Steel reaches breaking point: As Brussels looks for a rescue plan, Germany's producers face disaster, writes John Eisenhammer

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WITHOUT Thyssen group's broad shoulders, Heinz Kriwet, the company's chairman, would scarcely have dared venture his recent prediction that this year's results would be 'successful'.

In Germany's miserable industrial climate, such confidence rests on the belief that the conglomerate's extensive interests in trade and services, as well as processing, will more than compensate for its plummeting steel performance.

The European steel industry is in a state of crisis. There is gross overcapacity. European steel producers have already pledged production cuts of 8.5 million tonnes of crude steel and 6.6 million tonnes of rolled steel.

Yet a recent EC report by Fernand Braun, the Community's special steel envoy, calculated that there would probably have to be additional cuts of up to 17 million tonnes of crude steel and 11 million tonnes of rolled steel products.

An EC bail-out of sorts, with capacity cuts exchanged for fresh state aid, is under consideration. But the costs are potentially enormous, possibly up to ecu6bn (pounds 5bn).

German companies have been as hard hit as any. For some months, the Thyssen Stahl division has been running at an operating loss as the domestic market has begun to collapse. With its business year ending on 30 September, Thyssen Stahl managed to scrape home with a net profit of DM36m (pounds 15m) in 1992, down 89 per cent from DM317m.

But all the indicators are firmly pointing downwards into the recessionary abyss. In January, western German crude steel production fell 22 per cent to its lowest level in 10 years, about 2.5 million tonnes.

'The situation now is worse than it was even during the Seventies and Eighties,' said Ekkehard Schulz, Thyssen Stahl's chairman. He described the group's speciality steels division results as 'catastrophic', with net losses in 1992 up to DM354m from DM79m.

If things are that bad for Thyssen Stahl, Germany's highly efficient producer, then for for most of its domestic competitors they are dreadful. Just how bad is illustrated by the efforts of the merging Krupp and Hoesch producers to keep up with the pace of the deepening crisis.

Last week they announced plans for a temporary shutdown of one blast furnace; now the closure is to be permanent. One of the sites, at Rheinhausen or Dortmund, 'needs to be sacrificed to ensure the survival of our steel business', said Hans Wilhelm Grasshoff, Hoesch chairman, who is expected to head the merged group.

The steel companies' books are 'blood red', he said. Capacity at Krupp and Hoesch needs to be reduced by 20 per cent to 550,000 tonnes.

In its recent steel report, the RWI economics institute in Essen warned that if steel did not recover in the second half of this year, the decline in production, use and employment would worsen as the cyclical downturn grew into an overcapacity crisis.

But crisis is not an exaggerated term to apply already to Krupp and Hoesch. Last year, the combined losses of the two companies came to nearly DM500m. This year promises to be even worse, despite the expected DM200m annual savings from streamlining production and the cutting of 2,500 jobs.

In the last months of 1992, Hoesch had its lowest revenues since 1980, while Krupp is already struggling to service its DM6bn of debt.

The German steel producers' association predicts a further 15,000 jobs will have to go by the end of 1994, from a current level of about 155,000.

Industry analysts expect the losses will be double the association's figure. In Germany's industrial heartland of the Ruhr, politicians and trade unionists talk of an 'impending social disaster'. Unions have called for mass protests against Krupp and Hoesch's surprise closure decision.

The first big victim of the German recession was Klockner, a steel company that filed for protection in December. Its plastics and mechanical engineering divisions could not make up for overwhelming steel losses.

In a business where location and the closeness of key plants are essentials, Klockner scores badly. Situated well away from the Ruhr, it has no coking-coal plant of its own, paying over the odds to have it brought in. Moreover, the company had misread market trends by investing in a hot rolling mill wider than the norm, and then finding the expected shift to large cars never occurred.

Klockner's foundering highlights the general problems of an industry that, having been shielded from the recession by the post-unification boom, suddenly found last summer that the ground was shifting under its feet.

Two-thirds of Klockner's 1992 losses were made in the last six months of the year. Losses this year could be over DM400m. The collapse in the German car market, which is expected to decline by 15 per cent this year, is as dramatic as its growth over a year ago was spectacular.

The global recession has hit German steel makers with a vengeance. Capacity utilisation of German hot rolling mills is currently running at between 50 and 60 per cent. At these levels, as the analyst Michael Broeker points out, 'you can only make a heavy loss'.

With the pinch at home hurting badly, the German producers have stepped up their attacks on what they see as unfair competition around them: huge subsidies paid to inefficient producers, notably in Italy and Spain, and the uncontrolled surge of cheap steel coming in from eastern Europe.

Heinz Kriwet has threatened that if 'politicians do not make progress on cutting subsidies, then we will be forced to part with some of our steel activities'.

He said Thyssen was considering a deadline of 'some time this year' for deciding on its steel operations, which account for 27 per cent of group turnover.

But the fundamental problem remains one that German industry right across the board is having to grapple with: its costs structure. While British Steel pays dollars 15 an hour, the German producers pay dollars 25. And then there is Korea, where the figure is dollars 5 an hour.

No matter how productive you are, that is bound to be a losing game, as even Thyssen is finding out.