LONDON/MILAN, Dec 6 (Reuters) - Italy faces a deep crisis as its biggest steel plants struggle for survival, putting it in the forefront of a permanent decline in western Europe's steel sector and increasing cost pressures on many of the region's industries.
Producing crude steel in the European Union, where supply is 30 percent more than demand, has become too costly. Only the most technologically and environmentally advanced plants are set to survive.
Italy's largest steel producers, ILVA and Lucchini, face potential shutdowns, which could cost the country 25,000 to 30,000 direct and indirect jobs.
The future of Italy's largest stainless steel factory, Acciai Speciali Terni, is also finely balanced as it is up for sale. Many fear this might result in a break-up, production cuts and job losses.
The broader industry predicament is so acute that the country - Europe's second-largest steel producer after Germany - risks becoming a steel importer.
Italy's steel chain accounts for about 4 percent of its GDP.
"There is a serious risk of losing integrated steel production in our country. The impact on the Italian infrastructure, construction and automotive sectors, which are already suffering, would be terrible," said Gianni Venturi, national steel co-ordinator for Italy's biggest union, FIOM CGIL.
"Due to the steel demand collapse in Europe, the multinationals are divesting their French, Italian, German assets and moving to lower-cost countries."
Plant shutdowns inevitably create friction with European governments, which face widespread protests about job losses and the impact of austerity measures.
France's socialist government has lambasted ArcelorMittal , the world's largest steel producer, and its owner Lakshmi Mittal over its decision to shut two blast furnaces at Florange, France.
Producing crude steel at Florange, which supplied steel for the Eiffel tower, is no longer economically viable, ArcelorMittal said.
DIFFERENT PROBLEMS, COMMON THREAT
Europe's biggest steel plant, Riva-group owned ILVA, faces closure after judges ordered the seizure of its steel in a corruption probe tied to a health and environmental scandal.
Antonio Gozzi, the head of Italian steelmakers association Federacciai, said ILVA's shutdown would increase costs for local manufacturers by up to 5 billion euros ($6.5 billion) a year, pushing some companies towards bankruptcy.
Federacciai expects Italy's steel production to decline by almost a third to 21 million to 22 million tonnes this year.
Italy would still have the Brescia hub making long steel products, mainly used in construction, but it may have to import flat steel, used in anything from cars to home appliances.
"For flat steel the future is very much uncertain. I wouldn't want to be Fiat at the moment," Macquarie head of commodities research Colin Hamilton said.
ILVA's problems stemmed from a lack of investment to upgrade the heavily polluting plant.
"Plants such as the ThyssenKrupp one in Duisburg, (Germany) or the Voestalpine one in Linz, (Austria), are very similar to ILVA ... but have a much more sustainable environmental impact," said union chief Venturi.
Italy's second-largest producer, heavily indebted Lucchini, is battling weak market conditions and preparing to temporarily halt its main blast furnace in Piombino for the third time this year due to poor orders.
Its owners have tried to sell the group for the past few years without success.
Also a worry is the sale of the Terni Acciai Speciali plant.
Finnish producer Outokumpu was told by the European Commission it must divest the Terni plant to avoid having an anti-competitive market share.
"The Terni plant is a mixed bag. The equipment is good but the location is so-so; it's oversized for the Italian market," a stainless steel industry analyst said.
CURE BY CUTS
Job losses are a prime concern for the indebted Italian and European governments, leading to talk of nationalisation in France and Italy.
Late last week, the Italian government rushed through a decree to keep the ILVA plant going, putting it at loggerheads with the courts.
The French government meanwhile backed away from a threat to nationalise the Florange steelworks after securing promises from ArcelorMittal that it will invest.
Industry players say that, painful though it might be, plant closures are necessary to help the European sector overall.
"I think it does not make sense to try and artificially expand the lifetime of products for which there is no need or restricted need," said Wolfgang Eder, chief executive of Voestalpine and president of EU steel industry body Eurofer.
Consultants Wood Mackenzie said some 36 million tonnes of steel capacity have been taken off-line in Europe since 2008, while only 8 million tonnes have been closed permanently, leaving 28 million tonnes idle.
"If it is not economic to operate (those plants) today, and there seems little prospect of any improvement in demand, then there's a threat hanging over all of that capacity, and over those jobs," Wood Mackenzie analyst Patrick Cleary said.
Keeping plants idled is costly, and cash reserves built up by European producers during the good years are fast withering.
Industry experts say outdated, high-cost or polluting plants have limited options, given Europe's economic slump and the increasing self-sufficiency of Asian markets.
"They're just cutting those at bottom of the pile. Without those cuts, steel prices can't recover. For Europe the future lies in high-quality, speciality steels," said Metal Bulletin Research analyst Kashaan Kamal.