Introductory characteristics

Steel industry of the Czech Republic demonstrated in the last years that it belongs to those manufacturing branches which know how to prove their well-foundation also under the conditions of market economy.

It entered into the period of its transformation proceeding both by change of proprietary relations and in form of restructuralization under very hard sales conditions created by pronounced attenuation of steel demand nearly in the whole world. Just in these conditions when establishing on the market is especially difficult, management of the steel industry of the Czech Republic was able to confirm its position in various regions of the world market by active business policy and to ensure there growth of sales of its production, many times even at financial sacrifices connected with settlement of freight to more remote territories. If we take into consideration that this enabled, on the other hand, to eliminate large part of the negative effect of fixed cost because maintaining of utilization of capacities on an economically acceptable level proved to be successful and with conscious utilization of some comparative advantages like low depreciation and wage burdens, the profitability in the steel works of the Czech Republic was maintained whereas the steel works in the advanced countries e.g. in the European Union gradually came to loss. This profitability was, however, partly redeemed by slowing down the restructuralization process and affected especially by the pro-export exchange rate of CZK. Even after partition of Federation, financial means were acquired by export and, in this way, necessary financial as well as social space for restructuralization was created.

However, the situation of tube manufacturers was and it is till now hard. Here it was not possible to succeed in placing a sufficient volume of production in foreign markets, as the excess supply over demand in the world markets did not enable it and more intensive effect of the fallen out export possibilities to the countries of the former Soviet Union could not be sufficiently replaced.

Situation of the steel industry of the Czech Republic was already undoubtedly affected by the influences of the steel market conditions in the world and in its individual regions in addition to specific effects of the national industrial branch.

The steel industry in the Czech Republic solved and is still solving preferentially privatisation and had to look simultaneously for new markets which must at least partially replace drop in domestic demand till the target decrease in production volume. Therefore, even the most renowned market establishment in the world would be compelled not to behave in a different way to utilise its temporary comparative advantages and to export in order to create necessary financial as well as social space for restructuralization.

Also the rate of reaction to restrictive economic policy applied from the centre as to maintaining macroeconomic (monetary, financial and other) stability gives an account of place and position of the steel industry of the Czech Republic.

Iron and steel metallurgy is raw-material and energy intensive with high-level engineering facilities (especially tangible investment property). The decisive manufacturing equipments have long life and long restoration cycle. From this viewpoint (low flexibility of the branch as to the change of range of products), approach towards the future development of the branch including marketing should be adopted with high accuracy. On the other hand, the funds incurred are relatively long-time bound at high investment intensity of production. This means in comparison with other branches of industrial production the necessity to use long-term investment credits, especially in case of security of own resources for covering these high capital costs.

Operation of a metallurgical plant evokes, however, the necessity to make use of current short-time credits for operation for covering especially the material stock. The above mentioned shows objective necessity of the high percentage of own sources for stock coverage. Economic transformation after 1989 confirmed, however, the validity of measures from the beginning of the sixties when a part of turnover funds of metallurgical plants was transferred administratively to bank credits with interest of 1 %. The fall in own resources of coverage caused in this way has been later on directly reflected in high interest burden of metallurgical organizations and affected also high largely secondary insolvency inside the iron and steel industry.

Transformation and privatisation had a non-unambiguous impact on economy of the organizations in the branch. On the one hand, the price liberalisation assessed real market value of metallurgical products (till that time, metallurgy was constituted as a branch with the rate of profit lower than average within the price rearrangements made). „Opening“ of western markets enabled under the situation of insolvency of the former COMECON countries and drastic fall in domestic demand to increase percentage of export especially to Western Europe. Pro-export exchange rate of CZK acted here positively after three devaluations. Another factor influencing positively export and economy was the restrictive macroeconomic policy directed to attenuation of inflation and maintaining low price of manpower by wage control.

On the other hand, some factors affected economy and competitive ability of Czech organizations (taking account of the specificities of metallurgy) rather negatively.

Restrictive antiinflation policy made very much difficult availability of credits and increased their price (measures of commercial banks for reinforcing their reserves acceded hereto).

Creation of the own sources decreased for a long time (and this partly continues) by relatively high payments of tax and insurance premiums and low depreciations under the situation of highly underestimated depreciation base. Also limited possibilities of creation of tax reserves and adjusting entries to liabilities continue to cut cash flow of the enterprises and preserve high secondary insolvency of metallurgical organizations.

Situation in pro-export policy and export insurance antidumping measures, etc. has been and still is being inadequately solved.

A specific situation is the just proceeding process of privatisation of metallurgical companies which is connected with restructuralization.

Entry of sufficient (mostly foreign) capital into the metallurgical plants whether by purchasing of ownership interests and shares or in form of foundation of joint ventures can be unambiguously supported. A problematic items are coupon privatisation and sales of ownership interests in form of public tender without sufficient verification of solvency of the new owners. In such case, „pouring over“ financial funds from the privatised organisation to the new owner occurs, e.g. by virtue of the necessity to repay privatisation credits. These funds are then missing in the process of metallurgy restructuralization (namely even in the domestic banking sector).

The key problem of the steel industry of the Czech Republic is, however, recovery of economic activity of its domestic customers. Motivation of the need to maintain the production and to decrease it purposely consisted in limited possibilities to solve the social consequences of production decrease and also therein that liquidation of capacities should not make extreme use of financial resources which the steelmaking needs for modernisation of production.

Let us reiterate the aimed state of steelmaking in the Czech Republic according to the study of foreign consulting firms in several main parameters only. According to the forecasts in 1992, 1994 and 1996, it was expected that the steel industry of the Czech Republic will produce 6.5 mil t steel after 2000 in comparison with 10.6 mil t steel in 1989. This would mean significant reduction of the production volume in comparison with 1989 and employment reduction down to approx. 53 ths persons from 128 ths persons in 1990. The situation of our economy adapting to market economy together with present world-wide recession of steel industry caused that our per capita steel consumption which in 1989 belonged to the highest in the world fell down to less than a half and we expect that after recovery of economy the consumption will grow and attain at least the level of about 450 kg per capita. On the other hand, reduction of production capacities will make easy to attain competitive ability and efficiency of steel industry.

Total development of the Czech metallurgy in the first years of transformation of the economy proceeded on the background of favourable macroeconomic development in the Czech Republic. Year-to-year growth of GDP occurred for the first time in the period of transformation already in the 4th quarter of 1992. This fell, however, during 1993 particularly because of impacts of partition of the former Czechoslovak Federative Republic (on January 1, 1993), but already in 1994 year-to-year growth was 2.6 % and 4.8 % in 1995. Simultaneously, domestic demand grew in this period and the inflation rate fell from 17 % in 1993 down to 9.1 % in 1995. This reflected in reduction of discount rate of the Czech National Bank and in cheapening credits.

These favourable economic conditions were accompanied, from the viewpoint of development trend, by relatively favourable situation of iron and steel metallurgy in the world where 1994 meant beginning of revival in the market of steel products in spite of lower estimated growth rate in 1995.

Meanwhile the year-to-year growth of sales in iron and steel metallurgy at constant prices in 1994 was approx. 2 %, its growth in 1995 attained already 13.5 %. Higher production showed up in wage intensity decrease (from 13 % in 1993 down to 11.5 % in 1995) especially under the influence of fixed costs (also the outfit of workers with capital goods increased). In comparison with 1993, the labour productivity increase surpassed the growth rate of average earnings (in 1995, this advance in iron and steel metallurgy was already 24 %). A positive trend may also be documented by improving profitability parameters.

Volume of rolled material export increased from less than 3 mil t in 1989 to 4.4 mil t in 1993 and, at the production volume decrease, this means more faster growth in export percentage of total production. Another situation is in tubes where the deep sales crisis abroad has a deciding word.

In the future, i.e. in the more distant time horizon, it may be expected that the export volumes of metallurgical works of the Czech Republic will not deviate from the stage corresponding to the manufacturers in EU.

The main steel processors in the Czech Republic are in similar situation where they look for sale possibilities of their traditional products at least for an interim period, nevertheless they are not coming, for the time being, with new requirements for steel products, they also solve, obviously, questions of privatisation. The climate for economic activity of traditional and most important customers of steel production is similar like that in the steel industry proper. In 1993, industrial production dropped approximately by 5 %, similarly dropped also production in civil engineering and even more the activities in transport.

This is the situation of the Czech steel industry in the beginning stage of the independent Czech Republic.

In spite the development of the steel industry in the Czech Republic was complicated in all aspects of its existence, we show it now by means of selection of some parameters expressing basic features of this development.

Because everything is documented by tables or charts, we can concentrate on the development features rather by showing causes of and reasons for this development.