Dispute over tackling recession at ISD Dunaferr steelworks

The steelworks company ISD Dunaferr, once the flagship of Hungarian socialist industrialisation, faces falling demand driven by the economic crisis and cash flow problems due to excessive advance dividends paid to shareholders. Although the trade unions accepted the company’s first wave of austerity measures, they rejected a second wave of proposed salary cuts. As negotiations with the government on possible assistance have also ceased, the company dismissed over 500 workers.

Company background

The steelworks company ISD Dunaferr, with its headquarters in the city of Dunaújváros in central Hungary, is a prominent enterprise in the Hungarian steel industry and one of the largest manufacturing companies in the country. The history of the company’s predecessor, Danube Metalworks (Dunai Vasmű), is tied to the period of industrialisation in Hungary’s socialist era, as well as to the building of Dunaújváros in the 1950s – at that time, both the company and town were named after Joseph Stalin, the former leader of the Soviet Union. The company’s recent history dates from 30 September 2004 with the signing of a privatisation contract between the former Hungarian Privatisation and State Holding Company – currently the Hungarian State Holding Company (Magyar Nemzeti Vagyonkezelő Zrt, MNV) – and the Ukrainian-Swiss Donbass-Duferco Consortium, headquartered in the Ukraine. Under this contract, the consortium acquired about 80% of the company’s shares and pledged to undertake immediate recapitalisation, invest in the company, assist small regional development projects and preserve at least 7,005 jobs for a minimum of five years. At that time, the company employed 9,000 people, and employees acquired 5% of company shares, practically free of charge. Subsequently, Donbass-Duferco bought the remaining 15% of shares owned by the city of Dunaújváros.

First phase of austerity measures focus on cooperation

In October 2008, the two representative trade unions at the company, the Dunaferr Association of Metalworkers’ Unions (Dunaferr Vasas Szakszervezeti Szövetség) and the Youth Organisation Dunaferr (Dunaferr Ifjúsági Szervezet), were the first in the country to engage in direct negotiations with company owners and management. Their aim was to agree on the possible introduction of austerity measures to help the metalworks face the global economic crisis while maintaining employment levels. Following several rounds of negotiations between the management and trade unions, and also among members of the trade unions, an agreement was reached on 11 November 2008.

This implied a temporary modification of the collective agreement, which was to remain in force until 31 May 2009, resulting in cuts in workers’ benefits. Measures agreed included the temporary re-regulation of overtime, idle time and standby time, with benefits being cut to the level prescribed by the country’s Labour Code. In addition, the so-called Christmas wage, or 14th month salary, was reduced for 2008, by introducing a cap of HUF 140,000 (€528 as at 23 October 2009) on the amount to be paid. However, it was also agreed that the remainder of this payment would be made later in 2009. Furthermore, the agreement postponed the 2009 salary increase that was due to take effect from 1 July 2009. Other smaller modifications included the suspension of the provision of housing loans, food vouchers and other benefits. Altogether, it was anticipated that these measures would save HUF 3.5 billion (€13.2 million) for the company, while also resulting in a 20% decrease in workers’ salaries. Nonetheless, in exchange for wage cuts, the company signed a ‘no-redundancy clause’ for 2009.

Clash over company’s second action programme

Despite the abovementioned austerity measures implemented at the company by the end of 2008, further actions became necessary as the global economic crisis intensified. On 23 February 2009, the management devised a new action plan with the aim of reducing costs, which included a variety of temporary and long-term measures. The most relevant measures were as follows:

  • reducing the shift allowance to the level set out in the Labour Code;
  • cancelling the 2009 salary increase;
  • temporarily reducing (for six months) working time to 32 hours a week for those always working in daily shifts;
  • temporarily suspending the so-called ‘holiday wage’.

With these changes, the management envisaged a further 20% reduction of the wage bill. However, lower base salaries could have had a negative effect on workers’ pensions in the future – for instance, as the salaries of many workers would not have reached the official minimum wage level, they would thus have counted only as part-time workers, consequently accruing fewer years of service to the company. Furthermore, lower base salaries would also have had a negative impact on sick pay and unemployment allowances.

Having learnt about these far-reaching measures, the trade unions decided to hold off on their reply until they had a chance to consult their members, who were also informed that a negative reply from them on the management’s plan might trigger downsizing. Based on the results of a questionnaire, completed by more than 70% of all unionised workers, the trade unions rejected the management’s proposal. This decision was based on the fact that 91.7% of workers rejected the idea of a working time reduction, and 94.5% refused the shift allowance reduction. Another concern, which contributed to the trade unions’ negative response, was that they were unable to ensure that accepting the management’s proposal would rule out future dismissals connected with the economic crisis.

Negotiations on government support end in deadlock

In July 2008, ISD Dunaferr paid an advance dividend to its shareholders to the value of HUF 20 billion (€75.5 million). Later in December, however, with the unfolding of the economic crisis, the company initiated negotiations with the state agencies in charge of approving government assistance. As EU regulations do not allow for direct state subsidies in the steel industry, Dunaferr requested a commercially priced loan of HUF 13 billion (€49 million) with government backing. Initially, there was a positive response from the government. The minister responsible for the Prime Minister’s Office (Miniszter Elnöki Hivatal, MEH) at the time, Péter Kiss, stated in a public forum that the government envisaged a three-pillar support plan for the company, consisting of:

  • a state guaranteed loan of HUF 9 billion (€33.9 million), channelled through the Hungarian Development Bank (Magyar Fejlesztési Bank, MFB);
  • a continued collaboration between the company and the government, based on the company’s privatisation agreement, which otherwise was coming to an end;
  • job-preserving subsidies offered in the framework of the so-called ‘4 1 scheme’, which involved paying for 80% of wages and wage levies for one day a week if the company sends its workers for further training on that day.

In exchange, the government set the condition that the company owner, Donbass-Duferco, should reinvest an amount of money from the previously paid dividend to match the government loan. The consortium rejected this scheme, forcing the government to lower the investment requirement to HUF 4 billion (€15.1 million). Again, the company refused this second offer, arguing that not only had it complied with what was required in the privatisation agreement, but that it had also maintained a higher employment level. The company highlighted the fact that it had invested double the amount that was agreed and also pointed out that this was actually the first time that a dividend was paid to shareholders. Subsequently, the management of ISD Dunaferr expressed its willingness to invest a maximum of HUF 2 billion (€7.5 million); however, the cabinet considered this amount insufficient.

As negotiations with the government failed and the trade unions were unwilling to accept the austerity plan, the company decided to proceed with a collective redundancy of 500–700 employees, effective from April 2009.

Commentary

At first, it was relatively easy to encourage trade unions to agree to the necessity of cutting costs at the company. This was due to various reasons: for instance, the value of workers’ allowances was higher than the statutory requirement, thereby making a temporary reduction easier to conceive; moreover, the company owners and the management did more than what was agreed in the privatisation contract. Initially, the employees might have been motivated to collaborate as well, as they also hold some company shares. However, later on, they began to feel that the owners were trying to shift all of the costs incurred by the economic and financial crisis onto them. As a result, therefore, they declined to cooperate and opted instead for the dismissals. The layoffs, however, might prove to be a rather expensive move for the company, as it will either have to pay severance pay to redundant workers or, if workers choose otherwise, 80% of their remuneration for a year from the funds of the Steel Employment Foundation (Foglalkoztatásért Acélalapítvány), which are paid largely by the company.

As far as the government loan is concerned, besides the problem of the dividend paid off earlier, the credit might well be linked to political considerations. This perception stems from the fact that the Mayor of Miskolc, Sándor Káli, who is also a member of the governing Hungarian Socialist Party (Magyar Szocialista Párt, MSZP), publicly criticised such an accord on the basis that ISD Dunaferr opted for the closure of its other Hungarian subsidiary, the Diósgyőr Steelworks (Diósgyőri Acélművek, DAM), based in the city run by Mr Káli in northeast Hungary. He argued that Dunaferr should only receive government assistance if it is also made available to DAM. The background to the government’s action is not at all clear, especially in light of the fact that Dunaújváros, where the company headquarters are located, has long been held as a stronghold of the ruling Socialist Party. Despite the current deadlock in negotiations between the company and the government, it is also worth noting that the company, as the major employer and economic actor in the Dunaújváros region, has traditionally had a strong bargaining position in dealings with the government.

Márk Edelényi and László Neumann, Institute for Political Science, Hungarian Academy of Sciences

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