By Lisa Jucca
MILAN, May 29 (Reuters) - Italian manufacturers have started to turn to foreign makers of flat steel, fearing supply disruptions at crisis-hit ILVA, their usual provider now mired in an environmental and corruption inquiry.
The giant ILVA plant in the southern town of Taranto, which makes 40 percent of Italy's steel, is at the centre of a judicial probe over its toxic emissions.
Magistrates ordered its partial closure in July but the crisis reached a new height last week as they seized 8.1 billion euros ($10.4 billion) in assets from the controlling Riva family, triggering the resignation of the ILVA board.
Prime Minister Enrico Letta's government is desperate to preserve the largest plant in Italy's underdeveloped south, which produces almost all of the country's flat rolled steel for the automotive, shipping and white goods industries.
With crude steel output in the European Union running at around 30 percent above demand, the impact of a 25 percent drop in output from ILVA has been limited so far.
But faced with the growing uncertainty, even traditional clients have started to try to diversify their suppliers.
"We bought around 25,000 tonnes of steel from ILVA last year and were planning to buy a further 30,000 tonnes this year but have suspended all orders because we have no certainty that they will supply us," said Luigi Lion from historic client Cimolai.
Lion said his group got burned in November when magistrates seized 1.7 million tonnes of steel, including some of Cimolai's.
The specialist bridge and viaduct manufacturer, urgently needs the steel to complete work on gates for the extension of the Panama Canal linking the Atlantic Ocean to the Pacific.
Lion said his group looked up suppliers in Germany, Austria and even India. It found the steel but faces higher transport costs, longer delivery times and, in the case of non-European suppliers, the obligation to pay upfront before delivery.
Carmaker Fiat, which in past years has sourced from ILVA 20 percent of its flat steel requirements for Europe, the Middle East and Africa, says it has been able to meet all its needs, given present ample supplies of steel in Europe.
KEY PRODUCER
Big business lobby Confindustria says production at ILVA is worth 2.7 percent of Italy's gross domestic product. Italy's No.2 steel producer Lucchini is at risk of closing, while steel maker Terni has been put up for sale by Outokumpu.
"If the ILVA plant were to be shut it would be a real disaster. We would lose a key producer strategically located and would face higher costs to look for steel abroad," said Michele Ciocca from the Assofermet association of metal distributors.
Ciocca said Italian buyers would have to pay an extra 5-10 percent for their steel supply if the plant were to close.
Transport costs for Austrian steel come at 60/70 euros per tonnes and can rise to 90 euros per tonnes for steel imported from Germany against 10 euros a tonnes for ILVA steel.
While prices in India and China are competitive, it takes three months for delivery since order against 45 days in Italy. And while ILVA offered lenient credit terms to its cash-strapped local clients, foreign suppliers demand heavy guarantees.
"The loss of ILVA would be devastating, not only for the jobs lost in the Taranto district, but also for its impact for the manufacturing industry," said Bruno Tosoni, who used to buy 40,000 tonnes of steel per year from ILVA for his Tosoni group.
"A portion of our national GDP would be moving abroad. How can we be competitive against French and German rivals who can buy their steel at their backdoors?" ($1 = 0.7779 euros) (Additional reporting by Silvia Antonioli; editing by James MacKenzie and Stephen Nisbet)