Gabriela Gandovska in Sofia -

The Serbian government's sale of Zelezara Smederevo, the country's only steel mill, has collapsed,  putting at risk Serbia’s loan agreement with the International Monetary Fund.

Prime Minister Aleksandar Vucic said on February 17 that the government did not receive a guarantee from Esmark of the US that the plant would not be closed once the raw material currently in stock was used up. The plant employs some 5,000 people.

"It has been a difficult decision for us," Vucic told a news conference. "We’ve been working for months to save Zelezara."

Vucic said the loss-making steel mill will remain in state hands and the government will look for another partner. The state will reshuffle Zelezara management by end-March, cut costs and aim to increase production to over 1mn tonnes this year from some 340,000 tonnes in 2014.

The government's plan, however, needs backing from the European Commission, as Serbia has committed under its pre-accession agreement with the EU to end financing for the steel sector as of February 1. The failed sale also puts at risk Serbia’s loan agreement with the International Monetary Fund. Belgrade has pledged to cut subsidies to state-owned companies as a condition to receive a three-year, €1bn stand-by loan. The IMF will decide on the agreement on February 23.

“Given the fact that unprofitable companies’ restructuring is one of the key fiscal consolidation measures, any delays or halted processes would raise investors’ eyebrows and could pose risks to securing the IMF deal,” Hypo Alpe-Adria-Bank said in an e-mailed note to Bloomberg. “Such scenarios could cause adverse effects and increase fiscal slippage risks.”

The government has pledged previously to stop subsiding the company's operations as of 2015 and included no state aid for it in this year's budget bill. Previously, Zelezara was costing the state budget some $10mn a month.

Zelezara reportedly owes €260mn to banks, €120mn to suppliers and a further €145mn for raw materials. The steel mill is one of the largest of the 500 companies Serbia needs to sell or close to trim its budget gap.

Esmark filed the sole valid bid in the tender to buy 80% of Zelezara in January, saying it plans to invest $400mn in the next five years and to keep all of its workforce. In 2015 alone, it vowed to invest $28mn to restart the second blast furnace that has been idle for some two years.

Despite its financial troubles, Zelezara managed to generate €201mn worth of exports last year, emerging as Serbia's fourth biggest exporter in 2014. In early 2012, Serbia bought back Zelezara from its previous owner US Steel for the token price of $1 to prevent its collapse.