E. Europe's icons of progress: steel mills

Amid the roar of machinery, a quarter-mile slab of red-hot steel races through the hot rolling mill, midway through its transformation from coal and iron to sheets of galvanized steel.

Outside, workers are finishing work on a new $160-million galvanizing facility, while a locomotive pulls a train of steel-loaded flatbeds toward the gate of this sprawling, five square-mile mill, Slovakia's largest industrial facility.

A decade ago, prospects were dim for this and other Communist-era steel mills. Across Eastern Europe, they were seen as icons of an irrational economic system, industrial dinosaurs doomed to extinction. Dirty, wasteful, and poorly managed, few imagined they would survive into the 21st century.

Not only have the mills survived, many of them are thriving. The Kosice mill is earning big profits for US Steel, which bought the failing facility seven years ago, as is a second steelworks it purchased in Smedervo, Serbia, in 2003. The world's largest steel firm, Arcelor Mittal of Luxembourg, has snapped up 10 mills in Poland, the Czech Republic, Romania, Bosnia, and Macedonia, bringing a new lease on life for residents of the region's long-struggling industrial cities.

"It's been a win-win situation for everyone," says the president of US Steel Kosice, David Lohr, whose firm has invested more than $700 million in the mill. "Our East European investments have been a big contributor to our corporation's bottom line."

The region's mills have benefited from several factors. European Union membership made many of these countries attractive beachheads for steel producers, as they can enjoy free access to the European market while paying lower wages. More recently, explosive Chinese demand has driven steel prices to an all-time high, improving the industry's notoriously slim profit margins.

"It is definitely easier to make a profit in steel these days then it was before," says Arcelor Mittal spokesman Jean Lasar. "There's been a tremendous boom in China that is impossible to ignore."

Most of the mills also weren't as hopeless as outsiders assumed. "The basic industrial configuration of these big, integrated steelworks hasn't changed very much in forty years," says Christopher Beauman, a steel industry adviser at the European Bank for Reconstruction and Development in London. "If you looked at them with a clear eye, you could see that they had a reasonable chance for survival if they were correctly managed and modernized. But that was a big 'if.' "

"The mills were very smoky and dirty, and that tended to give people the impression that they were antiquated," says Mr. Lohr of US Steel, which has reduced particulate emissions at the Kosice facility by more than 75 percent since 2001.

But the mills were among the last major state companies to be privatized, largely because of their enormous political symbolism. As elsewhere, they employ large numbers of people in a single location, tempting politicians to protect them from competition, and produce a product long considered a vital military asset.

These factors were compounded in Eastern Europe, where many of the mills had been built to serve as the foundations of a promised communist workers' utopia. The Nowa Huta ("New Mill") steelworks were built after World War II outside Krakow on the orders of Joseph Stalin, as was the surrounding city of the same name, a planned community of 100,000 meant to outshine Poland's old royal capital. In Hungary, Dunaujvaros ("Danube New Town") served a similar role: a new model community producing the steel that would rebuild and protect a war-torn region.

Turning the mills over to foreign corporations was politically sensitive, given fears that employment would be slashed. "There was a lot of fear about a lot of things," recalls Jan Baca, a local spokesman for US Steel Kosice. "People wanted to work and work hard, but they also wanted to have security and some hope for the future."

As a result, many firms were driven to the brink of collapse, unable to afford vital infrastructure improvements. When Poland finally decided to sell its steel company in 2004, its mills weren't generating enough cash to pay its suppliers. In the 1990s, the Kosice mill was driven into bankruptcy by a political crony of then Slovak Prime Minister Vladimir Meciar, an autocratic nationalist who turned state companies over to friends and relatives.

US Steel has since turned the Kosice mill around, investing in automation and production lines and improving management and customer relations. "What they promise to do they always fulfill ahead of time," says Peter Tapak, head of regional development for Kosice's regional government. "They pay well, they care about the environment, and they support people who have social problems or have been historically disadvantaged in the workplace. We have had very good experience with them."

US Steel Kosice employs 16,000. Wages reportedly average $6.50 an hour. Combined with profit sharing benefits, they come to about twice Slovakia's average, but a small fraction of the $35 an hour the average steel worker earns in the US. US Steel also received tax breaks and other government investment incentives to come to Kosice.

Relations between the Pittsburgh-based company and its Slovak and Serbian hosts were smoothed by a quirk of history. Large numbers of Slovaks and Serbs emigrated to western Pennsylvania in the late 19th century, where they worked at US Steel mills back when the company was run by J.P. Morgan. Some US managers who came to Kosice found long-lost relatives in the region, while Pittsburgh was oddly familiar to Slovak employees who traveled there.

"There were places selling national meals from here, sold under their original Slovak names. You could feel an atmosphere from a hundred years ago," says Mr. Baca. "There's a connection between these places, something that counts that you just can't quantify."