Report from the Commission to the Council and the European Parliament - First monitoring report on steel restructuring in Bulgaria and Romania
Date: 2008-08-12
Institutions: European Commission
Subjects: Bulgaria, Romania, State aid, cessation of trading, control of State aid, industrial restructuring, iron and steel industry

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 12.8.2008 
COM(2008) 511 final 

REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT 

First monitoring report on steel restructuring in Bulgaria and Romania 

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1. 

INTRODUCTION 

1.1. 

The context 

This  report  describes  the  progress  in  restructuring  made  by  Bulgarian  and  Romanian  steel 
companies that are subject to the requirements set out in the specific chapters of the Europe 
Agreement and the Treaty of Accession respectively. More specifically these obligations, both 
for the respective governments and for individual companies, are set out in: 
–  Protocol  2  to  the  Europe  Agreement1  which  refers  to  the  restructuring  of  the  Bulgarian 
steel industry and EU-Bulgaria Association Council Decision 3/2006 dated 29 December 
20062 amending the Protocol 2 to the Europe Agreement, and  

–  Annex  VII  of  the  Accession  Treaty3  which  refers  to  the  restructuring  of  Romanian  steel 

industry. 

These provisions outline the conditions for a transitional regime for state aid given for steel 
restructuring. Although state aids for restructuring the steel industry are expressly forbidden 
under EU law, the European Union agreed on transitional arrangements for according certain 
aids  which  would  allow  these  new  Member  States4  to  complete  this  task  while  minimising 
social  and  market  disturbance.  Strict  conditions  are  attached  to  the  granting  of  this  aid, 
notably the achievement of viability by the companies concerned. 

The duration of the arrangements applicable to the transitional period lasts until 31 December 
2008.  The  above  mentioned  Protocol  and  Annex  also  set  out  detailed  provisions  for 
monitoring and reporting on the associated obligations. This report to the Council is part of 
these  provisions,  and  refers  to  the  results  achieved  in  the  year  2006.  Where  the  relevant 
information is available for 2007, this is also provided.. 

1.2.  Major elements of the restructuring exercise 

The  exception  to  the  EU  rules  on  state  aid  was  conditional  on  the  fulfilment  of  certain 
obligations,  negotiated  between  the  EU  and  Bulgaria  and  Romania.  The  precondition  for 
granting  state  aid  was  the  preparation  of  National  Restructuring  Programmes  (NRP) 
consisting  of  a  national  steel  sector  plan  and  individual  business  plans  (IBP)  for  each 
benefiting company. The purpose of the steel restructuring programmes was to show that the 
conditions  for  granting  of  restructuring  aid  are  observed  and  that  the  NRP  leads  to  the 
viability of companies.5 

In both countries, the NRP included also companies which had been in difficulties but were 
not  beneficiaries  of  past  or  future  state  aid.  In  many  cases  non-beneficiary  companies  have 
completed their restructuring in 2006 and became viable and profitable. 

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OJ L 358, 31.12.1994, p. 3–222 
UE-BG 1909/06 - Adoption decision 3/2006 
OJ L 157, 21.06.2005, p. 3–393 
Similar process has just been finished for Czech Republic and Poland, where the Commission 
monitored and reported on the restructuring until the end of 2006. 
Viability  implies  that  the  companies  return  to  sustainable  profitability  at  the  end  of  the  restructuring 
period.  According  to  longstanding  practice  the  Commission  considers  that  the  companies  should 
achieve:  
- a reasonable operating margin: i.e. an EBITDA over turnover of at least 10% for non-integrated steel 
companies and 13.5 % for integrated mills);  
- a minimum return of turnover on own capital: we are interpreting this as meaning a minimum return 
on sales, i.e. the EBIT must be at least 1.5% of the turnover). 

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Based on the information provided by Bulgarian and Romanian authorities in their 6-monthly 
reports,  the  Commission  has  assessed  the  progress  in  the  implementation  of  measures 
envisaged in the NRPs and companies’ IBPs. The scope of information provided includes data 
on  production,  capacity,  investments,  employment,  productivity,  financial  results  and  the 
environment. 

The steel sector in Bulgaria accounts for 2% of total industry employment and 3% of GDP, 
and in Romania for 4% of total industry employment and 4% of GDP6. 

2. 

RESULTS  OF  THE  MONITORING  PROGRAMMES  IN  BULGARIA  AND 
ROMANIA 

2.1. 

Bulgaria 

The only company to undergo the restructuring process with the help of public funding was 
Kremikovtzi  AD.  Two  other  companies  included  in  the  NRP  managed  to  successfully 
complete the restructuring process in 2006 without recourse to state aid. 

In  2006  Bulgaria  indicated  that  Kremikovtzi  AD,  although  it  did  not  need  more  aid  than 
previously authorised, would not be in a position to complete its restructuring plan before 31 
December 2006. It therefore submitted a modified restructuring programme and business plan 
to the Commission, in which it proposed the extension of their implementation until the end 
of  2008.  The  assessment  prepared  by  the  Commission  indicated  that  the  implementation  of 
the plan would allow the company concerned to reach viability and meet the requirements of 
Protocol  2.  Based  on  this  assessment,  the  EU-Bulgaria  Association  Council  by  its  Decision 
3/2006 of 29 December 2006 has amended the Protocol 2 accordingly.  

As regards the overall amount of aid allowed, according to the information provided by the 
Bulgarian authorities, for the period 1993 – 2005 the total amount of state aid overall, which 
was provided in Bulgaria is BGN 432,613,000 (222 million EUR7); no state aid was granted 
in 2006. The figure of total state aid granted is in line with the Protocol ceiling.  

Most (BGN 393 556 517 (202 million EUR)) of the amount allowed was disbursed in 1999 to 
help  the  beneficiary  company  –  Kremikovtzi  AD  -  to  continue  production.  The  aid  was 
focused primarily on financial restructuring to address the debt burden of the company. The 
rest of the allowed amount was granted to the company in 2004 in the form of rescheduled 
debts to gas and electricity suppliers. 

2.1.1.  Monitoring of the key restructuring benchmarks in the Bulgarian steel sector  
According to the provisions of the EU Common Position – Chapter 6: Competition8 and EU-
Bulgaria Association Council Decision 3/2006: 

–  the total net capacity reduction by the benefiting company shall be of 0.5 million tonnes, 

–  the  progress  of  the  restructuring  of  the  companies  shall  be  assessed  by  the  Commission 

using its viability test, 

–  the restructuring shall lead to the improvement of efficiency and effectiveness of business 

management. 

Capacity reduction 

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Eurostat, governments’ reports 
BGN/Euro exchange rate 1.9487 (average June 2004) 
EU Common Position – Chapter 6: Competition, adopted in June 2004, 10232/04 

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The closure of the wire rod mill in Kremikovtzi which has been planned as a compensatory 
measure  by  the  Bulgarian  government  for  the  restructuring  aid  granted,  has  been 
implemented. Production in the billet mill has been discontinued and the dismantling has been 
completed. The rod mill is expected to be permanently destroyed in compliance with relevant 
EU legislation9 by the end of the restructuring period. 

Viability 

The  main  goal  of  the  restructuring  process  and  of  all  actions  envisaged  under  the  NRP  and 
Kremikovtzi's IBP is to achieve the viability of the company under normal market conditions. 
As regards results achieved compliance with EC viability test benchmarks at the end of 2006 
was, in case of Kremikovtzi, very far from being reached.  

On the basis of the assessment of the data available at the end of 2006, the Commission has 
identified that there have been serious delays in the completion of the investments planned in 
the  company's  IBP.  This  is  likely  to  have  a  knock-on  effect  on  the  company’s  ability  to 
produce  higher  added-value  products.  This  ability  is  a  condition  to  increase  revenues  from 
sales and generate profits. Therefore, the operational performance has resulted in a substantial 
loss  and  the  company  has  achieved  worse  viability  ratios  than  planned  in  the  IBP.  The 
financial performance has reached a critically low level. 

Productivity 

The productivity level in Kremikovtzi remains well below EU and international standards, as 
the  low  levels  of  capacity  utilisation  hamper  advances  in  labour  productivity  in  spite  of 
gradual reductions in staff numbers. The productivity level is only 30% of that of comparable 
European steel plants. Although some improvements in productivity are still expected to take 
place as a result of the closure of the blooming mill during the second half of 2007 and the 
beginning  of  2008,  the  current  level  of  30%  is  considered  to  be  very  low  and  will  have  a 
negative impact on the efficiency and effectiveness of the company’s business. . 

Cost reductions 

In  2006  the  results  obtained  by  way  specific  cost  reduction  measures  at  Kremikovtzi  were 
mostly offset by the increase in overall costs reflecting the general trend, which were higher 
than expected. In the case of Kremikovtzi for 2006 purchase prices and specific consumption 
of  raw  materials  exceeded  the  IBP  projections.  In  some  areas  such  as  energy  and  materials 
consumption, the necessary cost reductions can only be achieved in the longer term through 
investment  in  modernisation.  Due  to  a  lack  of  capital,  amounts  invested  were  below  the 
expected values. In Kremikovtzi in 2006, taken together all the investments represented 80% 
of the IBP target for the year. At the same time environmental investments amounted to 75% 
of the IBP target. 

2.1.2.  Environmental protection 

The  Treaty  of  Accession  specifies  that  by  the  time  of  accession  Bulgarian  steel  companies 
need to comply with the relevant EU legislation in the field of environmental protection, and 
in  particular  to  make  the  necessary  investments  to  ensure  such  compliance.  In  that  context 
Bulgaria applied for a transitional period for the application of the IPPC directive10. By way 
of  derogation,  Kremikovtzi  should  have  obtained  a  fully  coordinated  permit  by  30  October 
2007 containing a binding timetable for the achievement of full compliance by 31 December 

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Decision 3010/91/ECSC OJ L 286, 16.10.1991, p. 20 
Council Directive 96/61/EC of 24 September 1996, OJ l257, 10.10.1996, p.26 

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2011.  This  has  not  yet  been  obtained  and  therefore  the  company  appears  to  be  operating 
without an environmental permit after its last permit expired. 

2.2. 

Romania 

Annex VII of the Accession Treaty identifies the maximum state aid allowed for each of the 
following  six  steel  producing  companies:  Mittal  Steel  Galati,  accounting  for  about  60%  of 
crude  steel  production  in  Romania,  Mittal  Steel  Hunedoara,  Mechel  Targoviste,  Mechel 
Campia Turzi, TMK Resita and Tenaris Donasid Calarasi.  

According to the information at the Commission’s disposal, Romania granted a total amount 
of ROL 49 985 billion (€ 1 270 million 11) of restructuring aid in the period 1993-2004. These 
amounts  of  total  state  aid  granted  are  in  line  with  the  ceiling  specified  in  Annex  VII  of  the 
Accession Treaty. 

The  Romanian  government  prepared  the  NRP  to  structure  and  limit  the  state  aid  granted  to 
steel companies to the absolute minimum. The implementation of the NRP was an important 
element to assist the companies in achieving viability. The aid focused primarily on financial 
restructuring  to  address  the  debt  burden  of  the  companies  so  as  to  facilitate  their  access  to 
financing and their acquisition by a strategic investor. The aid granted is deemed sufficient to 
help the companies to achieve viability by the end of the restructuring period. 

As regards potential additional state aid elements investigated by the Romanian Competition 
Council with reference to Mittal Steel Galati, it should be noted that the company reimbursed 
in  March  2006  all  the  contested  amounts  corresponding  to  the  principal  and  interest 
concerned.  Thereafter,  the  Romanian  Competition  Council,  by  Decision  Nr.  56/13.03.2006, 
closed the investigation and declared Mittal Steel Galati free of any doubtful state aid. 

2.2.1.  Monitoring of the key restructuring benchmarks in the Romanian steel sector  

The provisions of the Treaty of Accession for Romania established that: 

–  state aid shall lead to viability of the companies under normal market conditions and shall 

be limited to what is necessary, 

–  the  total  net  capacity  reduction  by  the  benefiting  companies  shall  be  a  minimum  of  2.05 

million tonnes, 

–  the  progress  in  the  restructuring  of  the  companies  shall  be  assessed  by  the  Commission 
using  the  restructuring  benchmarks  set  out  in  the  appendix  to  the  Treaty  of  Accession 
(viability, productivity and cost reductions) 

Capacity reduction 

It appears from the information at the Commission’s disposal that capacity closures planned 
for 2006 – the medium and special sections rolling mill in TMK Resita - have taken place as 
scheduled.  The  same  company  stopped  production  one  year  earlier  than  required  by  the 
Treaty in the case of the heavy sections rolling mill. In Mittal Steel Hunedoara the closure of 
the medium section mill took place in 2006 ahead of planned in the 1st quarter of 2008. Once 
the  above  installations  are  permanently  destroyed12,  Romania  will  fulfil  its  obligations  on 
capacity closures stemming from the Treaty of Accession. 

There were also additional closures of obsolete capacity at three companies, not provided for 
by the Treaty of Accession, namely, the blooming rolling mill at Mittal Steel Hunedoara , the 

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ROL/Euro Exchange rate 39358.0 (average December 2004) 
Decision 3010/91/ECSC OJ L 286, 16.10.1991, p. 20 

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rolling mill for semi finished heavy sections and rails at Tennaris Donasid Calarasi,, and the 
roughing rolling mill at Mechel Campia Turzii. 

Viability 

The  main  goal  of  the  restructuring  process  and  of  the  measures  envisaged  in  the  NRP  is  to 
achieve  the  viability  of  the  beneficiary  companies  to  enable  them  to  operate  under  normal 
market conditions. So far, the monitoring has shown that some of the measures envisaged to 
achieve  viability  of  the  benefiting  companies  have  been  initiated,  such  as  closure  of 
inefficient  capacities,  changes  in  employment  strategy  and  organisational  and  management 
modernisation.  

In 2006 while one company, namely, Mittal Steel Galati had already met the two benchmarks 
developed  by  the  Commission,  the  sustainability  of  the  company  can  only  be  assessed  in  a 
longer term perspective.  

In  the  two  cases  of  Mechel  Campia  Turzii  and  TMK  Resita  the  forecasts  prepared  by 
companies  and  regularly  updated  have  shown  that  the  companies  do  not  expect  full 
compliance  with  the  viability  criteria  at  the  end  of  the  restructuring  period.  Those  two 
companies should, accordingly, consider the implementation of specific remedial action plans 
to redress the situation. 

Productivity 

The total productivity rate in 2006 in the companies under analysis was below EU standards. 
Although the level of employment in the whole sector was much lower than the provisions of 
the NRP, the  level of productivity  in the beneficiary companies was only about  50% of the 
similar indicator in an average efficient European plant. According to the companies IBPs, the 
aggregated forecast for 2008 is still only about 60% of the average efficient European plant 
productivity. Efforts still need to be intensified if the necessary increase in productivity is to 
be achieved as required by the Protocol. 

Cost reductions 

Monitoring  shows  that  in  2006  many  beneficiary  companies  were  not  able  to  achieve  a 
significant  decrease  in  total  costs,  in  spite  of  investment  programmes  introduced  and 
implemented. This could be as a result of the rise in world prices of raw materials and in most 
of the companies’ high consumption raw materials that had the direct impact on costs. Values 
for  2006  and  revised  update  exceed  international  standards  of  energy  and  materials 
consumption. Progress has been achieved in the reduction in employment costs in almost all 
beneficiary  companies.  However,  in  Mittal  Steel  Galati  and  Hunedoara  there  appears  to  be 
scope for further improvement. 

2.2.2.  Environmental protection 

The  Treaty  of  Accession  specifies  a  transitional  regime  in  the  case  of  environmental 
legislation  for  Romania  and  establishes  a  list  of  installations  for  which  derogation  from 
compliance  with  the  IPPC  directive  has  been  granted  until  December  2014.  The  steel 
companies listed are Mittal Steel Galati, Mittal Steel Hunedoara, and Mechel Campia Turzii. 
The  other  companies  are  not  included  in  the  list  of  companies  to  benefit  from  such  a 
transitional  period  and  therefore  have  had  to  comply  with  this  legislation  by  the  date  of 
accession.  

Companies given the benefit of deferral of compliance under the IPPC directive have carried 
out the environmental investments according to the programme, with the exception of Mittal 
Steel Hunedoara.  

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The amount invested in 2006 for environmental purposes represents over 120% of the forecast 
level  of  the  NRP  thanks  to  bigger  than  planned  environmental  investments  in  Mittal  Steel 
Galati  and  TMK  Resita.  Two  other  companies,  Mechel  Targoviste  and  Mittal  Steel 
Hunedoara, did not fulfil their IBP targets and invested in environmental protection much less 
then planned. 

3. 

PRINCIPAL CONCLUSIONS 

Following the presentation of NRPs, important steps in the restructuring of the steel industry 
in  both  countries  have  been  taken.  Existing  plants  are  being  modernised  so  as  to  adapt 
production  to  the  quality  of  steel  required  by  the  EU  and  export  markets.  Changes  in 
management  structures  took  place  in  parallel  with  the  ongoing  concentration  processes, 
especially in Romania.  

However,  in  spite  of  these  efforts,  the  Commission  has  identified  delays,  sometimes 
significant,  in  the  implementation  of  the  obligations  and  requirements  as  specified  in  the 
respective  Decisions  and  Protocols.  The  Commission  will  in  its  next  and  final  monitoring 
report  thoroughly  analyse  whether  the  problems  identified  regarding  the  implementation  of 
the  restructuring  plans  are  mainly  due  to  the  firms  themselves  or  whether  they  have  to  be 
attributed  to  exceptional  and  unforeseeable  circumstances  for  which  the  company  is  not 
responsible.  This  will  include  a  further  assessment  of  the  possible  impact  of  recent  raw 
materials price increases. 

3.1. 

Bulgaria 

At  the  moment,  the  only  beneficiary  company  concerned,  Kremikovtzi,  is  entering  into  a 
situation of serious non-compliance with its commitments to the Bulgarian government and to 
the Commission. The non-compliance concerns technological and environmental investments, 
sales, cost reduction and productivity which affect the viability, efficiency and effectiveness 
of the business management. 

Moreover,  the  Commission  encountered  difficulties  in  obtaining  appropriate  and  consistent 
data related to the restructuring of the company. 

Even  in  the  exceptionally  favourable  current  world  steel  market  conditions,  achievement  of 
viability under the conditions prescribed by the end of 2008 looks a very difficult challenge 
for  the  company.  The  Commission  will  closely  monitor  the  areas  where  delays  and  lack  of 
compliance were registered and will report accordingly in its future progress reports. 

3.2. 

Romania 

In Romania the monitoring process is being carried out with sufficient respect for the mutual 
obligations of the government and the companies concerned. Focusing on 2006 results, all six 
companies  have  improved  their  results  comparing  to  the  previous  year.  Nevertheless,  the 
degree  of  compliance  with  the  viability  benchmarks  is  falling  behind  the  commitments 
adopted in the respective IBPs. 

In  order  to  achieve  viability,  restructuring  efforts  for  all  companies  should  be  intensified  in 
particularly  with  regard  to  implementation  of  the  cost  reduction  strategies,  improvement  of 
their  business  management  and  sales  strategies  in  order  to  profit  from  favourable  market 
conditions.  These  are  fundamental  requirements  for  achieving  the  objectives  of  the  IBPs  in 
2007 and in 2008. 

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3.3. 

Follow up 

The Commission considers it necessary to intensify the restructuring process so as to enable 
the beneficiary companies to achieve viability in 2008. 

The  Commission  recalls  that  the  provisions  of  the  EU-Bulgaria  Accession  Council  and 
Protocol  to  the  Accession  Treaty  with  Romania  clearly  stipulate  that,  other  than  the  aid 
planned,  no  further  state  aid  for  restructuring  shall  be  granted.  Any  additional  restructuring 
aid  would,  therefore,  be  incompatible  with  their  respective  provisions.  In  the  case  of  non-
compliance  with  the  conditions  applicable  to  state  aid  already  granted,  namely,  non-
compliance with EC viability benchmarks, the Commission will take the necessary measures 
to recover any such aid. 

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