REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT - First monitoring report on steel restructuring in the Czech Republic and Poland {SEC(2004)891}

1. INTRODUCTION

Steel is an important industrial sector in the Czech Republic and Poland, a fact reflected by the level of employment in the sector and the added value created by steel producers in both countries.

Over the last decade, significant restructuring of the steel industry in both countries has been achieved, reinforcing the competitiveness of the sector. A large number of non-viable facilities have been permanently closed. Existing plants have been modernised so as to enable the production of the grades and quality of steel required by the markets. Changes in management structures have taken place in parallel with the ongoing privatisation and concentration process. The change from a product oriented to a market oriented culture is to be seen in the improvements in operational results of most companies.

The marked reduction in manpower resulted in significant increase in productivity levels and made the adoption of social measures a necessity to reduce the impact of the restructuring process. The technical restructuring of steel producers in the Czech Republic and Poland resulted not only in a reduction of input costs, but also to a considerable cut in emissions to the environment.

Despite these efforts, the restructuring process in the steel sectors in the Czech Republic and Poland is not yet complete. Further restructuring is necessary if the companies concerned are to achieve viability and be competitive enough to operate under normal market conditions, especially those concerning competition.

For many companies in both countries, up to now, viability could only be reached with the financial support of the Governments. For this reason, transitional periods were negotiated with the Czech Republic and Poland to allow the granting of state aid to specific companies (see relevant Protocols to the Europe Agreements [1]). The maximum amount of state aid permitted corresponds to the financial projections made in the National Restructuring Programmes and the Individual Business Plans of the companies, which were adopted by the Czech and Polish governments and agreed by the Commission during 2002 and 2003.

[1] OJ L 360, 31.12.1994 p. 79-80 and OJ L 348, 31.12.1993 p. 70

This exemption from the EU rules on state aid is conditional on the fulfilment of certain obligations, negotiated between the EU and the Czech Republic and Poland. These obligations, both for the respective governments and for individual companies, are set out in Protocols incorporated in the Treaty of Accession, signed in Athens on 16 April 2003 by the Heads of State and Government of the enlarged EU. Protocol 2 [2] refers to the restructuring of the Czech steel industry and Protocol 8 [3] to the restructuring of the Polish steel industry.

[2] OJ L 236 of 23.9.2003 p. 934

[3] OJ L 236 of 23.9.2003 p. 948

The Protocols also set out detailed provisions for monitoring and reporting on these obligations, including that:

* each country provides to the Commission six-monthly reports concerning the restructuring of the benefiting companies and the fulfilment of the obligations and requirements contained in the Protocol;

* an independent evaluation be carried out in 2003, 2004, 2005 and 2006; and

* the Commission reports to the Council.

This is the report concerning progress achieved during 2003, the first year of the restructuring process, and contains the following elements:

* the global steel market background against which restructuring process is taking place, as well as a description of major developments linked to the restructuring programme in each of the countries;

* country-specific evaluation referring to state aids and key restructuring benchmarks as defined in the annexes to the Protocols (productivity and employment, costs , capacity reduction and viability);

* conclusions regarding steps necessary for benefiting companies to achieve viability by the end of the restructuring period.

Progress reports to the Council will be prepared annually. The last report, covering progress in 2006, will be submitted in 2007. This last report will also provide an overall assessment of the results achieved throughout the restructuring process (2003-2006).

2. GLOBAL STEEL MARKET DEVELOPMENTS

As the restructuring process is affected not only by the measures put in place by companies and public authorities, but also by the general economic developments and the market situation, it is necessary to provide some information on the global steel market developments in order to be able to appreciate the performance of the steel companies in the Czech Republic and Poland.

The recovery of the world economy in the second half of 2003 had a positive impact on steel demand and trade, after a two-year depressed cycle. The performance of the economy has pushed world steel consumption to a new record of 960 million tonnes in 2003, and there are signs of increasing demand worldwide. This upward trend is expected to continue throughout 2004.

Despite this strong growth at world level, demand in the EU, which is the main export market for both the Czech Republic and Poland, remained stable in 2003 and only a small increase in demand is forecast for 2004 (between 1.4 % and 1.7 % for the bigger countries).

While prices recovered worldwide in the second half of 2003 the increase was much more moderate in the EU than in other regions. In the same period, the increase in revenues to steel makers was partially offset by the significant increases in the cost of raw materials, transport, and energy. This development accelerated towards the end of 2003.

3. RESULTS OF THE MONITORING PROGRAMMES IN THE CZECH REPUBLIC AND POLAND

3.1. Czech Republic

According to the information at the Commission's disposal, the Czech Republic is, as regards the companies listed in Annex 1 of the Protocol, in general respecting its commitments as outlined in the Protocol.

The amount of state aid granted up to the end of 2003 is lower than the maximum agreed ceiling. In the period 1997-2003, the Czech Republic granted a total amount of CZK 12 000 million (EUR 371 million [4]), which is approximately 85 % of the Protocol ceiling. The beneficiary companies to which state aid can be granted in accordance with the Protocol are: Ispat Nova Hut a.s., Vitkovice Steel a.s. and Valcovny Plechu Fridek-Mystek a.s.

[4] CZK/Euro Exchange rate 32.329 (average December 2003)

While there were no capacity reductions scheduled for 2003, companies confirm their commitment to meeting their obligation regarding closure of non-viable facilities, as provided for in the National Restructuring Programme, over the coming years.

The first year of the restructuring of the Czech steel industry covered by the monitoring exercise shows broadly satisfactory results. It is clear that positive market developments contributed to the results obtained, but the beneficiary companies also demonstrated improvements towards meeting the overall restructuring target, which is to achieve viability by the end of the restructuring period.

Notwithstanding the good progress made in 2003, the Commission draws the attention of the Czech Republic to the need to accelerate the restructuring process in the coming years. Further efforts are required especially in the case of two beneficiary companies in order to finalise the restructuring. In particular, those investments, which aim at reducing costs and those related to the production of higher value-added finished products, will be necessary to allow these companies to achieve viability by the end of the restructuring period.

3.2. Poland

The Polish restructuring process must be assessed against the background that the National Restructuring Programme was only approved in mid-2003, and that the negotiations for the privatisation of the largest Polish steel producer, PHS, were still taking place in the second half of 2003, both of which had an influence on the results achieved so far.

According to the information at the Commission's disposal, Poland is, as regards the companies listed in Annex 1 of the Protocol, respecting the commitments outlined in the Protocol, concerning state aids granted, which are below the maximum ceiling. In the period 1997-2003, Poland granted a total amount of PLN 2 750 million (EUR 590 million [5]), which is approximately 80 % of the Protocol ceiling. The beneficiary companies to which state aid can be granted in accordance with the Protocol are: PHS, Huta Andrzej, Huta Bankowa, Huta Batory, Huta Buczek, Huta Lucchini-Warszawa (HLW), Huta Lab?dy and Huta Pok?j.

[5] PLN/Euro Exchange rate 4.6595 (average December 2003)

According to available information, the commitments related to capacity reductions in 2003 have also been respected. The total closure of capacities in rolled flat products in 2002 and 2003 were 901 000 tonnes.

However, the first year of the restructuring of the Polish steel industry shows significant delays. On the one hand, the beneficiary companies did not so far fully utilise the opportunities arising from an improved steel market situation and did not increase their sales accordingly. On the other hand, the sharp increase in raw materials prices does not allow the companies to fully implement the cost reduction strategy as planned.

The delays in the restructuring are mainly due to the privatisation negotiations of the main Polish steel producer, PHS, which was only concluded in 2004. However, the finalisation of this privatisation is expected to have a positive effect on the restructuring process. The experts advising the Commission on the restructuring process consider that the delays can be recovered rapidly by the new owner.

The Commission notes that all companies must intensify their restructuring efforts in the coming years so as to allow them to achieve viability by the end of the restructuring period. The good market environment is expected to continue and all beneficiary companies should profit from it to maximise their turnover in order to finance the necessary investments and implement other restructuring measures.

4. FOLLOW-UP

Based on the findings of the monitoring of the restructuring process of the steel sector in Czech Republic and in Poland during 2003, the Commission identifies delays, sometimes significant, in the implementation of the obligations and requirements as specified in the respective Protocols. The Commission considers that it is necessary to intensify the restructuring process in 2004 so as to enable the beneficiary companies to achieve viability by the end of the restructuring period. Special attention should be paid to investments necessary to reduce production costs and to foster the sale of higher value-added products, thereby increasing revenues.

The Commission will closely monitor the areas where delays were registered and will report accordingly in its future progress reports.

The Commission reiterates that the provisions of the Protocols clearly stipulate that, apart from the aid foreseen in the Protocol, no further State aid shall be granted by the Czech Republic and Poland for the restructuring processes of their respective national steel industries. Any additional restructuring aid would therefore be incompatible with the Treaty of Accession, and the Commission will take the necessary measures to recover any such aid granted [6].

[6] The Commission decided on 19 May 2004 to open a formal procedure under Article 88 (2) EC-Treaty regarding a restructuring aid to Huta Czestochowa, a steel producer not listed in Annex 1 of the Protocol (case C20/04 ex NN 25/2004).