Potential Purchase of Serbia‘۪s Only Steel Mill by China‘۪s State-Owned Hebei Iron and Steel Group

On November 10, 2015, Serbian Prime Minister Aleksandar Vucic announced that the Serbian government is in negotiations with Hebei Iron and Steel Group for the sale of Serbia’s only steel plant, located in Smederevo.  The company registered its interest in a strategic partnership with the plant and an intended investment of $321 million in early October 2015.  Both the Serbian government and Hebei have expressed their confidence that a deal will be reached on the sale of the company by the end of November

The steel plant has been losing $120 million a year since 2012, when the plant was purchased by Serbia from U.S. Steel for $1.  The government purchased the plant in order to ensure its continued operation.  U.S. Steel had announced its intention to close the failing plant.  Closure of the plant would have resulted in the loss of 5,000 jobs.  Investment is desperately needed in order to ensure future profitability of the plant.  The Serbian government is in the midst of an aggressive privatization effort that is designed to bring the country in line with EU regulations, meet certain preconditions for a $1.3 billion IMF loan it is pursuing, tackle the country’s problems with corruption and limit the drain on public resources from loss-making enterprises.  The country has faced difficulty accomplishing these objectives in the past, due to various vested interests involved as well as the impact this agenda could have on employment.  Prime Minister Vucic, however, appears to have the political mandate and wishes to push forward.

These privatization efforts, however, have a troubled history in the region, particularly with regard to cases of Russian state-owned enterprises stepping in to acquire strategically significant assets and infrastructure that have long-term security implications for the country and the region.  In other words, they represent opportunities for certain actors to establish a meaningful, influential position in important countries or regions for political or strategic reasons, rather than commercial ones.

Although it has typically been Russia stepping into these opportunities in the region (and may still in Serbia with regard to other assets coming up for bid), in this case China’s state-owned Hebei Iron and Steel appears to see the benefit associated with picking up this seemingly unproductive asset.