Report from the Commission to the Council and the European Parliament - Fourth monitoring Report on steel restructuring in the Czech Republic and Poland
Date: 2009-03-26
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, 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 

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1. 

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  21  and  Protocol  82  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 20043, 20054 and 20065. 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.  

2. 

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. 

2.1. 

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; 

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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 
COM(2006)814 final 

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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 company6. 

2.2. 

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 decision7. 

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  report8  were  dismantled 
during the first semester 2006.  

MSO executed the capacity change of the section mill in line with the Commission 
decision9.  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.  

2.3. 

Other key restructuring benchmarks 

2.3.1.  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  Protocol10  .  They  achieved  EBITDA 
situated between 20.2% and 23.4%, the target being 10.0% and EBIT between 17.1% 

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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 
Decision 3010/91/ECSC OJ L 286, 16.10.1991, p. 20 
COM(2006)814 final 
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 
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% 

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and  23.0%,  the  target  being  1.5%.  These  results  are  better  then  expected  in  the 
previous progress report11. 

2.3.2.  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. 

2.3.3.  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. 

2.4. 

Other Protocol requirements 

2.4.1.  Business/market strategies 

the  privatisation  and  facilitated  by 

A  significant  change  in  the  business  strategies  of  beneficiary  companies  has  been 
achieved. The abolition of barter trade represented a major achievement. Stimulated 
the  particularly  favourable  market 
by 
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.  

2.4.2. 

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. 

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COM(2006)814 final 

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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 aid12. 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. 

2.4.3.  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  directive13  have  already 
been granted for all steel making facilities in the sector.  

3. 

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. 

3.1. 

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  merger14)  received  92%  of  the  maximum 
amount agreed. 

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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 
Directive 96/61/EC, OJ L 257 of 10.10.1996, p.26 
Case No COMP/M.4137 - Mittal /Arcelor, Notification of 07/04/2006 pursuant to Article 4 of Council 
Regulation No 139/20041 

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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 AHW15. 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 issued16 a decision on misuse of state aid and ordered recovery. 

3.2. 

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  Decision17 
provisions.  In  the  particular  case  of  MSP  and  the  approved  change  of  its  business 
plan18 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. 

3.3. 

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.  

3.3.1.  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%. 

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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 
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 
Decision 3010/91/ECSC OJ L 286, 16.10.1991, p. 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 

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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.  

3.3.2.  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. 

3.3.3.  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.  

3.4. 

Other Protocol requirements 

3.4.1.  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. 

3.4.2. 

Investments 

Two  beneficiary  companies  Huta  Pokoj  and  Huta  Bankowa  met  their  investments 
the  approved 
targets.  Huta  Labedy  successfully  completed  about  75%  of 
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.  

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3.4.3.  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  Accession19  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. 

4. 

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. 

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OJ L 236 of 23.09.2003 p.875-905 

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