V. Progress Report the Implementation of the “Czech Steel Sector Restructuring Programme” V....

V. Progress ReportV. Progress Report on the Implementation of the Implementation of

the “Czech Steel the “Czech Steel Sector Restructuring Sector Restructuring

Programme”Programme”

((untiluntil December December 31, 31, 2004) 2004)

February 2005

2

The Czech steel sector, with its annual production of over 6 million tonnes of The Czech steel sector, with its annual production of over 6 million tonnes of steel, is the key supplier of steel products to Czech industry, with a domestic steel, is the key supplier of steel products to Czech industry, with a domestic market share in terms of apparent steel consumption exceeding 45 %. With market share in terms of apparent steel consumption exceeding 45 %. With the progressive implementation of basic restructuring and privatisation the progressive implementation of basic restructuring and privatisation steps, including the closing and liquidation of ineffective capacities, the steps, including the closing and liquidation of ineffective capacities, the sector is becoming competitive. The continued existence ofsector is becoming competitive. The continued existence of the Czech steel the Czech steel industry is based on the following factors:industry is based on the following factors:

IntroductionIntroduction

The real market for steel products in processing industries and other The real market for steel products in processing industries and other sectors is capable of supporting an apparent domestic consumption of sectors is capable of supporting an apparent domestic consumption of around 5 million tonnes per annum,around 5 million tonnes per annum,

The sector’s competitiveness as manifested in the export volumes The sector’s competitiveness as manifested in the export volumes achieved, is based on the specific achieved, is based on the specific strong aspectsstrong aspects of the steel industry and of the steel industry and partly on comparative advantages.partly on comparative advantages.

V. Zpráva o postupu realizace V. Zpráva o postupu realizace

„Programu restrukturalizace českého ocelářského průmyslu“„Programu restrukturalizace českého ocelářského průmyslu“

V. Progress Report on the Implementationof the “Czech Steel Sector Restructuring Programme“

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General position of the Czech steel industry in 2004 General position of the Czech steel industry in 2004

The increase of industrial production inThe increase of industrial production in the the CR was significantly supported CR was significantly supported by the metal and metal products sector. Revenues in fixed prices in 2004 by the metal and metal products sector. Revenues in fixed prices in 2004 increased by 10 % in the year-increased by 10 % in the year-onon-year comparison.-year comparison.The volume of steel production in 2004 exceeded the volume from 2003 by The volume of steel production in 2004 exceeded the volume from 2003 by 3.2 %. The total volume supplied to the domestic market, including 3.2 %. The total volume supplied to the domestic market, including consumption by consumption by own own steel companiessteel companies , rose by 6 % in the year-, rose by 6 % in the year-onon-year -year comparison. comparison.




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The restructuring is being performed according to the “National Czech Steel The restructuring is being performed according to the “National Czech Steel Sector Restructuring Programme” ( “the Programme”). This Programme is Sector Restructuring Programme” ( “the Programme”). This Programme is characterised as:characterised as:

Acquisition of a strategic partner for NOVÁ HUŤ, a. s. (hereinafter Acquisition of a strategic partner for NOVÁ HUŤ, a. s. (hereinafter referred to as referred to as NH)NH)

Long products (based on Třinecké železárny, a. s. –”Long products (based on Třinecké železárny, a. s. –”TŽTŽ""),),

Finalisation of the court settlement process of VÍTKOVICE, a. s., Finalisation of the court settlement process of VÍTKOVICE, a. s., connected with the sale of its steel subsidiary VÍTKOVICE STEEL, a. s. connected with the sale of its steel subsidiary VÍTKOVICE STEEL, a. s. (“VS”) and its detachment from the engineering corporation(“VS”) and its detachment from the engineering corporation

Permanent efforts to set up product chains for:

Flat products (based on the current ISPAT NOVÁ HUŤ, a. s. – “ INH”), Flat products (based on the current ISPAT NOVÁ HUŤ, a. s. – “ INH”), including the integration of VÁLCOVNY PLECHU, a. s. (“including the integration of VÁLCOVNY PLECHU, a. s. (“VPFMVPFM””).).




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Comparison of basic steel productions of the steel companies Comparison of basic steel productions of the steel companies included inincluded in the “National Czech Steel Sector Restructuring the “National Czech Steel Sector Restructuring

Programme” for the period 1999 to 2004 Programme” for the period 1999 to 2004

Overview of the development of basic steel product assortment production volumes Overview of the development of basic steel product assortment production volumes in the Czech Republic:in the Czech Republic:

1999 2000 2001 2002 2003 2004

Raw steel '000 tonnes 5 615,54 6 215,84 6 315,87 6 511,97 6 783,27 7 032,99

Cont.cast.product (CCP) '000 tonnes 3 814,48 5 417,33 5 500,52 5 795,98 6 127,95 6 334,00

Ratio of continuous casting

% 67.93 87.15 87.09 89.00 90.34 90.06

Rolled stock '000 tonnes 4 987,75 5 501,30 5 774,48 6 019,34 6 261,33 6 395,21

Steel tubes '000 tonnes 574,20 652,37 688,34 639,32 703,57 705,89

Drawn, peeled and ground steel

'000 tonnes 89,20 84,27 79,14 85,68 118,54 149,86

Assortment UnitProduction




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Development of basic steel product assortmentDevelopment of basic steel product assortmentproduction in the Czech Republicproduction in the Czech Republic

Raw steel Rolled stock CCP Steel tubes Drawn, peeled, ground steel

Pro

duct

ion

volu

me

in '0

00 to

nnes

Pro

duct

ion

volu

me

in '0

00 to

nnes

(tub

es, D

PG

)




7

1998 1999 2000 2001 2002 2003 2004

Mining of coal, oil, ores and other minerals 2.8 2.7 2.8 2.6 2.4 2.2 2

Production of basic metals and metallurgical products 1.9 1.2 1.3 1.5 1.6 1.8 1.5

Production of metal-working products, production of machinery and equipment 46.7 48.1 45.6 45.7 43.1 41.6 41

Production of electronic, electric, medical, optical machinery and equipment and time meters 2.4 2.6 2.9 3 3.4 3.1 3.7

Production of motor vehicles and other transport means and equipment 18.6 18.2 18.3 18.3 18.3 17.9 17.8

Production and distribution of electricity, gas and heat energy; collection, treatment and distribution of water 1.1 1 1.1 1.1 1.2 1.3 1.5

Construction 15.8 16.2 16.6 17.8 17.4 18.6 18.4

Wholesale and retail trade, trade mediation 7.2 6.8 7.9 6.6 8.5 7.9 7.6

Other consumer branches 3.5 3.1 3.4 3.3 4 5.7 6.5

TOTAL 100 100 100 100 100 100 100

N ame

Share in apparent consumption / % /

Apparent consumption of steel products in CR by customer sectors




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2002 2003 2004 2002 2003 2004

Ingots and semi-products 283,75 247,20 252,70 260,67 265,98 356,70

Long products 2 249,56 2 366,98 2 305,65 579,21 591,15 712,84

Flat products 997,57 994,98 950,58 1 541,98 1 512,21 1 814,73

Steel tubes 456,97 502,00 532,07 262,80 262,06 310,58

Other products * 427,82 458,39 485,25 369,94 394,02 537,69

TOTAL 4 415,67 4 569,53 4 526,24 3 014,60 3 025,41 3 732,55

* Other products include: cold rolled narrow strip, drawn, peeled and ground steel; drawn wire and cold formed section

Overview of the development of basic steel product assortment import and export volumes in CR (ths t.)

AssortmentExport Import




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Development of Development of the Czech the Czech steel product import and export steel product import and export volumes volumes

Export Import

Vo

lum

e in

'000

to

nn

es




10

2004 EC criteria

14.1 > 10 - 13.5 *

13.5 > 1.5

*

Total debt reduced by 10.2 %Wage intensity decreased by 23.8 %Work productivity (based on revenue) rose by 51.7 %

Total data for the entire steel industry

for integrated steelworks > 13.5 %

for non-integrated steelworks > 10 %

Indicator

Gross margin (%)

Pre-tax profit (incl. interest)/turnover (%)




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Indicator Achieved value NoteReturn on sales 11.6% Profit to sales revenueReturn on equity (ROE) 38.4% Profit to equityReturn on assets (ROA) 18.2% Profit to assetsWage intensity 6.4% Personnel costs to returnsAverage salary 21 349 CZK / month

Results of financial analysis (year 2004)

The economic results of 2004 brought achievement of viability even within the The economic results of 2004 brought achievement of viability even within the criteria of the European Commission standards.criteria of the European Commission standards.




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Labour productivityLabour productivityEmployment in the steel sector has a radical downward trend, caused mainly by outsourcing of Employment in the steel sector has a radical downward trend, caused mainly by outsourcing of service activities and rationalisation of the production process.service activities and rationalisation of the production process.

Labour productivity assessed in terms of steel volume produced per employee (t./year)Labour productivity assessed in terms of steel volume produced per employee (t./year)

Year 2002 2003 2004 2005* 2010*

Total number of employees 29 500 28 250 25 914 24 000 22 000

Of which: steelworkers 13 500 12 740 10 960 9 200 8 500

* Anticipated annual figures

The wage trend forecast for the Czech steel industry up to 2010 is based on the assumption that The wage trend forecast for the Czech steel industry up to 2010 is based on the assumption that nominal wages will grow 4 % annually at 3 % inflation.nominal wages will grow 4 % annually at 3 % inflation.

Year 2002 2003 2004 2005* 2010*

Production per employee in CR 466 509 611 652 706* Anticipated annual figures




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Implementation procedure of the National Czech Steel Sector Restructuring ProgrammeImplementation procedure of the National Czech Steel Sector Restructuring Programme

A.A. ClosureClosure of surplus of surplus capacity capacity in the range of 1.9 million tonnes in the range of 1.9 million tonnes((across the entire steel production cycleacross the entire steel production cycle))

B.B. Annual production of 6 million tonnes of steelAnnual production of 6 million tonnes of steel

C.C. Apparent domestic consumption of 4.7 - 4.8 million tonnesApparent domestic consumption of 4.7 - 4.8 million tonnes

a)a) The Programme provides for the The Programme provides for the dismantlingdismantling of 590 000 tonnes of rolling mill capacity by 2006, which the of 590 000 tonnes of rolling mill capacity by 2006, which the CR undertook in Protocol no. 2 to the Accession Treaty.CR undertook in Protocol no. 2 to the Accession Treaty.

b)b) The steel cThe steel capacities already shut down and apacities already shut down and dismantled dismantled (300 000 t - electric arc furnace in Kladno - Drin) a(300 000 t - electric arc furnace in Kladno - Drin) as s well aswell as the production of expanded tubes (300 000 t - Válcovny trub Chomutov the production of expanded tubes (300 000 t - Válcovny trub Chomutov).).

a)a) The volume of steel produced in 2004 amounts to 6.7 million tonnes.The volume of steel produced in 2004 amounts to 6.7 million tonnes.b)b) This is an increase of 3.3 % in comparison with the same period in 2003, due to increased demand for steel This is an increase of 3.3 % in comparison with the same period in 2003, due to increased demand for steel

products on the domestic market linked with an upswing in the Czech economy:products on the domestic market linked with an upswing in the Czech economy:

GDP growth of 3.7 GDP growth of 3.7 %%Industrial production growth of 10.2 Industrial production growth of 10.2 %.%.

The apparent domestic consumption of final steel products reached 5.09 million tonnes in 2004. This indicator was The apparent domestic consumption of final steel products reached 5.09 million tonnes in 2004. This indicator was mainly influenced by 10.2 % year-on-year growth in industrial production and new foreign investments in the Czech mainly influenced by 10.2 % year-on-year growth in industrial production and new foreign investments in the Czech Republic.Republic.




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Associated Social Programme for the steel industry restructuringAssociated Social Programme for the steel industry restructuring

To solve the social and employment consequences of the restructuring of the Czech steel industry, To solve the social and employment consequences of the restructuring of the Czech steel industry, the government adopted the “Comprehensive Plan for the Associated Social Programme for Steel the government adopted the “Comprehensive Plan for the Associated Social Programme for Steel Industry Restructuring”(ASP) in 2000.Industry Restructuring”(ASP) in 2000.

Year

Number of steel

industry

employees

Number of

employees made

redundant within

ASP

ASP costs

(in mil. CZK )

1999 51 2372000 43 499 1 623 1302001 38 549 970 2152002 29 500 1 239 1702003 28 250 1 358 2012004 25 914 479 1672005 24 000 (600) 1602006 22 400 (510) 110

Since 2005 - forecast according to the business plans




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Other instruments for the settlement of social and employment consequences of the restructuring Other instruments for the settlement of social and employment consequences of the restructuring of the Czech steel industry are included in:of the Czech steel industry are included in:

The implementation of the START programme - a programme supporting business activities. 403 non-The implementation of the START programme - a programme supporting business activities. 403 non-interest-bearing loans totalling CZK 176 million were extended across the entire business sphere in 2004. interest-bearing loans totalling CZK 176 million were extended across the entire business sphere in 2004. More than 2/3 of these loans, which were provided by Českomoravská záruční More than 2/3 of these loans, which were provided by Českomoravská záruční a a rozvojová banka, were rozvojová banka, were directed to support the entrepreneurial activities of persons redundant due to the restructuring of steel directed to support the entrepreneurial activities of persons redundant due to the restructuring of steel companiescompanies..

The Regional Development programme - stimulating the generation of new jobs in regions affected by The Regional Development programme - stimulating the generation of new jobs in regions affected by restructuringrestructuring..

Summary of standard social welfare instruments used to address the impacts of restructuring:Summary of standard social welfare instruments used to address the impacts of restructuring:

Early retirement (2 to 3 years before entitlementEarly retirement (2 to 3 years before entitlement),),

Financial contributions for redundant employees paid from company reserves - according to collective Financial contributions for redundant employees paid from company reserves - according to collective bargaining agreements. Example - bonuses paid to redundant workers of INH, when upon an application of bargaining agreements. Example - bonuses paid to redundant workers of INH, when upon an application of a particular worker for termination of employment the company awards a bonus amounting up to 25 a particular worker for termination of employment the company awards a bonus amounting up to 25 months’ wages. This solution excludes a concurrent drawing of ASP fundsmonths’ wages. This solution excludes a concurrent drawing of ASP funds,,

Services of employment agencies (to assist adaptation of redundant employeesServices of employment agencies (to assist adaptation of redundant employees ),),

Employee retrainingEmployee retraining,,

Labour Pool Labour Pool (adaptation for a preset period, work experience, retraining, secondment of employees…),(adaptation for a preset period, work experience, retraining, secondment of employees…),

Financial support and consulting to business start-ups - e.g. the START programmeFinancial support and consulting to business start-ups - e.g. the START programme. .




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Total State Aid – Disbursements for Steel Sector RestructuringTotal State Aid – Disbursements for Steel Sector Restructuringduring 1997 – 2003 (CZK '000 000)during 1997 – 2003 (CZK '000 000)

Companies A B

NH 5700.1 4834.4

VPFM 292 291.8

VS 8155.3 3063.3

T o t a l 14147.4 8189.5

Explanatory notes Explanatory notes ::

A – A – State aid according to Protocol no. 2 - upper limitState aid according to Protocol no. 2 - upper limit

B – B – State aid disbursed according to Protocol no. 2State aid disbursed according to Protocol no. 2




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The total final production volume of rolled stock is being gradually reduced The total final production volume of rolled stock is being gradually reduced in line with the pertinent schedule of capacity shutdowns and in line with the pertinent schedule of capacity shutdowns and dismantlingdismantling of of the mentioned capacity. The capacity closure and the mentioned capacity. The capacity closure and dismantlingdismantling project aiming project aiming at a reduction of annual capacity by 590 000 tonnes has already been at a reduction of annual capacity by 590 000 tonnes has already been implemented, with capacity amounting to 120 000 tonnes already closedimplemented, with capacity amounting to 120 000 tonnes already closed..

SteelmakerDescription of facility

(equipment)

Date of permanent

closure

Final date of dismantling

Capacity reduction

('000 tonnes)

Final product

POLDI Steel Rolling mills V1 - V8 1.8.1999 31.5.2000 120 Long productsVS DUO rolling mill 30.6.2006 31.12.2006 130 Flat productsVPFM Hot rolling mills no. 1& no. 2 31.12.2005 30.6.2006 70 Flat productsNH (INH) HCC heavy sections mill 31.8.2006 31.12.2006 600 Long products

SteelmakerDescription of facility

(equipment)Production

start

New capacity

('000 tonnes)

Final product

NH (INH) Section rolling mill 1.1.2007 330 Long products

Reductions of final rolling mill capacities ('000 tonnes)

New capacities - construction and operations ('000 tonnes)




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Privatisation of steel companiesPrivatisation of steel companies Within the VÍTKOVICE, a. s. judicial settlement process, an equity share Within the VÍTKOVICE, a. s. judicial settlement process, an equity share amounting to 98.96 % of its subsidiary company VS was acquired by amounting to 98.96 % of its subsidiary company VS was acquired by OSINEK, a. s., which is a 100 % -owned subsidiary of the Czech Republic’s OSINEK, a. s., which is a 100 % -owned subsidiary of the Czech Republic’s National Property Fund (NPF), by public tender in 2002. Public National Property Fund (NPF), by public tender in 2002. Public competitive bidding for sale of this share to a strategic investor will take competitive bidding for sale of this share to a strategic investor will take place before the end of the 1st half of 2005. place before the end of the 1st half of 2005.

At the beginning of 2003, LNM Holdings N.V. took over NH management At the beginning of 2003, LNM Holdings N.V. took over NH management as the dominant owner of NH based on the contract sale of NH shares as the dominant owner of NH based on the contract sale of NH shares concluded between NPF and LNM and changed membership of the concluded between NPF and LNM and changed membership of the company boards. This completed the basic structure of the product chain company boards. This completed the basic structure of the product chain for flat products, as INH is also the majority owner of VPFM. At the same for flat products, as INH is also the majority owner of VPFM. At the same time, INH owns an approximately 58.3 % time, INH owns an approximately 58.3 % shareshare in JÄKL Karviná, a. s., in JÄKL Karviná, a. s., which is an important finalising segment of the production chain. which is an important finalising segment of the production chain.




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Implementation of EU environmental legislation is being performed continuously Implementation of EU environmental legislation is being performed continuously in accordance with EC documents.in accordance with EC documents.

Implementation of EU environmental legislationImplementation of EU environmental legislation

The Integrated Pollution Prevention and Control Act (IPPC) applies to 114 The Integrated Pollution Prevention and Control Act (IPPC) applies to 114 technological units in the steel sector. The applications already processed and technological units in the steel sector. The applications already processed and completed imply that facilities operated in the steel sector meet the requirements of completed imply that facilities operated in the steel sector meet the requirements of best available technology (BAT). The entire process is monitored and evaluated on a best available technology (BAT). The entire process is monitored and evaluated on a quarterly basis, and measures are taken in order not to endanger the awarding of quarterly basis, and measures are taken in order not to endanger the awarding of integrated permits to all facilities no later than on 30.10.2007.integrated permits to all facilities no later than on 30.10.2007.

Trading in greenhouse gases (ETS). Compared to 1990, CR has reduced COTrading in greenhouse gases (ETS). Compared to 1990, CR has reduced CO22

emissions in industry totally by approximately 32 %; in the steel industry the emissions in industry totally by approximately 32 %; in the steel industry the reduction amounted to 40 %. Trading officially started on 1.1.2005reduction amounted to 40 %. Trading officially started on 1.1.2005..

Steel industry companies produce chemical substances in some technologies (e.g. Steel industry companies produce chemical substances in some technologies (e.g. coking plants), therefore they follow the REACH process and are preparing for coking plants), therefore they follow the REACH process and are preparing for implementation thereof. Intensive work based on identified issues is supposed to implementation thereof. Intensive work based on identified issues is supposed to take place during 2005.take place during 2005.




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Monitoring of the results as of 31 December 2004 shows that business results Monitoring of the results as of 31 December 2004 shows that business results and productivity growth have improved because of the intensification and productivity growth have improved because of the intensification measures taken in the course of the Czech steel industry restructuring as measures taken in the course of the Czech steel industry restructuring as recommended by the EC.recommended by the EC.

ConclusionConclusion

Five monitoring reports on progress of the implementation of the ”Czech Steel Five monitoring reports on progress of the implementation of the ”Czech Steel Sector Restructuring Programme”, elaborated for the period since 2002, were Sector Restructuring Programme”, elaborated for the period since 2002, were handed over to the EC.handed over to the EC.

In the remaining term of the restructuring process (i.e. by 31.12.2006), the In the remaining term of the restructuring process (i.e. by 31.12.2006), the privatisation and investment programmes of the VS and VPFM companies and privatisation and investment programmes of the VS and VPFM companies and the programme of excess final rolled stock capacity liquidation must be the programme of excess final rolled stock capacity liquidation must be completed. Decisions of the government of the Czech Republic and the completed. Decisions of the government of the Czech Republic and the procedure approved by the EC provide the necessary procedure approved by the EC provide the necessary assumptionsassumptions for a for a positive completion of the restructuring process.positive completion of the restructuring process.




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Indicator ISPAT NH VPFM Vítkovice Steel

Production of steel ('000 tonnes) 3 208 - 965

Rolled stock production ('000 tonnes)

2 761 187 869

Investment expended (mil. CZK) 524 29 71

Number of employees 10 673 925 1 575

Average income (CZK/month) 24 498 17 094 25 280

Gross profit margin (%) 1 24.1 4.7 16.2

Gross profit (%) 2 14.6 2.9 12.2

1 EC Standard 13.5 10.0 10.0

2 EC Standard 1.5 1.5 1.5

Annex – Results for 2004Annex – Results for 2004

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