CMC STEEL: LARGEST U.S. INVESTMENT IN CROATIA

UNCLAS SECTION 01 OF 02 ZAGREB 000329

SIPDIS

DEPT FOR EUR/ERA AND EUR/SCE, TREASURY FOR INTERNATIONAL
AFFAIRS LARRY NORTON, COMMERCE FOR FCS REGINALD MILLER

E.O. 12958: N/A
TAGS: ETRD ECON EINV HR
SUBJECT: CMC STEEL: LARGEST U.S. INVESTMENT IN CROATIA
STRUGGLES THROUGH ECONOMIC CRISIS


1. Summary: With the buyout of Barr Pharmaceuticals by the
Israeli firm Teva, the Houston-based Commercial Metals
Corporation of Sisak is now the largest U.S. investment in
Croatia. The mill employs roughly 1,000 people, making it
also one of the largest employers in this central Croatian
town of 50,000 people just 25 miles south of Zagreb. Despite
continuous bureaucratic hurdles and poor market conditions,
CMC is able to turn out high-quality forged seamless steel
pipes and other products, primarily for the oil and gas
industry. Unfortunately, the mill has only one month's worth
of orders to fill -- a large order destined for the Algerian
oil and gas industry -- and no others on the horizon.
Despite the dismal market conditions, CMC continues to look
to the future and has just broken ground on a new state of
the art melting facility for conversion of scrap metal into
raw steel. CMC told us they are on good terms with the local
government, although they complain about a business climate
still stifled by heavy bureaucratic involvement and a
widespread "socialist era" mindset. End Summary

Trying to Make Money, not Launder it
--------------


2. Econoff and Commercial Counselor visited the CMC steel
mill in Sisak on June 1. First opened in 1938 as the Sisak
Steel Mill, the series of mills and plants occupying
semi-forested land outside of Sisak employed 14,000 people at
its peak. The massive complex now employees a much more
modest 1,000 people, which still makes CMC one of the largest
employers in the area. CMC has consolidated its operations
to a smaller number of products on production lines occupying
only a small fraction of the available space in the mills,
the rest taken up by large spaces filled with rusting
machinery or piles of scrap metal. Despite aging technology,
CMC has the capacity to produce 8,000 tons of high-quality
steel pipe monthly (although with current market conditions,
actual production is significantly less).


3. Despite the reduced number of employees, the workers with
whom we spoke were very positive about the direction of the
mill. Our guide through the complex, a 15 year veteran who
started as a welder and now works in the marketing office,
told us she had planned to emigrate to Canada prior to the
CMC takeover but changed her mind after the takeover. "I
like that the Americans are interested in making money," she
told us. "The previous managers were simply interested in
laundering money."

Undercut by the Chinese
--------------


4. While the goal may be to make money, CMC Sisak has not
yet made a profit. Its business and investment plan has
stayed on track, however, thanks to strong markets in the oil
and gas industry of North Africa, primarily Algeria. These
markets have withered somewhat with the fall in world oil
prices, and the mill's General Manager admitted to us they
have no orders after the current one, which will be completed
in approximately one month. The situation would be even more
dire were it not for an anti-dumping ruling in the U.S.
against China, which makes CMC products competitive on U.S.
markets (although also increasing the volume of cheap Chinese
product on markets elsewhere). Managers told us competition
from China is still their biggest worry, with the Chinese
routinely offering finished product for the cost of CMC's raw
materials.

The Bureaucracy is Still Heavy, but Improving
--------------


5. In the past year, CMC has struggled with several
bureaucratic headaches, including onerous and long-delayed
permitting procedures for its new melting facility, a dispute
over interest payments on taxes owed by the previous owners,
and negotiations with the government to change certain
stipulations in its purchase agreement to facilitate the
company's investment plan. The GM told us relations with the
government are improving. Permits are complete for the
expansion, and the company has achieved at least a partial
solution with the government on the back taxes issue.
Nevertheless, CMC officials complained about a lingering
"socialist mindset" in which the bureaucracy, whether by
accident or design, still has a large role to play in
determining winners and losers in the economy.


6. COMMENT: In a market in which many businesses are taking
on loans simply to cover operating expenses, it is

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encouraging to see a U.S. company committed to its
investment, and moving forward with its plans for the future
even in highly unfavorable conditions. It is too early to
say that normal market forces, rather than a stifling
bureaucracy, are now the central risks to a business in
Croatia. But we are hopeful that once the world economy
begins to revive, CMC Metals will be a success story of U.S.
investment and a standard bearer for U.S. business practices
in the region. END COMMENT.
BRADTKE