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}
Date: 2004-07-07
Institutions: European Commission
Subjects: Czechia, Poland, industrial restructuring, iron and steel industry, report

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 07.07.2004 
COM(2004)443 final 

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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} 

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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  Agreements1).  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.  

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 22 refers to the restructuring of the Czech steel industry and Protocol 83 to 
the restructuring of the Polish steel industry.  

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

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OJ L 360, 31.12.1994 p. 79-80 and OJ L 348, 31.12.1993 p. 70  
OJ L 236 of 23.9.2003 p. 934  
OJ L 236 of 23.9.2003 p. 948 

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•  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 

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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  (€ 371 million4),  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. 

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 

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CZK/Euro Exchange rate 32.329 (average December 2003) 

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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 
(€ 590 million5),  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 Labędy and Huta Pokόj.  

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 

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PLN/Euro Exchange rate 4.6595 (average December 2003) 

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incompatible  with  the  Treaty  of  Accession,  and  the  Commission  will  take  the 
necessary measures to recover any such aid granted6. 

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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). 

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