so protectionist," states Mr. Von Kunitski, "but when the markets are weak, they are protectionist and we lose 2 percent of our sales in a market that already has weak prices."


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