Steel makers on the brink: Russell Hotten on the battle over painful cuts in an ailing industry

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THE European steel industry is at the edge of the precipice, and a meeting of steel company executives in Geneva tomorrow should give a good indication of whether its leaders are prepared to pull back or jump.

The European Commission hopes last week's extraordinary decision to block Italy's massive write-offs for its ailing steel industry will bring other countries into line.

By invoking rarely-used powers against Italy, Karel Van Miert - the EC competition commissioner - has raised the stakes in his attempt to secure agreement to restructure radically the European steel industry through cuts in capacity.

If he fails, those with the most to lose include British Steel, whose cutbacks over the past three years have made it one of the most efficient steel producers in Europe. Brian Moffat, the chairman and chief executive, admits that the company could not be expected to survive unless there is a free market. Without a Europe-wide agreement, the consequence would be a subsidy war in which privately-owned companies such as British Steel could never compete with state-owned enterprises.

'The whole thing could fall apart,' Mr Van Miert said last week. 'That's why we are ringing the alarm bell. The situation is serious because the credibility of our approach is also to do with our ability to solve state-aid cases, and if we cannot maintain that credibility there will be chaos.'

The depth of British Steel's problem is reflected in the collapse of its profits. Healthy price levels at the end of the 1980s propelled its profits to pounds 733m just three years ago. Last month it made a pounds 149m loss, and cut almost 4,000 jobs in the year.

In some markets steel prices have fallen 30 per cent. Trade to China was cut off for a time after the Tiananmen Square massacre. The Gulf War closed off some markets, as did the collapse of Communism. Now western European producers are facing cheap imports from eastern Europe, plus the imposition of tariffs in the US.

For many months Fernand Braun, the EC steel envoy, has darted between European capitals trying to secure voluntary cuts in output by 30 million tonnes of crude steel and 20 million tonnes of rolled steel.

To soften the blow the EC has promised pounds 192m in aid, some coming from a levy imposed on the steel producers which survive the restructuring. About 100,000 jobs are thought to be at risk, many in industrial regions suffering mass unemployment and unrest. In eastern Germany there have been demonstrations against cuts, and the government has proposed subsidising the Eko Stahl plant. In Spain, the government is committed to subsidising a new steel plant in the politically sensitive Basque region.

But negotiations are the edge of collapse because of the unwillingness of the state- owned Italian company IRI to suspend write-offs of pounds 3.2bn in debts at its steel division, Ilva. If Italy cannot be stopped, Spain and Germany are unlikely to agree cuts.

Opinion at British Steel remains gloomy. 'At the moment it seems clear that the Italians have no intention of conforming,' said a company source.

If Italy refuses to comply, the Commission could impose sanctions, such as suspending financial aid and imposing import restrictions. The Rome government was given 15 days to reply.

British Steel has already cut production, and last June closed its Ravenscraig plant in Scotland, bringing the total workforce down to 41,500 from 44,800. Although this closure was due to commercial pressures rather than EC demands, British Steel argues that it has nevertheless made its contribution to European capacity cuts.