[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |

Brussels, 26.3.2009

COM(2009) 141 final

REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT

Fourth monitoring report on steel restructuring in the Czech Republic and Poland

INTRODUCTION

The present report covers the results obtained during the last year of restructuring of the Czech and Polish steel industries. It has been prepared in line with the monitoring requirements provided in the specific Protocol 2[1] and Protocol 8[2] respectively, incorporated in the Treaty of Accession of the Czech Republic and Poland.

The above mentioned Protocols specified the transitional period for finalising the restructuring of the steel sectors and the key benchmarks for assessing its achievement.

The Commission adopted monitoring reports in 2004[3], 2005[4] and 2006[5]. This fourth and final monitoring report supplements the previous Commission reports and assesses the results achieved in 2006, the last year of the transitional period, taking into account the relevant information made available in 2007 and 2008.

RESTRUCTURING OF THE CZECH STEEL SECTOR

The companies covered by the provisions of Protocol 2 were: Ispat Nova Hut (now Mittal Steel Ostrava - MSO), Valcovny Plechu Fridek-Mystek (VPFM) and Vitkovice Steel (VS). These companies represented in 2006 a share of 57% of the Czech crude steel production.

State aid for restructuring

The Commission concluded on the basis of the available information that the Czech Republic respected its Protocol obligations on state aid. The final assessment showed that the overall amount of state aid granted to beneficiary companies for restructuring purposes was CZK 8.3 billion so 59% of the Protocol ceiling of CZK 14.15 billion. This aid was granted until the end of 2003. Furthermore the Commission concluded that, lower than foreseen, the amount of aid being actually granted had no adverse effect on the financial performance of the companies.

This aid was primarily focused on financial restructuring. Reducing the debt burden of beneficiary companies facilitated their acquisition by strategic investors and allowed to access the funds necessary for financing the modernisation programmes. The amount of aid granted was determined on the basis of the approved National Restructuring Programme (NRP) and Individual Business Plans (IBPs) in which investments played a central role in reducing costs and improving the quality of finished products so as to increase the operational income of the companies. In its final assessment the Commission took a particular attention at the relation between state aid granted and the investments realised.

An analysis shows the following results for each company:

a) MSO received 86% of the maximum amount of restructuring aid allowed by the Protocol, the largest part of which was provided in 2003 and was related to debt write off;

b) VPFM received 99% of the maximum amount of state aid provided by the Protocol all being granted in 2003, covering mainly the debt-for-equity swap with state owned privatisation agencies. Part of this aid was reimbursed (see 3.4.2. below).

c) VS received 37% of the Protocol ceiling, mainly during the period 1997-2001 and no restructuring aid was granted to the company after 2002. The aims of the aid were to relief the company from its debts versus main creditors, and to a minor extend to cover operational costs.

The Protocol required that no restructuring aid may be granted to companies not included in the NRP. The Commission opened an investigation on a Czech steel company Trinecke not covered by the Protocol, but it concluded that no illegal state aid was granted to this company[6].

Capacity reduction

In order to compensate the competitive advantage, which beneficiary companies obtained through the restructuring aid granted, Annex 2 of the Protocol required closing of several production facilities. The net capacity reduction to be achieved by Czech Republic for finished products during the period 1997-2006 was established at 590,000 tonnes.

These installations were very obsolete and their closures were beneficial in terms of financial results of the companies and contributed to reduced energy consumption and emissions of pollutants to the environment. The monitoring has shown that all closures were executed in conformity with the relevant Commission decision[7].

The permanent closure of the hot rolling mills No. 1 & 2 at VPFM which was postponed for six months as reported in the third progress report[8] were dismantled during the first semester 2006.

MSO executed the capacity change of the section mill in line with the Commission decision[9]. The change involved the modernisation of the existing mill instead of a construction of new mill, which required much less capital expenditure than forecast. The Commission concluded that by the fact that the company received less state aid than envisaged this change remained neutral in terms of state aid.

Other key restructuring benchmarks

Viability and financial performance

At the end of the restructuring period in 2006 all beneficiary companies passed the Commission's viability test as outlined in the Protocol[10] . They achieved EBITDA situated between 20.2% and 23.4%, the target being 10.0% and EBIT between 17.1% and 23.0%, the target being 1.5%. These results are better then expected in the previous progress report[11].

Productivity and employment

During 2006 the number of jobs reduced by beneficiary companies was higher then forecast (average annual employment level of 11 905 versus NRP target of 12 222). This result was mostly achieved by outsourcing, early retirement and a voluntary redundancy scheme. However as a consequence of their delayed investment programmes, two beneficiary companies did not meet the target level of employment by the end of 2006, but they were able to do so by the end of 2007.

The employment reduction achieved, during the monitoring period, together with increased output of beneficiary companies resulted in increased productivity levels. Although the final productivity (ca. 365 tonnes per person) remains slightly below EU average, they outreach by far the levels forecast in the IBPs, with the exception for VPFM.

Cost reduction

Production processes were rationalised and good management practices such as the creation of cost reduction teams and the investment in new IT, contributed to reduction of costs. A large number of small initiatives in relation to maintenance and repairs contributed to the achievement of this restructuring target. After the new strategic private investors took over the formerly state owned companies, a radical improvement was noticed as a result of cost reduction becoming largely a function of company culture.

Moreover the improved utilisation rates of installations contributed to reduced energy cost by unit produced. This is the important cost factor crucial for the environmental and economical performance of the companies.

Other Protocol requirements

Business/market strategies

A significant change in the business strategies of beneficiary companies has been achieved. The abolition of barter trade represented a major achievement. Stimulated by the privatisation and facilitated by the particularly favourable market developments, beneficiary companies reviewed their product mix, improved the quality of finished products, entered into higher added-value markets so that they were able to compete on quality rather than on price bases. These efforts are to be continued and will be supported by the materialisation of future modernisations of the finishing lines and thus improve the quality of end products.

Investments

None of the companies covered by the Protocol was able to realise all the investments foreseen in their IBPs. Finally companies completed or irrevocably committed only between 22% and 71% of the targets until the end of 2006. However given that amount of state aid given remained below authorised values, the Commission concluded, that the restructuring had a proper aid intensity and no state aid was received in excess of the minimum necessary.

Only in case of VPFM the level of investments realised, compared with received amount of restructuring aid let the Commission to investigate and order the partial reimbursement of the aid[12]. Thus, the beneficiary repaid CZK 24.88 million.

The Commission continued to monitor the materialisation of the outstanding but irrevocably committed investments which were to be finalised during 2007 and 2008. Since for some of the investments their commissioning is foreseen after 2008, it also reserves the possibility to take the appropriate measures in case the investments will not be implemented.

Environmental protection

The Protocol required beneficiary companies to achieve compliance with the relevant Community legislation in the field of environmental protection at the moment of accession. Integrated permits in compliance with the IPPC directive[13] have already been granted for all steel making facilities in the sector.

RESTRUCTURING OF THE POLISH STEEL SECTOR

The companies covered by the provisions of Protocol 8: Polskie Huty Stali (now Mittal Steel Poland - MSP), Huta Andrzej, Huta Bankowa, Huta Batory, Huta Buczek (now Technologie Buczek), Huta L.W. (now Arcelor Huta Warszawa - AHW), Huta Labedy and Huta Pokoj. Meanwhile 2 companies were withdrawn from the respective National Restructuring Programme (NRP) - Huta Andrzej and Huta Batory because they went into receivership. The beneficiary companies represented 70% of Poland's crude steel production.

State aid for restructuring

The Commission concluded on the basis of the available information that Poland respected its Protocol obligations on state aid. It paid PLN 2.73 billion of restructuring aid which represented only 82% of the Protocol ceiling of PLN 3.38 billion. This aid was granted before the end of 2003 in accordance with the Protocol. The assessment also showed that the reduced amount had no negative impact on the financial performance of the companies. Similar to the Czech case, state aid provided to polish steel companies mainly focussed on financial restructuring.

The detailed allocation of state aid to individual companies has been specified in the approved Polish NRP. The data provided let the Commission conclude that the amount and intensity of the aid was limited to the strict minimum necessary for allowing the companies to become viable. For the individual beneficiary companies the result was as follows:

a) MSP received 85% of the maximum amount of PLN 3.14 billion, the largest part being related to debt write off or loan guarantees. Its subsidiary Huta Bankowa which in 2006 was divested from the Arcelor-Mittal group (following the Commission Decision regarding the merger[14]) received 92% of the maximum amount agreed.

b) AHW received 63% of the maximum amount of state aid. This has been confirmed on the basis of the state aid procedure which the Commission opened to investigate on a possible misuse of aid by AHW[15]. The Commission concluded in its investigation that a guaranty at an amount of 31.2 million EUR was partly misused and ordered a partial recovery. AHW voluntarily repaid in November 2007 the sum of 2.09 million EUR.

c) Huta Labedy and Huta Pokoj received 40% and 66% of the ceiling respectively. This allowed the Commission to conclude that despite their low levels of investment the amount and intensity of the aid was limited to the strict minimum of the necessary restructuring costs.

d) Technologie Buczek received 41% of the approved maximum amount of state aid. As consequence of the bankruptcy procedure announced in 2006, the Commission issued[16] a decision on misuse of state aid and ordered recovery.

Capacity reduction

The Protocol specified a number of finishing lines which were to be closed in relation with the restructuring aid granted, so as to compensate the possible competitive advantage and the related distortive effects. The net capacity reduction to be achieved by Poland for finished products during the period 1997-2006 was established at 1,231,000 tonnes.

The Commission checked capacity reductions via closure certificates and verification by the independent consultant, according to the relevant Commission Decision[17] provisions. In the particular case of MSP and the approved change of its business plan[18] the existing hot strip mill will only be closed once a new hot strip mill will be installed at its Krakow site what was scheduled for the end of 2008.

On the basis of the information provided, the Commission concluded that all closures were executed in line with the approved plans.

In addition to the Protocol obligations polish steel companies decided to voluntarily liquidate a number of inefficient capacities which include coke batteries, slabbing and blooming mills and electrolytic galvanizing line.

Other key restructuring benchmarks

Following the bankruptcy procedure of Technologie Buczek the Commission concluded that the company did not comply with the objectives of the restructuring and therefore issued a decision on misuse of state aid and ordered recovery.

Viability and financial performance

All companies except Huta Bankowa passed the EC viability test with ease at the end of the restructuring period in 2006. They achieved EBITDA situated between 10.1% and 21.6%, the target being 10.0% and EBIT between 5.2% and 16.6% the target being 1.5%.

Huta Bankowa did not pass the Commission's viability test in 2006 due to unexpected technological difficulties. However on the basis of the positive results achieved first in 2005 and later in 2007, it is concluded that the benefits of the restructuring efforts undertaken allowed Huta Bankowa to reach sustainable viability.

Productivity and employment

Two companies achieved final employment levels which were below forecast, one company was on track with planned employment levels and two companies achieved levels far above forecast. The overall number of employment remained above the forecast (average annual employment level of 15 564 versus NRP target of 13 702) which was mainly the result of the delay of closures and the finalisation of major investments. The ongoing modernisation should however enable this situation to be adjusted in a near future.

Although the overall productivity level of beneficiaries did improve, it remained however far behind EU average as referred to in the Protocol. At the end of 2006, an average productivity level of ca. 321 tonnes per person was observed. The individual company results differ strongly, with AHW achieving much higher level then forecast, MSP achieving much lower level then IBP target.

Cost reduction

Beneficiary companies clearly demonstrated their change in company culture which allowed them to reduce their costs. The results obtained at individual company level show that a number of actions were taken to reduce the operational costs. A particular attention was given to new IT tools to monitor and control costs throughout the production. Technological investments were realised to modernise and replace existing facilities and provide a substantial contribution to reduce costs. On the financial side, bank charges were renegotiated and raw materials’ purchase contracts were revised.

Other Protocol requirements

Business / market strategies

The objectives provided in the IBPs with regard to reorganisation of production facilities and improved organisational structures were achieved. The companies also revised their sales structure and achieved higher levels of direct sales. The product mix was changed and, when required, companies moved into the higher value added product market.

Investments

Two beneficiary companies Huta Pokoj and Huta Bankowa met their investments targets. Huta Labedy successfully completed about 75% of the approved investments. AHW realised 37% of the initially approved plan, but since the company was taken over in 2005 it invested in a new mill and thus reached 170% of the initially foreseen amount.

MSP, as envisaged in the Protocol, realised the investments related to product mix changes and improving the quality of its products. However, due to the change of its IBP, the targets for energy efficiency and yields could not be met in 2006 but were planned to be met in 2008.

Environmental protection

The Protocol did not, contrary to the case of the Czech steel industry, require beneficiary companies to achieve compliance with the relevant Community legislation in the field of environmental protection at the moment of accession. Therefore the transitional regime on the environmental acquis for Poland as established under the Treaty of Accession[19] provides a derogative list of steel installations for compliance with the IPPC directive. By way of derogation from IPPC directive the requirements for the granting of permits for existing installations did not apply to Huta Sendzimira (now a part of MSP), Huta Andrzej, Huta Czestochowa, Huta Batory, Huta Jednosc and Huta Laziska until December 2010. Transitional permits were issued for these installations containing individually binding timetables for the achievement of full compliance.

CONCLUSIONS

This is the last of the monitoring reports concerning the restructuring of steel industries in the Czech Republic and Poland. In view of the results achieved, the Commission assessed that the provisions of Protocol 2 and 8 to the Treaty of Accession were respected:

- the total restructuring aid granted to the benefiting companies was below the ceilings,

- the net capacity reduction was achieved,

- the restructuring benchmarks as set out in Annex 3 to the Protocols (viability, productivity and cost reductions) were achieved.

The Commission concludes that the restructuring process under the transitional period ended generally with success. From 2007 steel producers in Poland and Czech Republic operate under the same conditions as all the steel companies in the European market.

The restructuring process was particularly facilitated by two factors: privatisation and the general market conditions during the transitional period (2003-2006). Both the Czech and Polish steel sector went through a major change of ownership during that period. While in 2002 steel companies were still largely publicly owned, by 2008 their privatisation was concluded by the transfer of shares to strategic investors. Furthermore, the Commission is of the opinion that the change of the company internal culture and rigorous implementation of the business plans played the major role in preparing those companies to face the challenges of the future.

On the other hand, the companies received a substantial support from the booming steel market and related increase of sales prices, which, since 2003 till mid 2008, allowed them to considerably improve their performance. The particularly high growth rates of the domestic markets for steel in both Member States played a major role in helping to reach viability of the beneficiary companies.

The monitoring of the restructuring of the steel sector allowed for a close and regular cooperation between the Commission, national authorities and companies. This contributed to an adequate fulfilment of the obligations required by the Protocols.

[1] OJ L 236 of 23.9.2003 p. 934

[2] OJ L 236 of 23.9.2003 p. 948

[3] COM(2004)443 final

[4] COM(2005)359 final

[5] COM(2006)814 final

[6] 2007/319/EC: Commission Decision of 8 September 2006 on State aid C 45/04 (ex NN 62/04) in favour of the Czech steel producer Tinecké ~[pic]elezárny a.s., OJ L 119 of 09.05.2007 p.37-44

[7] Decisiinal

[8] 2007/319/EC: Commission Decision of 8 September 2006 on State aid C 45/04 (ex NN 62/04) in favour of the Czech steel producer Tinecké železárny a.s., OJ L 119 of 09.05.2007 p.37-44

[9] Decision 3010/91/ECSC OJ L 286, 16.10.1991, p. 20

[10] COM(2006)814 final

[11] State Aid case no. N 350/06 – Change of restructuring plan of MSO – Czech Republic dated 13.09.2006, OJ C 280 of 18.11.2006 p.4

[12] The companies should achieve:- a gross operating result of turnover: i.e. the % EBITDA (Earning before interest, tax, depreciation and amortization) of turnover of at least 10% for non-integrated steel companies and 13.5 % for integrated mills);- a return of turnover on capital, i.e. the % EBIT (earnings before interest and taxes) of turnover of at least 1.5%

[13] COM(2006)814 final

[14] State Aid case no. N 350b/06 – Change of restructuring plan of VPFM dated 08.06.2007, OJ C 200 of 28.08.2007 p.1

[15] Directive 96/61/EC, OJ L 257 of 10.10.1996, p.26

[16] Case No COMP/M.4137 - Mittal /Arcelor, Notification of 07/04/2006 pursuant to Article 4 of Council Regulation No 139/20041

[17] Commission Decision of 11 December 2007 on State aid C 51/06 (ex N 748/06) which Poland has implemented for Arcelor Huta Warszawa , OJ L 143 of 3.06.2008

[18] Commission Decision of 23 October 2007 on State Aid C 23/06 (ex NN 35/06) which Poland has implemented for steel producer Technologie Buczek Group OJ L 116 of 30.04.2008

[19] Decision 3010/91/ECSC OJ L 286, 16.10.1991, p. 20

[20] State Aid case no. N 186/05 – Change of business plan of MSP dated 20.07.2005, OJ C 12 of 18.01.2006 p.2

[21] OJ L 236 of 23.09.2003 p.875-905