Andrew MacDowall in Zenica, Bosnia-Herzegovina -

A sprawling, decrepit-looking steel mill dating back 120 years in a mountain valley in one of Europe's poorest countries - and a landlocked one at that - seems an unlikely description of an investment success story. But ArcelorMittal's plant at Zenica in central Bosnia-Herzegovina is a rare example of a foreign investment triumph in this beleaguered, war-scarred country.

Despite its existence remaining somewhat tenuous with the expected consolidation in the European steel industry and some attacking the mill for allegedly casting a ghastly environmental blight on its surroundings, Zenica's plant looks set to survive for some time yet following a wide-ranging overhaul over the last decade, when it was rescued from its near-extinction during the Bosnian War of the 1990s.

The mill, one of the biggest in the former Yugoslavia, was founded by Austrian industrialists in 1892, and substantially enlarged under Tito's industrialisation drive. It currently produces around 750,000 tonnes of long steel per year, but its overall capacity is over 1m tonnes. Some 60% of its output of rebar, wire rods and wire products is exported, largely to the Balkans, but also to Italy, Austria, Romania, North Africa and occasionally Asia. The plant alone is one of Bosnia's top-three export earners. ArcelorMittal also owns the Bosnian ore mine that supplies it, in Prijedor, and employs just shy of 4,000 people directly, making it the biggest private employer in the country, MV Kulkarni, AcelorMittal Zenica's chief executive, tells bne. The mine and mill account for 50% of freight volumes on Bosnia's railways.

On the one hand, the plant is still operating at less than half its peak production of 2.25m tonnes, and employs far fewer than the 23,000 it once did. On the other, it is one of the few examples globally of a blast furnace being restarted after a decade and a half of inactivity, says Kulkarni, an Indian metallurgical engineer who masterminded the turnaround.

When the Yugoslav wars started, the mill's activities were reduced to occasional smelting of scrap. ArcelorMittal acquired its 92% stake in 2005 - 8% is retained by the government of the Federation, Bosnia's predominantly Muslim and Croat regional entity - and launched Project Pheonix, a $130m overhaul that returned Zenica to full production in July 2008 after a 17-year hiatus.

Unfortunately, the re-opening coincided with the onset of the global economic crisis, which hit all the plant's main markets. "Demand fell 30% in Europe just as capacity had been added across Europe," says Kulkarni. "The recovery has been slow, but all plants are going through this. And we take a long-term view."

Survival of the fittest

Bosnia, with its complex and sometime conflicting layers of government, difficult geography and patchy infrastructure, is not a natural industrial investment destination, but Kulkarni asserts that there are competitive advantages on which it can capitalise. "The strategic position in the heart of the Balkan markets means that we are well-placed to cater to the region's needs," he says. "The fact that we are an integrated plant also helps in a price squeeze. ArcelorMittal has made cost savings, brought technical expertise and knowledge, supplementing a 120-year tradition."

The company will certainly need to keep pressing home those advantages in the near term. The European steel market is expected to recover this year, with output forecast to grow 2.4%, according to a Financial Times poll of analysts. But Kulkarni estimates that the continent still has 50% more capacity than demand; an independent steel analyst that bne spoke to said that plants are likely to close in the coming years - indeed, some have already been shut down and others (including of course Zenica and a large plant at Smederevo in neighbouring Serbia) are working below capacity. "In this environment the fittest will survive," says Kulkarni. "For five years we have been surviving in a very difficult situation. But yes, rationalisation [in Europe] will happen - it has to happen."

A second steel analyst who follows ArcelorMittal tells bne that Zenica was not threatened with closure. Good news for the many thousands of people dependent on the plant for their livelihoods directly and indirectly in and around Zenica, otherwise a rather moribund place. But despite its undoubted contribution to the local and national economy, the plant remains highly controversial even in Zenica itself due to the high levels of pollution in the town, which lies low in a bowl in the mountains. "Mittal poisons us," reads graffiti not far from the plant.

Local activists bitterly attack ArcelorMittal, questioning its commitment to environmental protection. "The impact is significant, and it affects air, soil, vegetation, water and they produce a lot of noise," Samir Lemes, president of Ekoforum Zenica, says. "The air is heavily polluted, and concentrations of PM10 [particle matter] and SO2 [sulphur dioxide] exceed allowable limits tens of times."

However, Azra Sivro, environmental officer at the plant, argues that, in winter at least, fires using dirty local coal produce more SO2 than the mill, and that the plant only contributes 20% of SO2 emissions in the Zenica Valley.

It is a claim that Lemes refutes, saying that SO2 levels doubled between 1996 (when the plant was barely functioning) and 2011. And he rejects the idea that pollution is a necessary evil, a side effect of a major job creator, pointing to the reduction in the plant's workforce since the fall of Communism.

Sivro candidly admits that pollution from the mill is a real problem, but points out that ArcelorMittal inherited infrastructure developed under Communism, when environmental protection was minimal, and in tight economic circumstances, which have meant that investments in making the plant cleaner have been incremental. She asserts that the company has invested $51m in environmental projects since 2008, with a further $25m expected between 2014 and 2017. Late last year, a new filter was inaugurated - contrary to what the layman might expect, this is not something that clips into a chimney, but is a large block the size of a five-storey building.

For many like Lemes, this is too little, too late.

Unloved but needed

The pitched battle between ArcelorMittal and environmentalists shows little sign of abating. But it is difficult to refute the fact that the mill makes a substantial contribution to the broader economy. And that economy, long one of the poorest in the region let alone Europe, has been struggling.

Foreign direct investment (FDI) more than doubled in the first half of 2013 to €247m, from the €115m recorded in the same period of 2012, but that remains a pretty meagre figure, possibly inflated by a few major projects. The country recorded €1.329bn in FDI in 2007, but that remains an outlier, rather than indicative; inflows fell to €684m in 2008 and since then have not topped the €442m achieved in 2007. Businesspeople regularly complain about red tape, poor infrastructure and having to deal with the layers of government created by Bosnia's two entities - the Federation and the highly autonomous Serb Republic - as well as canton administration in the former.

Kulkarni says that his experience has been remarkably smooth, despite working closely with Prijedor, on the other side of the ethnic border. But he acknowledges that not all investors have such a smooth ride. "The political situation is peculiar," he says. "And legislation has not always been adapted to the capitalist system. But it is more a case of ambiguity than specific restrictions. The legacy of self-management [a Communist-era system of worker control of companies] makes labour legislation protective. Foreign investors will naturally look for returns first, but maybe Bosnia needs to improve the business environment, for example providing a single investment window like Macedonia."

There is a widespread and not incorrect perception that Bosnia's politicians are more interested in fighting internecine battles with one another than making the changes that the country needs to grow and tackle its eye-watering 45% unemployment.

In an ideal world, perhaps Bosnia would harness the considerable skills of its people, its natural beauty and its location to grow through service sectors and value-added industries, rather than relying so much on a huge mill, producing basic steel products from poor-grade ore. But as any Bosnian will tell you, this is far from an ideal world.