Select Committee on Trade and Industry Annxes to the Report

Memorandum submitted by the UK Steel Association

  Thank you for your letter of 15 February requesting an update on developments in the Central and Eastern European Countries (CEECs). I am sorry for the delay in replying.

  I regret to say that progress since our July 1998 memorandum has been slow.


  Our original memorandum explained how the European Coal and Steel Community (ECSC) protocols to the Europe agreement had granted the CEECs a five year "grace period" from full compliance with their provisions. These grace periods have expired, and the EU has consistently refused requests for extension.

  This means that all CEEC steel companies should theoretically now be in full compliance with the ECSC Steel Aid Code, which already applies to EU producers. This Code permits limited aid in certain circumstances (environmental compliance, research and development, the social costs of restructuring and closure aid): more particularly it bans all forms of operating aid, rescue and restructuring aid and regional aid.

  Despite this, the facts that few CEEC steel companies have yet been privatised while many remain in financial difficulty suggest that operating aid continues to be given. Certainly, the debt write-offs that will be necessary for the successful privatisation of many of the CEEC producers will constitute "banned" rescue and restructuring aid.

  The Commission is extremely concerned at these possible breaches of the Europe Agreements, but there is little that the Commission can do directly to control the situation. The Commission has therefore adopted a strategy aimed at encouraging restructuring leading to viability and privatisation. This strategy is however being frustrated by political indecision in most of the CEECs, and an unwillingness to face up to the social problems that such restructuring would undoubtedly entail.

  To date, only two CEEC governments have submitted steel restructuring plans to the Commission: Poland and the Czech Republic. The first Polish restructuring plan was rejected as making seriously unrealistic assumptions about future demand and important penetration trends. A revised plan was submitted in 1999. Independent analysis undertaken for the Commission concluded that:

    —  On very conservative estimates of import penetration trends, the "restructured" Polish steel industry would have excess capacity of over 800,000 tonnes in 2005.

    —  Of the individual company plans submitted, only six out of 13 were deemed capable of leading to viability.

  Details of the Czech government's restructuring plan have not been made available to the EU steel industry, so it is not possible at present to assess the viability of these plans. Two major steel companies however are known to be bankrupt, or virtually bankrupt.

  While neither the Bulgarian nor Romanian governments have submitted restructuring plans, they are both seeking foreign investment partners and/or purchasers for their steel industries. Here again though the process has been delayed by government indecision.

  The situations in Hungary, Slovenia and (following last year's change in government) Slovakia give less cause for concern.

  You have asked specifically about the status of the former British Steel's (now Corus) involvement with Huta Katowice in Poland. We are not normally able to comment on the business plans of individual member companies. However Corus have informed us that despite the internal delays to the privatisation process in Poland, they remain interested in Huta Katowice.

  Although Corus were selected as the preferred investor by the Huta Katowice management in 1998, it became obvious that the proper procedures had not been followed in Poland for privatisation, and that the Minister had not been authorised to sell any of the assets of Huta Katowice by the Council of Ministers. Consequently the process was restarted and it was not until September 1999 that Corus were able to take their interest forward officially. They are now working with Huta Katowice to determine whether they can find a mutually beneficial means of participating in the privatisation process.


  In our 1998 submission to the Committee, we drew attention to our concern that each of the CEECs should have fully adopted the acquis communautaire, and be applying it, prior to accession. A slower enlargement timetable was preferable to prolonged post-accession transitional arrangements.

  The decision to start assessing separately each CEEC's progress toward meeting the accession criteria, instead of treating the first wave of applicants en bloc, is welcome. This will make it less likely that an individual country will be allowed early accession, without having achieved full compliance, for reasons of political expediency.

  Nevertheless, we remain concerned about environmental compliance. While it is likely that each CEEC will have been obliged formally to adopt the environmental acquis prior to accession, informal contacts with Commission officials reveal a widespread expectation that few enterprises will be able to comply with the acquis. Substantial and lengthy derogations will therefore be necessary. For an industry such as steel (with the cost of environmental compliance running at £250 million a year for the UK steel industry) this would be severely distortive.

8 March 2000

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