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

1. V. Progress Report on the Implementation of the “Czech Steel Sector Restructuring Programme” (until December 31, 2004) February 2005

2. V. Progress Report on the Implementation of the “Czech Steel Sector Restructuring Programme“ Introduction 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 market share in terms of apparent steel consumption exceeding 45 %. With the progressive implementation of basic restructuring and privatisation steps, including the closing and liquidation of ineffective capacities, the sector is becoming competitive. The continued existence ofthe Czech steel industry is based on the following factors: • The real market for steel products in processing industries and other sectors is capable of supporting an apparent domestic consumption of around 5 million tonnes per annum, • The sector’s competitiveness as manifested in the export volumes achieved, is based on the specific strong aspects of the steel industry and partly on comparative advantages.

3. V. Progress Report on the Implementation of the “Czech Steel Sector Restructuring Programme“ The increase of industrial production in the CR was significantly supported by the metal and metal products sector. Revenues in fixed prices in 2004 increased by 10 % in the year-on-year comparison. General position of the Czech steel industry in 2004 The volume of steel production in 2004 exceeded the volume from 2003 by 3.2 %. The total volume supplied to the domestic market, including consumption by own steel companies, rose by 6 % in the year-on-year comparison.

4. V. Progress Report on the Implementation of the “Czech Steel Sector Restructuring Programme“ Acquisition of a strategic partner for NOVÁ HUŤ, a. s. (hereinafter referred to as NH) Finalisation of the court settlement process of VÍTKOVICE, a. s., connected with the sale of its steel subsidiary VÍTKOVICE STEEL, a. s. (“VS”) and its detachment from the engineering corporation Permanent efforts to set up product chains for: • Long products (based on Třinecké železárny, a. s. –”TŽ"), • Flat products (based on the current ISPAT NOVÁ HUŤ, a. s. – “ INH”), including the integration of VÁLCOVNY PLECHU, a. s. (“VPFM”). The restructuring is being performed according to the “National Czech Steel Sector Restructuring Programme” ( “the Programme”). This Programme is characterised as:

5. V. Progress Report on the Implementation of the “Czech Steel Sector Restructuring Programme“ Comparison of basic steel productions of the steel companies included in the “National Czech Steel Sector Restructuring Programme” for the period 1999 to 2004 Overview of the development of basic steel product assortment production volumes in the Czech Republic:

6. V. Progress Report on the Implementation of the “Czech Steel Sector Restructuring Programme“ Production volume in '000 tonnes Production volume in '000 tonnes (tubes, DPG) Drawn, peeled, ground steel Raw steel Steel tubes CCP Rolled stock Development of basic steel product assortmentproduction in the Czech Republic

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

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

9. V. Progress Report on the Implementation of the “Czech Steel Sector Restructuring Programme“ Volume in '000 tonnes Import Export Development of the Czech steel product import and export volumes

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

11. V. Progress Report on the Implementation of the “Czech Steel Sector Restructuring Programme“ The economic results of 2004 brought achievement of viability even within the criteria of the European Commission standards.

12. V. Progress Report on the Implementation of the “Czech Steel Sector Restructuring Programme“ Labour productivity Employment in the steel sector has a radical downward trend, caused mainly by outsourcing of service activities and rationalisation of the production process. Labour productivity assessed in terms of steel volume produced per employee (t./year) 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.

13. V. Progress Report on the Implementation of the “Czech Steel Sector Restructuring Programme“ a) The Programme provides for the dismantling of 590 000 tonnes of rolling mill capacity by 2006, which the CR undertook in Protocol no. 2 to the Accession Treaty. b) The steel capacities already shut down and dismantled (300 000 t - electric arc furnace in Kladno - Drin) as well as the production of expanded tubes (300 000 t - Válcovny trub Chomutov). a) The volume of steel produced in 2004 amounts to 6.7 million tonnes. b) 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: Implementation procedure of the National Czech Steel Sector Restructuring Programme 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 Republic. • Closure of surplus capacity in the range of 1.9 million tonnes(across the entire steel production cycle) • Annual production of 6 million tonnes of steel • GDP growth of 3.7 % • Industrial production growth of 10.2 %. • Apparent domestic consumption of 4.7 - 4.8 million tonnes

14. V. Progress Report on the Implementation of the “Czech Steel Sector Restructuring Programme“ Associated Social Programme for the steel industry restructuring 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 Industry Restructuring”(ASP) in 2000.

15. V. Progress Report on the Implementation of the “Czech Steel Sector Restructuring Programme“ Other instruments for the settlement of social and employment consequences of the restructuring of the Czech steel industry are included in: • 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. More than 2/3 of these loans, which were provided by Českomoravská záruční a rozvojová banka, were directed to support the entrepreneurial activities of persons redundant due to the restructuring of steel companies. • The Regional Development programme - stimulating the generation of new jobs in regions affected by restructuring. Summary of standard social welfare instruments used to address the impacts of restructuring: • Early retirement (2 to 3 years before entitlement), • 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 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 funds, • Services of employment agencies (to assist adaptation of redundant employees), • Employee retraining, • Labour Pool (adaptation for a preset period, work experience, retraining, secondment of employees…), • Financial support and consulting to business start-ups - e.g. the START programme.

16. V. Progress Report on the Implementation of the “Czech Steel Sector Restructuring Programme“ Total State Aid – Disbursements for Steel Sector Restructuringduring 1997 – 2003 (CZK '000 000) Explanatory notes : A – State aid according to Protocol no. 2 - upper limitB – State aid disbursed according to Protocol no. 2

17. V. Progress Report on the Implementation of the “Czech Steel Sector Restructuring Programme“ The total final production volume of rolled stock is being gradually reduced in line with the pertinent schedule of capacity shutdowns and dismantling of the mentioned capacity. The capacity closure and dismantling project aiming at a reduction of annual capacity by 590 000 tonnes has already been implemented, with capacity amounting to 120 000 tonnes already closed.

18. V. Progress Report on the Implementation of the “Czech Steel Sector Restructuring Programme“ Privatisation of steel companies • Within the VÍTKOVICE, a. s. judicial settlement process, an equity share 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 National Property Fund (NPF), by public tender in 2002. Public competitive bidding for sale of this share to a strategic investor will take place before the end of the 1st half of 2005. • 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 concluded between NPF and LNM and changed membership of the 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 time, INH owns an approximately 58.3 % share in JÄKL Karviná, a. s., which is an important finalising segment of the production chain.

19. V. Progress Report on the Implementation of the “Czech Steel Sector Restructuring Programme“ Implementation of EU environmental legislation is being performed continuously in accordance with EC documents. Implementation of EU environmental legislation • The Integrated Pollution Prevention and Control Act (IPPC) applies to 114 technological units in the steel sector. The applications already processed and 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 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. • Trading in greenhouse gases (ETS). Compared to 1990, CR has reduced CO2 emissions in industry totally by approximately 32 %; in the steel industry the reduction amounted to 40 %. Trading officially started on 1.1.2005. • Steel industry companies produce chemical substances in some technologies (e.g. coking plants), therefore they follow the REACH process and are preparing for implementation thereof. Intensive work based on identified issues is supposed to take place during 2005.

20. V. Progress Report on the Implementation of the “Czech Steel Sector Restructuring Programme“ Monitoring of the results as of 31 December 2004 shows that business results and productivity growth have improved because of the intensification measures taken in the course of the Czech steel industry restructuring as recommended by the EC. Conclusion Five monitoring reports on progress of the implementation of the ”Czech Steel Sector Restructuring Programme”, elaborated for the period since 2002, were handed over to the EC. 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 the programme of excess final rolled stock capacity liquidation must be completed. Decisions of the government of the Czech Republic and the procedure approved by the EC provide the necessary assumptions for a positive completion of the restructuring process.

21. V. Progress Report on the Implementation of the “Czech Steel Sector Restructuring Programme“ Annex – Results for 2004