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OO RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
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DE RUEHVB #0329/01 1561220
ZNR UUUUU ZZH
O 051220Z JUN 09
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9283
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

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 
 
ZAGREB 00000329  002 OF 002 
 
 
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