Report from the Commission to the Council and the European Parliament - Third monitoring Report on steel restructuring in the Czech Republic and Poland
Date: 2006-12-19
Institutions: European Commission
Subjects: Czechia, Poland, accession to the European Union, industrial restructuring, iron and steel industry, report, transitional period (EU)

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 19.12.2006 
COM(2006) 814 final 

REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT 

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

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1. 

INTRODUCTION 

This  report  describes  the  progress  made  by  Czech  and  Polish  steel  companies  in 
restructuring their operations and in line with the requirements set out in the specific 
chapters of the Treaty of Accession. As a consequence of national and international 
development  of  the  economies,  the  Czech  and  Polish  steel  producers  faced  a 
challenging situation in 2005 marked by decreased sales and prices compared to the 
previous year. Despite this trend, companies in both countries generated a reasonable 
level  of  income,  but  the  efforts  to  finalise  the  restructuring  process  need  to  be 
continued in order to allow steel mills to reach sustainable viability. 

Transitional  periods  were  negotiated  between  the  European  Union  and  the  Czech 
Republic and Poland to allow their steel companies to finalise their restructuring and 
their full integration into the internal market. This measure was necessary in order to 
allow  the  new  Member  States  to  grant  the  necessary  financial  support  on  the  basis 
that  beneficiaries  would  become  viable  in  the  long  term.  This  exemption  from  the 
general state aid rules is conditional on the fulfilment of certain obligations, both by 
the respective governments and by individual companies. The obligations are set out 
in Protocols incorporated in the Treaty of Accession with Protocol 21 referring to the 
restructuring  of the Czech steel industry and Protocol  82 to the restructuring of the 
Polish steel industry. 

The duration of the restructuring period is limited until 31 December 2006 by which 
date all companies shall be viable. The Protocols also set out detailed provisions for 
monitoring and reporting on these obligations, including that the Commission report 
to the Council.  

On  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  that  both  countries  benefit  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. 

In  its  second  Monitoring  Report  adopted  on  3  August  20054,  the  Commission 
identified  improved  operational  results  for  most  beneficiary  companies,  which  was 
mainly  the  result  of  significantly  improved  market  conditions.  At  the  same  time  it 
underlined  that  not  all  beneficiary  companies  were  able  to  fully  benefit  from  the 
exceptionally  good  market  environment  and  had  not  implemented  the  required 
restructuring  measures  with  the  consequence  that  they  remained  underperforming 
and  could  fail  to  become  viable  by  the  end  of  the  restructuring  period.  The 
Commission  invited  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 
COM(2005)359 final 

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This third monitoring report describes the progress achieved during 2005 and some 
trends in 2006; it contains the following elements: 

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

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).  This  chapter  also 
includes  a  reference  to  Commission  decisions  adopted  with  regard  to  the 
beneficiary companies within the framework of EU competition law. 

•  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. 

The  Commission  will  prepare  a  progress  report  to  the  Council  in  2007  which  will 
cover  progress  made  in  2006.  This  final  report  will  also  provide  an  overall 
assessment of the results achieved throughout the restructuring process (2003-2006). 

2. 

GLOBAL STEEL MARKET DEVELOPMENTS5 

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

On  the  international  steel  market,  the  high  rate  of  expansion  observed  in  2004 
continued in certain regions in 2005. Unprecedented production growth in China, but 
also in India, pushed the world steel output up by 6% to 1.129 billion tonnes in 2005. 
In the EU however, after a slight increase during the first quarter of 2005, production 
was  cut  back  in  response  to  falling  demand,  and  at  186  million  tonnes,  crude  steel 
production was 3.2% lower compared to 2004.  

This reflects the weakness of demand experienced on the EU market in 2005 which 
was mainly due to inventory cycle factors, and an initially high supply. As a result of 
the  decreased  offer  of  EU  steel  producers,  stocks  were  reduced  and  consequently 
contributed to steel price levels being maintained.  

In 2005, steel imports into the EU reached 26 million tonnes, about the same level as 
experienced the previous year, with a decrease during the second half as a result of 
weakening  prices.  The  main  exporting  countries  to  the  EU  remained  Russia, 
followed  by  Ukraine  and  Turkey,  while  China  moved  up  into  the  fourth  position. 
Steel exports from the EU reached 31.7 million tonnes which represents an increase 
of  6%  compared  to  2004.  This  increase  was  partly  supported  by  a  temporary 
depreciation  of  the  Euro  against  the  US  Dollar.  The  deliveries  to  China,  the  EU's 

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Sources : IISI and Eurostat  

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third  largest  export  market,  decreased  by  3%  in  2005,  a  trend  that  intensified  and 
reached a 31% decrease during the first quarter of 2006. 

During  the  first  quarter  of  2006,  EU  steel  production  registered  an  upwards  trend 
reflecting  positive  developments  in  the  EU  economy  supported  by  internal  demand 
and  investments.  Apparent  steel  consumption,  which  shrank  by  4.6%  in  2005,  is 
expected  to  increase  by  4%  in  2006.  Steel  prices  increased  again  during  the  first 
quarter of 2006 due to higher raw materials costs and stronger demand from the main 
consuming sectors. 

In  2005  there  was  a  clear  difference  between  the  results  in  the  former  EU15  and 
those registered in the new Member States: while the steel output of EU15 decreased 
by 1.9% compared to the previous year, the decrease of output in the new Member 
States was much steeper with a decrease of 12% for the Czech mills and 18.7% for 
the  Polish  ones.  However,  this  situation  needs  to  be  seen  in  the  context  of  the 
exceptional increase in steel production in both countries during 2004 as well as the 
initially high stocks and a decline in demand during the first half of 2005. Some key 
figures for the Czech and Polish steel markets are provided in the annex, tables 1A, 
1B, and 2. 

Despite this negative development, the operational benefits of Czech and Polish steel 
companies  remained  high  and  the  mills  were  generally  able  to  reduce  their 
indebtedness and speed up investments. This positive trend is expected to continue in 
2006.  The  most  recent  economic  and  industrial  surveys  for  2006  indicate  that  the 
expected recovery in the economy and steel consuming sectors should translate into 
further improvement in steel market conditions in the EU.  

3. 

RESULTS  OF  THE  MONITORING  PROGRAMMES  IN  THE  CZECH 
REPUBLIC AND POLAND 

3.1. 

Czech Republic 

Information obtained from various sources shows that the Czech Republic granted a 
total of CZK 8 166 million (€ 256.6 million6) of restructuring aid to the national steel 
sector,  which  is  approximately  58%  of  the  ceiling  of  CZK  14  147  million  as 
established  in  Protocol  2.  The  independent  assessment  shows  that  for  the  period 
covered,  no  further  restructuring  aid  was  granted  to  the  Czech  steel  sector  after 
31 December 2003.  The Commission  concludes on  this  basis  that  the  commitments 
regarding the granting of a maximum amount of state aid to the companies listed in 
Annex 1  of  Protocol 2  are  met.  The  beneficiary  companies  to  which  state  aid  was 
granted  were  Mittal  Steel  Ostrava  (MSO  -  previously  Nova  Hut),  Valcony  Plechu 
Fridek-Mystek (VPFM) and Vitkovice Steel (VS). 

With regard to the investments, the independent assessment of the progress achieved 
in  implementing  the  restructuring  measures  highlights  the  overall  low  level  of 
expenses and in particular the delay in some key investments being made and which 
are  essential  to  allow  the  beneficiary  companies  to  reduce  costs  and  to  operate  the 

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CZK/Euro exchange rate 32.329 (average Dec. 2003) 

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shift towards  a  higher added  value. However the assessment  shows  at  year end  the 
implementation  of  the  investment  plans  accelerating,  a  trend  which  is  expected  to 
continue.  In  the  meantime,  the  major  sources  of  delay,  namely  the  sluggish 
privatisation process and the impossibility of securing loans, have been overcome by 
the  beneficiary  companies,  which  are  therefore  expected  to  achieve  most  of  the 
planned  investments  by  the  end  of  the  restructuring  period,  except  in  the  case  of 
VPFM, as is reported in detail below.  

The Czech government executed its plan for privatising VS, which consisted initially 
of the sale of the shares of OSINEK s.a to VS, followed by a public tender. In July, 
the government approved  the sale  of  VS  to  Mastercraft  Ltd,  owned  by  the  Russian 
steel  and  mining  group  Evraz  Holding.  This  privatisation  was  achieved  by  the 
transfer of shares in November 2005. 

In  2005,  the  Czech  authorities  also  finalised  the  privatisation  process  of  VPFM, 
which  was  completed  by  the  full  integration  of  the  company  into  MSO.  The 
integration  legally  entered  into  force  in  the  second  quarter  of  2006.  VPFM  also 
updated its business plan in order to adjust it to the final industrial structure within 
MSO and to address the new market requirements.  

The  application  of  the  Commission’s  viability  test  shows  that  the  operational 
performance  of  VPFM  is  below  forecast  and  would  not,  under  normal  market 
conditions, achieve viability before the end of 2007. This is a consequence of the 18 
months delay in finalising the privatisation of VPFM, which is therefore not on track 
with its implementation of the restructuring measures. As, however, this company is 
now fully integrated into MSO, the Commission has agreed that its financial results 
need  no  longer  be  evaluated  independently.  In  applying  this  approach,  the 
independent  assessment  concludes  that  the  integrated  company  MSO  has  a  very 
healthy operating margin and comfortably achieves viability. 

In relation to changes of capacities, as stated in the previous report and pursuant to 
article 12 of Protocol 2, the Commission decided not to object to the postponement 
of  the  permanent  closure  of  the  hot  rolling  mills  N°1  and  N°2  of  VPFM  7  (70,000 
tonnes)  by  six  months  until  30 June 2006  with  production  being  stopped  on 
31 December 2005. The independent assessment shows that the requirement to cease 
production  has  been  respected  by  the  beneficiary  company  and  that  a  dismantling 
plan is being prepared. 

The  Czech  authorities  informed  the  Commission  by  the  end  of  2005  also  of  the 
technical details of the required capacity reduction at MSO. The company envisages 
achieving  the  capacity  reduction  provided  for  in  Protocol  2  (270,000  tonnes)  by 
means  of  a  substantial  overhaul  of  its  heavy  section  mill  instead  of  a  greenfield 
investment. MSO also revised its investment plans and notified the new plans to the 
Commission for approval, which was recently confirmed8.  

As  a  general  recommendation,  the  Commission  invites  the  Czech  companies  to 
continue  their  efforts  in  restructuring  their  production  facilities  with  the  main 

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Commission Decision of 2.3.2005, OJ of 16.07.2005, C176/12 
Commission Decision of 13.09.2006, OJ of 18.11.2006, C280/4 

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emphasis being put on investment related yield and energy efficiency improvement 
as well as changes in working practices and increased productivity. 

3.2. 

Poland 

As  previously  reported  and  according  to  the  information  obtained  by  the 
Commission,  Poland  is,  as  regards  the  companies  listed  in  Annex 1  of  Protocol 8, 
respecting the commitments outlined in the Protocol, concerning state aid granted, in 
so far as the maximum ceiling is respected. In the period 1997-2003, Poland granted 
a total amount of PLN 2 750 million (€ 590 million) 9, which is approximately 80 % 
of  the  total  amount  of  PLN  3  387  million  allowed  under  the  Protocol.  The 
beneficiary  companies  to  which  state  aid  could  be  granted  in  accordance  with  the 
Protocol are: Mittal Steel Poland (MSP - previously Polskie Huty Stali/PHS), Huta 
Bankowa, Huta Buczek, Arcelor Huta Warszawa (AHW - previously Huta Lucchini-
Warszawa),  Huta  Labędy  and  Huta  Pokόj10.  According  to  the  Protocol  no  further 
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  Technology  Buczek,  the 
Commission  is  currently  clarifying  some  remaining  inconsistencies  in  a  formal 
investigation procedure under Article 88 (2)11. 

For Huta Czestochowa, which was not included in the list of beneficiary companies 
as  specified  in  Annex  1  of  Protocol  8  and  considered  bankrupt  under  the  Polish 
National  Restructuring  Programme  as  approved  in  2003,  the  Commission  launched 
an investigation into illegally granted state aids and concluded12 in June 2005 that the 
amount of EUR 5 million must be reimbursed. In October 2005 the Polish authorities 
approved  the  transfer  of  100%  of  shares  from  Huta  Czestochowa  to  Ukraine’s 
Industrial Union of Donbass. 

The difficult market conditions in 2005 resulted in most beneficiaries’ sales volumes 
falling  significantly  below  forecast.  Consequently,  the  operating  margins  of  most 
companies  were  lower  than  planned.  Nevertheless,  despite  lower  demand,  some 
companies saw a price rise reflecting the higher processed nature of their products. 
The  financial  results  did,  however,  allow  most  companies  to  pursue  and  accelerate 
their restructuring efforts during 2005. 

During  2005,  Poland  informed  the  Commission  of  the  intention  to  change  the 
individual business plans of all beneficiary companies in order to adapt them to the 
new market needs and to the new industry structures. In this context, the Commission 
launched a preliminary investigation as regards the changes proposed by MSP which 
mainly  focussed  on  the  installation  of  a  new  hot  strip  mill  instead  of  substantial 
modernisation of the existing one. With the undertaking of dismantling the existing 
mill and maintaining the capacity level, the Commission concluded that the changes 
were compatible with the protocol obligations and decided on the basis of point 10 of 

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PLN/Euro Exchange rate 4.6595 (average December 2003) 
Huta Andrezj and Huta Batory have been taken off the list of beneficiary companies due to liquidation 
proceedings 
Commission Decision C(2006) 2093, OJ 2006 C196/23 
Commission Decision C(2004) 1962 

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Protocol  N°8  to  approve13  the  changes.  Moreover,  the  Commission  did  not 
investigate further the updated plans of Huta Bakowa, Huta Labedy and Huta Pokój, 
but  will,  in  view  of  the  minor  changes  in  the  plans,  continue  to  monitor  the 
restructuring  on  the  basis  of  the  updated  business  plans.  Only  in  the  case  of  AHW 
was the Commission not yet able to approve the plan and a decision is still pending. 

According  to  the  available  information,  the  commitments  related  to  capacity 
reductions in 2005 have been respected. The independent evaluation shows that Huta 
Bankowa  stopped  production  of  its  medium  section  mill  (60,000 tonnes)  in 
December 2004 and that the mill was physically liquidated in December 2005, a year 
ahead of the planned date. The hot strip mill at MSP-Krakow (700,000 tonnes) which 
stopped operations in 2002 was permanently dismantled in the first quarter of 2005. 
In the same plant, the cold sheet mill (650,000 tonnes) was reported to have ceased 
production  in  December  2005,  while  the  cold  strip  mill  at  the  MSP-unit  in 
Swietoclowice (36,000 tonnes) was dismantled by December 2005. Numerous other 
non  viable  and  obsolete  production  facilities  not  mentioned  in  the  Protocol  were 
closed or dismantled by beneficiary companies during 2005. 

Due to delays in the realisation of the investment programme, MSP did not finalize 
the  changes  in  production  capacities,  which  should  occur  by  modernising  the  wire 
rod  mill  in  Sosnowiec  (200,000  tonnes)  and  constructing  an  organic  sheet  coating 
line in Swietoclowice (100,000 tonnes). 

The  independent  evaluation  shows  that  two  beneficiary  companies  may  not  reach 
viability by the end of the restructuring period. The first one concerns AHW which 
has  been  owned  by  Arcelor  since  September  2005  following  the  transfer  of  shares 
from Lucchini. On the basis of its own assumptions, it is not on track to pass the EC 
viability  test  in  2006.  The  reorientation  of  the  company’s  investment  plan  will  not 
allow  it  to  significantly  improve  its  yield  and  efficiency  in  the  short  term.  This  is 
why  the  Commission  is  still  considering  how  best  to  deal  with  the  revised 
investment.  Secondly,  Technology  Buzek  will  not  be  viable  by  the  end  of  2006. 
Despite  the  fact  that  it  has  realised  parts  of  its  investment  plan,  the  company  has 
failed to reduce costs and outstanding liabilities.  

On the basis of the elements provided above, the Commission recommends that all 
beneficiary  companies  intensify  their  restructuring  efforts  in  the  remaining  months. 
The emphasis shall be put on investments related cost reduction as well as improved 
working practices in the field of purchase and sales; productivity increases need to be 
continued. 

4. 

FOLLOW-UP  

The steel intense economies of the Czech Republic and Poland, as well as access to 
the  EU  market,  are  substantial  advantages  and  should  guarantee  the  success  of 
beneficiaries over the coming years. However the restructuring measures as defined 
in the restructuring programmes and business plans will allow beneficiary companies 
in  Czech  Republic  and  Poland  to  concentrate  on  necessary  improvements  and  to 

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Commission Decision C(2005) 2687 OJ 2006 C12/2 

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strengthen their operational performance. Therefore these measures need to be fully 
implemented  so  as  to  make  the  companies  more  resistant  to  a  possible  economic 
downturn. This concerns in particular those companies which failed to pass the EC 
viability test as reported above. 

The  Commission  will  continue  to  monitor  the  implementation  of  the  transitional 
arrangements in close cooperation with the respective authorities and companies. In 
2007,  it  will  proceed  with  an  extended  evaluation  of  the  results  achieved  and  the 
extent  to  which  the  National  Restructuring  Programmes  and  Individual  Business 
Plans  have  been  implemented.  In  this  assessment  it  will  check  in  particular  the 
intensity  and  relevance  of  state  aid  granted  against  the  restructuring  measures 
implemented. As previously indicated, should the findings be unsatisfactory, it will 
invite the respective authority to reclaim the reimbursement of appropriate amounts 
of state aid. A final report will be presented to the Council in 2007. 

The  Commission  also  recalls  that  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.  

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Steel Market in Czech R.
 ( Unit million t. )

Table 1A

7

6

5

4

3

2

1

0

Production

Imports Total
Intra and
Extra EU

Exports Total
Intra and
Extra EU

Consumption

Table 1B

10

8

6

4

2

0

Table 2

Steel Market in Poland
 ( Unit million t. )

Production

Imports Total
Intra and
Extra EU

Exports Total
Intra and
Extra EU

Consumption

% Czech R. and Poland in Total Production of Steel the EU

Czech R.
3%

Poland
5%

2003

2004

2005

2003
2004
2005

Others EU
92%

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