US puts one foot in, one foot out of Croatia, shakes it all about

By bne IntelliNews October 11, 2011

Guy Norton in Zagreb -

Historically, US investment has been pretty thin on the ground in Croatia. So the past few days have been bittersweet ones for the EU wannabe state that is struggling to address its stubbornly high jobless rate of about 14%.

On a positive note, bio-ethanol giant ICM is finally set to receive a building permit for a state-of-the-art green energy facility in the eastern Croatian city of Osijek. On the other hand, US steelmaker Commercial Metals Company announced it is pulling out of its investment in a pipe-making plant in the central city of Sisak, amid complaints that the authorities have done little to address its concerns about operating in the country.

ICM's plan to set up shop in Osijek promises to be a landmark development for the city, with the forecasted €100m outlay to be the biggest greenfield investment in manufacturing in Osijek since independence in 1991. Founded in 1995, ICM operates 120 bio-ethanol plants in North America, with ICM's dry mill processing technology used in more than 60% of the US's bio-ethanol plants.

The factory will be the 121st run by the Kansas-based firm and its first in Croatia, manufacturing 180m litres of ethanol per year and using over 400,000 tonnes of maize annually. In addition, 150,000 tonnes of high protein animal feed will be produced. According to ICM estimates, Etanol Osijek will employ several hundred locals in the construction phase of the plant and create at least 50 full-time jobs once it is up and running. In addition, it will provide a sustainable source of revenue for up to 1,000 farmers.

The new plant will be built in the Free Trade Zone of Osijek, which in addition to offering financial incentives to foreign investors is also located next to Osijek's port on the river Drava, which in turn gives it access to the major Danube waterway. This will not only ease transportation of finished product, but will also enable the importation of corn from neighbouring countries if necessary.

ICM coming to town represents a major triumph for Osijek, Croatia's fourth biggest city, and its economic development strategy of transforming itself from an industrial to an "intelligent" city - based on attracting hi-tech investors to the city which has suffered from an exodus of young people who have either moved to the Croatian capital Zagreb or flourishing tourist cities such as Zadar on the Dalmatian coast.

Osijek leaders also recently met representatives from CHS Renewable Fuels, another major biofuel and animal feed producer from the US, about establishing operations in the city.

Feeling Sisak

Osijek's gain has been followed by Sisak's loss, with the news on October 7 that Texan steelmaker Commercial Metals Company is exiting the CMC Sisak pipe-making mill. The company announced it would close out the existing orderbook and wind down operations over the next couple of months.

Although the company, which bought into the steel mill in September 2007, has said it is open to selling the loss-making plant, it acknowledged that in all likelihood the mill's 1,130-strong workforce would join the ranks of the 300,000 or so unemployed in Croatia.

Despite CMC shelling out roughly $200m on the Sisak mill - the biggest US investment in Croatia to date - it has never been profitable. "Despite focused efforts and substantial progress over the past several quarters to stabilise and improve the operating efficiency of the Croatian mill, we have determined that achieving sustained profitability would take considerable additional time and investment in a product line which is not considered a core business," said Joe Alvarado, CMC's president, adding: "This was a difficult decision that came after careful analysis and thorough review of the marketplace and our production capabilities. By exiting this business, we believe the capital and management attention consumed by our Croatian operations will be better deployed in our other businesses."

The company said it would also cut around a further 350 jobs globally, with the closure of some US and international facilities. The total cuts represent about 13% of its workforce. The company expects the closures to cost $135m-165m in 2011 and a further $25m-40m next year. The announcements come as CMC is fighting off the attentions of veteran activist investor Carl Icahn, who has been looking to build up his stake in the company.

With Croatian parliamentary elections scheduled for December 4, Economy Minister Duro Popijac announced that the government would this week hold urgent discussions with CMC about its proposed closure plans for CMC Sisak and pledged that the authorities in Zagreb would do everything in their power to preserve production and jobs at the mill. Earlier this year another Croatian steel mill, Željezara Split, went into bankruptcy after racking up roughly HRK700m ($126m) of debts.

Local critics say that the Croatian authorities have long failed to address CMC's concerns about the viability of its operations in Croatia. For example, last year the company's management complained that despite being one of state-owned electricity company HEP's biggest customers, it had taken more than two months to schedule a meeting with HEP management to discuss the high prices it was paying for electricity. CMC Sisak complained it was paying more than twice the level paid by its nearest competitor, ArcelorMitall Zenica, in Bosnia.

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