Report from the Commission to the Council and the European Parliament - Second monitoring Report on steel restructuring in Bulgaria and Romania
Date: 2009-04-01
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, 1.4.2009 
COM(2009) 146 final 

REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT 

Second monitoring report on steel restructuring in Bulgaria and Romania 

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1. 

INTRODUCTION 

This  report  describes  the  restructuring  progress  made  in  2007  by  Bulgarian  and  Romanian 
steel  companies  that  are  subject  to  the  requirements  set  out  respectively  in  the  specific 
chapters of the Europe Agreement and the Treaty of Accession: 
–  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  (extending  the  restructuring 
period until the end of 2008), and  

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

industry. 

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  States  to  complete  this  task  while  minimising  social  and 
market disturbance.  

The above mentioned Protocol and Annex outline the conditions for a transitional (until the 
end of 2008) regime for state aid given for steel restructuring. These provisions also set out 
detailed obligations for the Commission for monitoring and reporting.  

On 12 August 2008, the Commission adopted its first monitoring report referring to the year 
20064. This new report refers to the results achieved in the year 2007 and when appropriate 
also  to  important  developments  which  occurred  in  2008.  The  current  report  is  based  on  the 
data  provided  by  the  respective  authorities,  as  well  as  on  evaluation  carried  out  by 
independent consultant. It will be followed by a last report in 2009 covering the developments 
in 2008. 

2. 

RESULTS  OF  THE  MONITORING  PROGRAMMES  IN  BULGARIA  AND 
ROMANIA 

2.1. 

Bulgaria 

The  only  company  covered  by  the  National  Restructuring  Programme  (NRP)  and  the 
monitoring scheme is Kremikovtzi.  

a) Situation in 2007 

2.1.1. Monitoring of the key restructuring benchmarks 

State aid 

Most  of  the  amount  allowed  was  disbursed  in  1999  and  the  remaining  was  granted  to  the 
company  in  2004  in  the  form  of  rescheduled  debts  to  national  gas  and  electricity  suppliers. 
Kremikovtzi paid these liabilities regularly in 2007. 

According to information made available to the Commission, no state aid was granted to steel 
companies other than Kremikovtzi. 

Capacity reduction 

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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 
COM/2008/511 

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The  blooming/slabbing  mill  was  expected  to  be  closed  in  July  2007,  but  according  to 
information provided by the Bulgarian authorities, operations were stopped in February 2008 
and the mill is in the process of being dismantled. The rod mill was stopped in 2007 and is 
also  being  dismantled.  It  is  expected  that  both  mills  will  be  permanently  destroyed  in 
compliance with relevant EU legislation5 by the end of the restructuring period. 

Viability 

The  Commission  encountered  difficulties  in  obtaining  appropriate  and  consistent  financial 
data related to the company. Despite repeated requests, the company has not provided to the 
Bulgarian  authorities  and  to  the  Commission  final  complete  information  related  to  the  full 
year  2007,  and  also  about  the  evolution  of  the  operations  in  the  first  half  of  2008.  The 
incomplete financial statements showed however that the financial performance in 2007 has 
been negative, which constitutes non-compliance with the viability commitments6 adopted in 
the Individual Business Plan (IBP). The results -11.1% EBITDA and -20,7% EBIT are even 
worse than in 2006. 

Productivity 

The productivity level did not improve much compared to 2006 and reached only 30% of that 
of  comparable  European  steel  plants.  This  has  a  negative  impact  on  the  efficiency  and 
effectiveness of the company’s business.  

Cost reductions 

Even though actual raw materials’ purchasing prices in 2007 were in accordance with market 
developments,  they  were  negatively  affected  by  the  lack  of  financial  resources  and  thus  by 
stricter  conditions  imposed  by  raw  materials  suppliers.  Actual  values  were  on  average  32% 
over the IBP estimations.  

Due to low capacity utilisation in 2007 (average 50%) Kremikovtzi did not manage to reduce 
the  consumption  of  raw  materials  per  unit  produced.  In  some  areas  such  as  energy  and 
materials  consumption,  the  necessary  cost  reductions  could  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  2007  technological  investments  represented 
38% of the IBP target for the year. At the same time environmental investments amounted to 
only 10% of the IBP target. 

b) Developments in 2008 

In  August  2008  the  Commission  was  informed  by  the  Bulgarian  authorities  about  the 
declaration of insolvency of Kremikovtzi. 

2.1.2. Environmental protection 

2.1.1. 
Bulgaria applied for a transitional period for the application of the IPPC directive7. By way of 
derogation, Kremikovtzi should have obtained a fully coordinated permit by 30 October 2007 

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Decision 3010/91/ECSC OJ L 286, 16.10.1991, p. 20 
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  gross  operating  result:  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 minimum return: i.e. the % EBIT (earnings before interest and taxes) of turnover of at least 1.5% 
Council Directive 96/61/EC of 24 September 1996, OJ l257, 10.10.1996, p.26 

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containing a binding timetable for the achievement of full compliance by 31 December 2011. 
In  April  2007  the  EMEPA  presented  its  decision  to  not  issue  an  integrated  permit  to 
Kremikovtzi. The company resubmitted an application in May 2007. The official deadline to 
issue a permit is not later than 21.10.2008. 

2.2. 

Romania 

2.2.1.  Monitoring of the key restructuring benchmarks  

State aid 

According  to  information  made  available  to  the  Commission,  no  state  aid  granted  to  steel 
companies other than those listed in Annex VII of the Accession Treaty8 has been given. 

Capacity reduction 

It appears from the information at the Commission’s disposal that capacity closures planned 
for 2007 – semis mill in Arcelor Mittal Hunedoara - have taken place as scheduled. Cessation 
of  production  on  the  light  sections  and  wire  rod  mills  in  Hunedoara  took  place  at  the 
beginning of 2008, due to the change in the industrial strategy. Once the above installations 
are permanently destroyed9, Romania will have fulfilled its obligations on capacity closures 
stemming from the Treaty of Accession. 

There was also an additional closure of obsolete capacity at TMK Resita, not provided for by 
the Treaty of Accession, namely the blooming mill, which was closed at the end of 2007. 

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  beneficiary  companies  have  been  initiated,  such  as  closure  of 
inefficient  capacities,  changes  in  employment  strategy  (spin-off  of  auxiliary  activities, 
outsourcing of non-core activities) and organisational and management modernisation.  

Two companies, ArcelorMittal Hunedoara and Mechel Campia Turzii, incurred major losses 
in 2007, worse than their 2006 performances. The remaining four companies increased their 
operating revenues as compared to 2006. All six have EBITDA situated between -2.2% and 
12.8%, the target being 10.0% and EBIT between -6.0% and 7.3%, the target being 1.5%. The 
degree  of  compliance  with  the  viability  benchmarks,  for  all  companies,  was  still  falling 
behind the committed targets adopted on the respective IBPs. 

Productivity 

The actual and forecast employment levels in the steel industry were achieved on schedule. 
The  employment  level  in  the  steel  sector  in  2007  (38.186  persons)  represented  85%  of  the 
NRP forecast, taking into account the average annual staff level. According to the information 
provided by the companies monitored, the workforce level in 2008 would account for 78% of 
the year’s objective. However the average productivity of beneficiary companies is still only 
50%  of  international  standards10.  The  productivity  achieved  by  companies  differs  widely. 
Only  Tenaris  Donasid  is  on  track  with  its  commitments  and  almost  reaching  international 

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OJ L 157, 21.06.2005, p. 3–393 
Decision 3010/91/ECSC OJ L 286, 16.10.1991, p. 20 
over  600  Hot  Rolled  Tm/man/year  in  integrated  mills,  over  800  Hot  Rolled  Tm/man/year  in  non-
integrated steel mills 

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standards.  The  main  reason  for  productivity  not  evolving  in  line  with  employment  levels  is 
lower production levels compared to 2006. 

For all companies, efforts to increase production still need to be intensified if the necessary 
increase in productivity is to be achieved as required by the Protocol. With the exception of 
TMK  Resita  and  Tenaris  Donasid,  there  appears  to  be  scope  for  further  improvement  in 
employment levels. 

Cost reductions 

In some areas such as energy and raw materials consumption, the necessary cost reductions 
can  only  be  achieved  in  the  longer  term  through  investment  in  modernisation.  In  2007, 
technological investments represented between 110% and 1500% (in the case of TMK Resita) 
of the target for the year. At the same time environmental investments amounted to between 
75% and 2500% (in case of Tenaris Donasid) of the target. Although Mittal Steel Hunedoara 
almost reached its target for 2007, its environmental investments in the period 2004-2007 just 
accounted for 54% of the IBP forecast. 
Although  beneficiary  companies  introduced  and implemented  their  investment  programmes, 
most  of  them  still  reported  cost  values  which  do  not  show  operational  improvements 
stemming  from  the  investment  programmes.  In  most  of  the  plants,  raw  materials’ 
consumption yields, the share of labour cost in total cost and energy consumption are much 
higher than international standards. Selling prices made up for the operational inefficiencies 
of certain plants.  

2.2.2.  Environmental protection 

The Treaty of Accession specifies a transitional regime 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  Mittal  Steel  Galati,  Mittal  Steel  Hunedoara, 
Mechel Targoviste and Mechel Campia Turzii already obtained transitional integrated permits 
according  to  IPPC  directive  in  2007  or  2006  (Mittal  Steel  Hunedoara).  These  transitional 
authorisations are valid until 31 December 2014 (2012 for Mechel Targoviste) and include the 
environmental  investment  programme  to  be  undertaken  during  the  validity  period  of  the 
authorisation. 

Other companies not included in the list of beneficiaries of such a transitional period have had 
to comply with this legislation by the date of accession.  

3. 

PRINCIPAL CONCLUSIONS 

3.1. 

Bulgaria 

The  situation  in  2007  did  not  improve  the  already  unsatisfactory  developments  in 
Kremikovtzi in 2006. The results in 2007 showed further non-compliance with restructuring 
objectives  listed  in  the  Protocol  concerning  viability,  technological  and  environmental 
investments,  sales,  cost  reduction  and  productivity.  This  situation  was  confirmed  by  the 
Bulgarian  authorities  who  informed  the  Commission  that  the  implementation  of  IBP  for 
Kremikovtzi  was  terminated  on  6  August  2008  following  the  announcement  of  insolvency 
and opening of bankruptcy procedure by Sofia City Court.  

The decision of the EU-Bulgaria Association Council of 29 December 2006 amending Article 
3 of the Additional Protocol to the Europe Agreement provides that "In case monitoring of the 
implementation  of  the  restructuring  programme  and  the  plans  shows  that  the  relevant 
conditions of Protocol 2 to the Europe Agreement and key restructuring measures, including 
all  investments  implemented,  have  not  been  fulfilled  […],  Bulgaria  shall  recover  from  the 

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beneficiary any aid granted in breach of these conditions before or after its accession to the 
European Union."  

Under the above mentioned decision  of the EU-Bulgaria Association  Council, Bulgaria will 
be obliged to claim the reimbursement of the aid if the relevant conditions of Protocol 2 to the 
European Agreement and key restructuring measures, including all investments implemented, 
are  not  fulfilled.  The  declaration  of  insolvency  is  a  strong  indication  that  the  firm  has  not 
restored its viability and will probably not do so before the end of 2008. In this respect, the 
Commission should be kept informed about developments in the insolvency procedure and in 
particular the claim for the reimbursement of state aid. 

3.2. 

Romania 

The  financial  performance  achieved  in  2007  has  not  yet  fully  satisfied  the  objectives  of  the 
IBPs, since four of the six companies have not reached the percentage of EBITDA established 
by their respective targets for this year.  

The results in 2007 and forecasts for 2008 offered by the companies show increasing growth 
in revenues and improvements in profitability for all six beneficiaries. The major profitability 
changes (from loss to profit) expected in ArcelorMittal Hunedoara and Mechel Campia Turzii 
are  particularly  challenging.  As  regards  the  EC  viability  test,  all  the  companies  expect  to 
comply with the EBIT criterion in 2008, but only two of them, ArcelorMittal Galati and TMK 
Resita,  have  forecast  reaching  the  EBITDA  benchmark.  Therefore,  the  year  2008  requires 
increased  efforts  of  sustainable  improvement  in  efficiency  to  overcome  the  recent 
uncertainties perceived on the markets. 

In  spite  of  the  potential  improvement  expected  by  beneficiaries  in  the  first  half  of  2008, 
sustainable  viability  can  only  be  achieved  when  efforts  in  all  companies  are  intensified,  in 
particular with regard to the implementation of the cost reduction strategies and development 
of coherent strategies for the future. 

The Commission recalls that the provisions of Protocol to the Accession Treaty with Romania 
clearly  stipulate  that  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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