Situation in 1995 - 1997

Year 1995

Year 1995 (at least its first half) was one of the relatively very good years for the steel industry abroad world-wide and the best since 1989. Naturally, steelmaking of the Czech Republic also engaged in the foreign trade with steel products primarily as the exporter could benefit from the situation.

In 1995, for the first time after 1989, the steel industry of the Czech Republic had the opportunity to increase the deliveries to its two main domestic customers - industry and civil engineering. Choosing between favourable export conditions and inland deliveries, the steel industry has chosen its inland customers in compliance with its long-term trade strategy. It pursues, in this way, undoubtedly its own profit from recovery of economic activities with significant steel consumption and the strategic presumption that per capita consumption of steel products would increase to 400 to 450 kg. In 1995, this consumption increased again beyond the 1992 level and so it is possible to consider the year 1995 as a change in chances for inland steel supplies. The year 1995 can be briefly characterised from the viewpoint of the steel industry such that in 1995 more Czech steel was processed at home. Rolled material export dropped between 1995 and 1994 by 23 % and the supplies for the domestic market increased by 31 %. Imports increased by 45 % and its share in the inland market increased up to 30 %.

In absolute figures, this meant that exports dropped from 3.4 mil t down to 2.7 mil t, the market supplies grew from 2.4 mil t to 3.2 mil t if we compare data for 1995 and data for 1994 for the rolled material. The highest dynamics of the change in development appeared in imports with priority influence of East-European countries having been increased from 917 000 t to 1,334 000 t.

Investments in 1995 increased in comparison with 1994 from 4.496 billion CZK to 4.687 billion CZK (168.3 million USD and 191.1 million USD at valid exchange rates). Their amount in current prices attained 7.179 billion CZK in 1996.

Year 1996

The year 1996 meant a turn for the successful development of the whole Czech economy. Increase in GDP attained 4.4 % (in comparison with 4.8 % in 1995), industrial production increased in comparison with 1995 by 6.8 %. Also the results of metallurgical organisations were lower than those predicted, among others in connection with continuing recession in the market with metallurgical products and, in consequence, with total drop in metallurgical production. Production of material commodities dropped with impact to all following economic categories (decrease in productivity at faster wage increase, decrease in profitability at relatively higher share of fixed costs). A specific affair remained: difficult access to financial funds and low collection rate at continuing high secondary insolvency.

It is coming to light that the competitive ability of the Czech manufacturers is derived from a deficient legislation.

In connection with decrease in production of material commodities, the sales in current prices dropped in 1996 in comparison with the comparable period of 1995 by more than 6.5 %. Decrease in comparable prices with respect to higher inflation in the Czech Republic can be, in this way, estimated at min. 14 %. This value, however, corresponds to 13.5 % of year-to-year growth 95/94. Even lower prices obtained when exporting to EU countries reflect decline in income, especially in the 1st half of the year.

Production in the Czech metallurgical works in the monitored period was secured in its entirety with lower numbers of workers (-5 %). Growth of average wages (nominal wages +13.1 %) declined pronouncedly from the growth rate of productivity of labour (-6 %). The drop in production has also been reflected in the growth of wage and material intensity of production. In comparison with 1995, production profitability markedly decreased.

The liabilities of organisations increased in comparison with the comparable period of 1995 and their credit indebtedness increased. Total indebtedness (in relation to liabilities) increased from 41.8 % in 1995 to 44.8 % in 1996 and liquidity also deteriorated.

Development in the last period (1996) cannot be evaluated otherwise than negatively. The effect of year-to-year comparison with the relatively successful year 1995 is partially seen here. Metallurgical production and sales in 1996 got into discrepancy with other features (wages, stock, liabilities incl. relation of loans for operations and investment credits and the like). However, even inside the group of metallurgical works, enterprises exist which markedly differ in the positive sense of the word from the mentioned general evaluation.

Some of the above-expounded basic economic characteristics of iron and steel metallurgy in the Czech Republic are shown in the following table and annexed charts.

Economic features of iron and steel metallurgy in the Czech Republic (mil CZK)

* incl. methodical effect of the changed comparable base

The world market in 1996 and its impact on Czech metallurgy

The above-mentioned impairment of economic results was based, among other things, also on development of the world market. Re-attenuation of the world steel market occurred since the 2nd half of 1995 which is vanquished only in 1997. The reason was a big stock of material made by speculative purchasing which squeezed demand and, primarily, prices. It is to be said that these cycling situations are usual in steel and therefore it is positive, and that it was possible to realise more deliveries to domestic customers just in the period of 1995.

These rates of development changed in the first half of 1996 in comparison with the same period in 1995 so that the rolled material export dropped by 2.5 %, apparent domestic consumption dropped by 3.7 % and import increased by 20.7 %. Import’s share in apparent consumption was 32.5 %. Domestic market supplies dropped by 13 %. Evident cause of the drop was here corresponding to the world-wide large reserves of rolled material at dealers and processors - because both main customers of steelmaking also showed dynamic development in the 1st half of 1996. The share of continuously cast steel attained 47 %.

The characterisation of trends in development of production, import, export, inland deliveries documented on the example of long products fully applies to flat products as well, despite the fact that the turn years and development slopes somewhat differ.

The most serious situation was in the trend of tube production. If rolled material production dropped between 1996 and 1989 by approx. 32 %, then this figure was approx. 42 % for tubes. This means substantially lower utilisation of production capacities and resulting effectivity. Both limited export possibilities and the drop in domestic demand caused this trend. The figures in charts with tables document it. Trend of productions is also shown here according to the product mix.

As it is seen from charts with tables and from this commentary, development of production and possibilities of steel products deliveries will be permanently more and more dependent on the situation of foreign markets. The share in these markets is, obviously, a question of competitive ability.

Inland demand

Optimism regarding the start of positive development of inland demand appeared as somewhat premature in 1996. Nevertheless, there is no reason, for the time being, to consider the repeated drop permanent.

An important factor affecting (especially in the last two years) the possibilities of inland deliveries is growth in import share. Effectively confronting this trend consists not only in quality and prices of the Czech steel products but also in new relations between the supplier and the customer. It is a question of steel works’ strategy to catch up with a formation of service centres based on processing and complementation of the Czech steel products.

The effect of comparative advantages enabled the steel manufacturers to use 70 % of production capacities without passing into losses. It may be presumed that the Czech steelmaking industry will gradually come to face the point of an economically acceptable 85 % utilisation of capacities as it is in EU.

Investment

The rates of growth in civil engineering and industry in 1997 slowed down but they will not reverse trends in steel demand. The investment rate in the Czech economy continues to be positive for the steel industry. Growth renewal of investment demand occurred already in the second half of 1992. The upward trend of investment growth (gross formation of fixed capital) culminated in 1994 (real growth 17.3 %). It maintained high dynamics in the Czech economy (15-16 %). Investment rate was above average in international comparison (34 % of GDP from current prices in 1996). In the transformation years, nearly 1,500 billion CZK were invested in the territory of the Czech Republic. Ecological investments amounted to 6.2 %. As the following table shows, productive investments represented only 44 % of this volume. Industry’s share in material investments in total was 38 % in 1995 and in comparison with 1992 it had a continuous downward trend. Investments in the steel industry decreased from 5.4 % in 1993 down to 3 % in 1995 relating to the industry in total. Investment rate in the Czech steel industry continues, in this way, to be quite insufficient in comparison with the restructuralisation needs.

As to resources of investment financing, the share of the self-owned financial means in the enterprising sector was more than 68 % (data of the Czech Statistical Office 1994). The share of credits of financial institutions was 20.5 %. The source of the self-owned financial means was income from operations after taxation and depreciation. The share of depreciation decreases with respect to non-executed ”valorisation”. In industry, the self-owned financial means would cover in 1995 and 1996 investments within the range of 66-75 %. Comparison of cash flow and its share in the investments is under the conditions of Czech metallurgy problematic for a group as a whole (high losses and non-investment in ”crisis organisations”). It may be set forth for comparison that the three largest organisations invested in 1996 approximately 5,291 mil CZK (73 % of the total). Creation of their annual cash flow would cover an increase in these investments from 35 % only (in 1995, the invested sources of these organisations would be 100 % covered). Features of metallurgical investments require, however, centralisation of means in a longer time horizon. The ”economic prosperity of the year” plays here, however, an important role at relatively low capital outfitting (also the effect of non-re-pricing of capital assets). In contrary to the presumption of investment growth in 1996 amounting to 1.138, growth 1.126 should be attained in this year in comparable prices. However, actual development of the macro-economy in the Czech Republic is crucial from the long-term view.

Year 1997

The Czech economy increased in 1997 exactly by 1 % as measured against GDP.

The development in 1998 shows agreeable development of industrial production but, on the contrary, the situation in building industry production is bad where the drop by roughly 2 % within the whole year is expected. The largest growths are in the processing industry (approx. 9.8 %). Particularly, conveyance production, production of electrical instruments, chemical and pharmaceutical industry, furthermore paper industry and polygraphical industry belong hereto deserving well of the growth rate. The main reason for this drop in building production are permanent lack of orders for construction work and high interest rates of credits. The growth is evidenced in those branches where the foreign capital has the decisive word and where re-structuralization is the farthest.

The Steel Market

Though the second half of 1997 signalled serious macroecenomic problems, this did not markedly affect the all-year demand for steel products so that the steel making of the Czech Republic could deliver to inland approx. by 3 % of the rolled material more than in the foregoing year in despite of this unfavourable development. In comparison with some other countries, advantage of the export possibilities has not been taken by far because also export of the rolled material increased by 3 % whereas the export of tubes dropped. So the policy of long-term aiming of the deliveries to the domestic market continues.