Report from the Commission to the Council and the European Parliament - Second monitoring report on steel restructuring in the Czech Republic and Poland {SEC(2005) 1039}
Date: 2005-08-03
Institutions: European Commission
Subjects: Czechia, Poland, accession to the European Union, industrial restructuring, iron and steel industry, report, transitional period (EU)

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 3.8.2005 
COM(2005) 359 final 

REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT 

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

{SEC(2005) 1039} 

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REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT 

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

1. 

INTRODUCTION 

The  finalisation  of  the  steel  restructuring  in  the  new  Member  states  and  the  full 
integration  of  the  respective  companies  into  the  Internal  Market  remain  a  major 
challenge.  Many  companies  in  both  countries  did  not  achieve  viability  before 
accession on 1 May 2004, and the respective governments granted financial support 
on the basis that beneficiaries would become viable in the long term. For this reason, 
transitional  periods  were  negotiated  between  the  European  Union  and  the  Czech 
Republic  and  Poland  to  allow  the  granting  of  state  aid  to  specific  companies.  This 
exemption  from  the  state  aid  rules  is  subject  to  certain  obligations,  both  for  the 
respective governments and for individual companies, which are set out in Protocols 
incorporated in the Treaty of Accession. Protocol 21 refers to the restructuring of the 
Czech steel industry and Protocol 82 to the restructuring of the Polish steel industry. 

The Protocols also set out detailed provisions for monitoring and reporting on these 
obligations, including that the Commission reports to the Council. 

On  the  7 July 2004,  the  Commission  adopted  its  first  Monitoring  Report  on  steel 
restructuring in the Czech Republic and Poland for the year 20033. In this report the 
Commission identified delays in the restructuring process, in particular in relation to 
investments.  It  recommended  both  countries  to  profit  from  the  positive  market 
conditions and to accelerate the restructuring process in the coming years so that the 
relevant companies would be able to achieve viability by the end of the restructuring 
period. 

This  second  progress  report,  which  is  based  on  the  national  monitoring  reports 
notified by the Member States authorities, as well as on independent evaluation and 
discussions with stakeholders, underlines the fact that steel companies are operating 
in an exceptionally good market that has shown levels of demand for steel and steel 
prices not seen for years. This has helped the companies to improve their sales and 
operational  results  considerably  and  should  have  facilitated  the  implementation  of 
the restructuring programmes. 

The  evaluation  of  the  results,  however,  shows  that  some  companies  are  still 
underperforming and may fail to become viable by the end of the restructuring period 
on  31 December 2006.  As  there  are  only  18 months  left  until  that  target  date,  the 
Commission  invites  the  beneficiary  companies  and  the  authorities  to  consider  its 
recommendations with attention. 

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OJ L 236 of 23.9.2003 p. 934  
OJ L 236 of 23.9.2003 p. 948 
COM(2004)443 final 

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The Commission emphasises that, if companies do not restore viability by the end of 
the restructuring period, it will analyse the reasons for this state of affairs. If failure 
to restore viability is due to the fact that the restructuring measures envisaged in the 
National  Restructuring  Programme  and  Individual  Business  Plans  have  not  been 
carried out as planned, it is possible that action could be taken to recover aid which 
has been given. 

This report describes the progress achieved during 2004 and contains the following 
elements: 

•  a description of developments in the global steel market, the background in which 

the restructuring process is taking place; 

•  a country-specific report on the main monitoring results referring to state aid and 
key restructuring benchmarks as defined in the annexes to the Protocols (capacity 
reduction, investments, productivity, costs and viability); 

•  conclusions  and  recommendations  regarding  measures  to  be  taken  and  the 
necessary  follow-up  regarding  beneficiary  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 DEVELOPMENTS4 

The restructuring process is affected by a number of factors including the measures 
put in place by companies and public authorities, the general economic developments 
and  the  market  situation.  Consequently,  a  good  understanding  of  these  elements  is 
necessary  to  appreciate  the  performance  of  the  steel  companies  in  the  Czech 
Republic and Poland. The basic assumptions on the development of the global steel 
market are summarised below.  

The  global  market  context  in  which  the  companies  operated  in  2004  was 
exceptionally favourable. The world economy started to recover in the second half of 
2003 and showed strong growth in 2004, especially in Asia and North America, with 
an annual growth rate of 5.5% on a year to year basis compared to an annual growth 
rate of 2.8% in 2003. 

This  had  a  very  positive  impact  on  steel  demand  and  trade,  after  a  two-year 
depressed cycle. The performance of the economy, driven by the buoyant growth of 
the  Chinese  market,  showed  an  unexpected  acceleration  pushing  world  steel 
consumption to a new record of 967 million tonnes of finished products in 2004, an 
increase  of  9 %  compared  to  2003.  This  upward  trend  is  expected  to  continue 
throughout  2005  although  at  a  much  slower  pace  with  forecasts  predicting  an 
increase of around 3.8%. 

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Sources : IISI and Eurostat  

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In the European Union, the economy recovered at a lower pace to achieve in 2004 a 
GDP growth of 2.4 % compared to 0.9% in 2003. At the same time, the demand of 
finished  steel  products  in  the  EU,  showed  a  significant  increase  in  2004  of  7 % 
compared to 1.5 % in 2003. Both Czech and Polish steel companies fully benefited 
from the growth of their main export markets. They also increased their sales on the 
even stronger growing domestic markets. Current forecasts, however, show a much 
lower  increase  in  demand  for  2005  as  a  result  of  an  expected  lower  growth  of  the 
European economy of around 2 %. 

Steel prices rocketed in 2004 showing an increase at world level of around 60 % in 
flat  and  long  steel  products.  In  the  European  Union  the  prices  increased  at  a  lower 
pace of around 30 %, which was influenced by the strength of the Euro. In the same 
period, the increase in revenues of steel makers was partially offset by the significant 
increases  in  the  cost  of  raw  materials,  transport  and  energy.  The  outlook  for  2005 
forecasts a stabilisation of the prices. 

3. 

RESULTS  OF  THE  MONITORING  PROGRAMMES  IN  THE  CZECH 
REPUBLIC AND POLAND 

3.1. 

Czech Republic 

Despite  overall  positive  market  developments, which allowed all steel producers to 
significantly improve their financial performance, not all Czech steel companies are 
in  a  position  to  achieve  sustainable  viability.  This  is  mainly  a  consequence  of  the 
delayed  privatisation  process,  which  is,  however,  expected  to  be  concluded  by  mid 
2005.  

On the basis of available information obtained from various sources, the Commission 
concludes that the Czech Republic is, as regards the companies listed in Annex 1 of 
Protocol 2, meeting its commitments regarding state aid granted. As reported in the 
Commission’s first Monitoring Report the total amount granted is below the ceiling. 
According to the Protocol, no more restructuring aid could be granted to the Czech 
steel sector after 31 December 2003.  

The Protocol required the permanent closure of the hot rolling mills N° 1 & N° 2 at 
Valcovny  Plechu  Fridek-Mystek  by  31 December 2005.  However,  the  Commission 
pursuant  to  article 12  of  the  Protocol 2  accepted  a  change  of  the  restructuring 
programme, by which the permanent closure has been postponed by six months until 
the  30 June 2006  (production  will  be  stopped  on  31 December 2005).  The 
Commission accepted the change on the basis of a duly provided justification5. There 
were  no  other  capacity  reductions  scheduled  for  2004  and  the  Czech  authorities 
confirmed  the  companies’  commitments  for  the  capacity  changes  scheduled  till  the 
end of the restructuring period. 

The independent evaluation of the progress achieved during the restructuring of the 
Czech  steel  sector  did  confirm  a  major  area  of  concern  for  two  beneficiary 
companies  listed  in  Annex 1  of  the  Protocol 2  with  regard  to  their  investment 

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For 
publicly 
http://europa.eu.int/comm/competition/state_aid/decisions/n600_2004/en.pdf. 

decision 

details 

which 

see 

the 

is 

available 

under: 

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programmes, which are behind schedule. Both companies could not until now secure 
loans for the purpose of making investment, especially in quality improvements. As a 
consequence,  the  companies  were  not  able  to  fully  benefit  from  the  excellent 
domestic and global market conditions. Other profit improvement opportunities such 
as  cost  reduction  and  increased  sales  on  the  domestic  market  only  partly 
compensated for the loss of income and in both cases the operating margins remained 
below  threshold.  This  means  that  under  normal  market  conditions,  both  companies 
would  fail  to  pass  the  Commissions’  viability  test  at  the  end  of  the  restructuring 
period. 

The analysis above is however expected to be favourably influenced over the coming 
months by the announced finalisation of the privatisation process of the Czech steel 
sector.  So  far  the  Commission  concludes  from  previous  experience  that  the  full 
acquisition by a strategic investor has a significant impact on the operational results 
of a company, which is the consequence of the combination of key determinants such 
as  improved  management  structures  and  its  consequences  of  cost  reduction,  yield 
improvements  and  marketing  reorientation,  as  well  as  the  improved  possibility  to 
secure investment loans. 

The coming months are thus decisive for the Czech steel sector to reach sustainable 
viability.  In  order  to  facilitate  the  expected  developments  it  will  be  crucial  for  the 
Czech  authorities  to  successfully  conclude  the  privatisation  process  as  early  as 
possible.  In  parallel  all  companies  need  to  continue  their  restructuring  efforts,  in 
particular those aiming at reducing costs and producing higher quality products. 

3.2. 

Poland 

According to the information at the Commission’s disposal, Poland is, as regards the 
companies  listed  in  Annex 1  of  Protocol 8,  respecting  the  commitments  outlined  in 
the Protocol, concerning state aid granted, which is below the maximum ceiling. In 
the  period  1997-2003,  Poland  granted  a  total  amount  of  PLN 2 750 million 
(€ 590 million6), which is approximately 80 % of the total amount allowed under the 
Protocol.  The  beneficiary  companies  to  which  state  aid  could  be  granted  in 
accordance  with  the  Protocol  are:  Polskie  Huty  Stali  (PHS),  Huta  Andrzej,  Huta 
Bankowa,  Huta  Batory,  Huta  Buczek,  Huta  Lucchini-Warszawa,  Huta  Labędy  and 
Huta  Pokόj.  According  to  the  Protocol  no  more  state  aid  could  be  granted  to  the 
Polish steel sector after 31 December 2003. According to the information available to 
the  Commission,  to  date  this  condition  has  been  fulfilled.  However,  as  regards  the 
operation  of  Huta  Buczek  Poland 
is  currently  clarifying  some  remaining 
inconsistencies. 

According to available information, the commitments related to capacity reductions 
in  2004  have  been  respected.  It  appears  from  the  information  at  the  Commission’s 
disposal  that  the  physical  liquidation  of  the  cold  strip  mill  in  Huta  Lucchini-
Warszawa  (30 000 tonnes)  has  taken  place  as  scheduled  in  December 2004.  Huta 
Bankowa  stopped  production  of  its  medium  section  mill  (60,000 tonnes)  in 
December 2004. 

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PLN/Euro Exchange rate 4.6595 (average December 2003) 

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The  European  Commission  also  notes  that  the  beneficial  market  conditions  have 
resulted  in  a  significant  increase  in  sales,  improved  operational  results  and  high 
levels of profits of most companies. This has had a positive effect on the companies’ 
viability  prospects  but  in  some  cases  it  seems  insufficient  for  them  to  achieve 
viability by the end of 2006.  

The second year of monitoring of restructuring of the Polish steel industry continues 
to show delays, sometimes significant, especially in relation to investments, which in 
the  case  of  some  companies  could  affect  their  future  viability  if  there  were  to  be  a 
significant market slowdown. In other cases the financial situation of the companies 
raises concerns despite the exceptionally favourable market situation.  

The  Commission  concludes  that  the  improved  operational  results  of  the  companies 
are a positive factor, but are mainly the result of the exceptionally favourable market, 
which  is  expected  to  stabilise  this  year.  The  privatisation  of  the  main  Polish  steel 
company,  which  was  concluded  in  March 2004  is  contributing  to  improve  the 
performance of the company. However, further efforts are still needed.  

the  Commission  recommends  all  companies 

Therefore, 
their 
restructuring efforts in the two remaining years, profiting from the increased turnover 
and  availability  of  cash,  in  particular  in  relation  to  investments,  employment 
reduction and cost reduction in order to be able to face a possible slowdown and to 
achieve viability by the end of 2006 as planned. 

intensify 

to 

4. 

FOLLOW-UP  

Based  on  the  findings  of  the  monitoring  of  the  restructuring  process  of  the  steel 
sector in the Czech Republic and in Poland during 2004, the Commission identifies 
improved  operational  results  of  most  companies.  This  is  mainly  the  result  of  the 
significantly  improved  market,  both  domestically  and  globally.  At  the  same  time  it 
underlines  that  the  monitoring  shows  in  some  cases  significant  delays  in  the 
implementation of the restructuring obligations and requirements as specified in the 
respective Protocols.  

The Commission considers that it is crucial for the beneficiary companies covered by 
the restructuring programmes, to intensify the restructuring process in 2005 and 2006 
so  as  to  allow  them  to  catch  up  with  the  delays  accumulated  last  year  in  the 
implementation  of  their  business  plans.  Major  emphasis  should  be  given  to 
investments,  necessary  to  foster  the  sale  of  higher  value-added  products,  thereby 
increasing  revenues.  Efforts  for  reducing  costs  and  improving  yields  need  to  be 
continued.  Furthermore,  the  authorities  are  invited  to  successfully  complete  the 
remaining privatisations. 

The  Commission  will  continue  to  closely  monitor  the  restructuring  process  and  in 
particular those areas where delays were identified and will report accordingly in its 
future progress reports.  

As it did in its previous progress report, the Commission reiterates that the provisions 
of the Protocols clearly stipulate that, apart from the aid foreseen in the Protocol, no 
further restructuring aid shall be granted by the Czech Republic and Poland to their 

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respective  national  steel  industries.  Any  additional  restructuring  aid,  to  beneficiary 
companies included in the Protocol, or to any other steel company not covered by the 
restructuring programmes, would be incompatible with the Treaty of Accession. The 
Commission has already in two cases commenced the necessary measures to verify 
whether any state aid has been illegally granted and needs to be recovered7. 

7 

The Commission opened on 19 May 2004 a formal procedure under Article 88 (2) EC-Treaty regarding 
a restructuring aid to Huta Czestochowa, a Polish steel producer not listed in Annex 1 of the Protocol 
N° 8  (case  C20/04  ex  NN 25/2004  OJ C 204  of  12.8.2004,  p. 6).  Moreover,  the  Commission  on 
14 December 2004  opened  another  formal  procedure  regarding  the  restructuring  aid  to  Třinecké 
Železárny, a Czech steel producer not listed in Annex 1 of the Protocol N°2 (case C45/04 OJ C 22 of 
27.1.2005) 

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