Committee Reports::Report No. 04 - Irish Steel Limited::22 November, 1988::Report

iThe Joint Committee noted the Company’s efforts to improve overall profitability through the strategy of developing the sale of (Category III) section products (Ref. Par. 31).

iiAs a consequence of Commission Decision No 3484/85/ECSC of 27 November, 1985, which restricts further State aid to steel undertakings and to the terms associated with the Government loan of £18 million made in December 1985, it is incumbent on the Company to reach profitability at an early date - through the implementation of appropriate marketing and financial strategies. (Ref. Par. 36)

iiiThe Company should seek to extend the sale of colliery arches to prospective customers both within and outside the EC. The Joint Committee understands that negotiations have taken place with a European company in relation to the sale of additional tonnages of colliery arches and that some small tonnages have already been sold in the U.S. (Ref. Par. 37)

ivThe Joint Committee is deeply concerned that, with the exception of 1986 when a small profit (£0.5 m.) was recorded, losses are again forecast for the next three years. In the year to 30 June 1988 a loss of £4.54 million was recorded. However, if the recent demand for steel is sustained it is possible that profitability will be achieved earlier than the three year time horizon referred to. If the earlier loss making trend continues the future viability of the Company must be seriously in question. (Ref. Par. 55).

vThe Committee requested to have sight of the Company’s Corporate Plan but this document was not made available. In the Committee’s view it is regrettable that the plan - or alternatively a synopsis of it - was not made available for examination having regard to the fact that the Company’s plans are of such importance to its future viability. On the basis of past performance the Committee questions the Company’s capability to attain the objectives of any such plan. (Ref. Par.79)

RECOMMENDATIONS:

iIn view of the high overall proportion of energy costs represented by electricity, the high electrical load drawn and the average price payable for electricity within the present tariff structure, the Company should explore the feasibility of increasing its annual load factor, for example through the option of week-end working, in order to negotiate a more favourable tariff structure with the Electricity Supply Board. (Ref. Par. 26)

iiIn view of the substantial amounts of energy utilised in steel production the Company should continue to investigate possible economic methods of waste heat recovery. (Ref. Par. 28)

iiiThe Company should endeavour to sell increased product volumes on the domestic market through an extension of its product range, probably through continued association with producers of such complementary products, and as part of its niche marketing strategy it should broaden, where possible, both its product range and its customer base. (Ref. Pars.35 and 36)

ivThe financial performance of Irish Steel Limited over the past decade would not, in the opinion of the Joint Committee, have justified the investment by the Exchequer of an amount totalling in excess of £170m. It seems to the Joint Committee that Government support in the future would not be warranted, even if allowed by the EC, unless the Company clearly demonstrates an early return to commercial viability.

(i)the singularly unimpressive financial track record of the Company to date, and

(ii)the ongoing losses which are progressively eroding the equity base of the Company.

the Joint Committee recommends that the Department of Finance undertake a comprehensive financial review of Irish Steel Limited. There is an urgency about having this review carried out and it is the intention of the Committee to request, in early course, a progress report from the Department on this matter. (Ref. Pars. 67 & 84).

vThe Committee places great importance on the Company entering into a joint partnership to strengthen its marketing, financial and technological base. Information was obtained from the Company and from the Department of Industry and Commerce in relation to a joint venture partner and the Committee notes the recent statement of the Minister for Industry and Commerce with regard to progress in this matter. (Ref. Pars. 81 and 83).

viThe Committee draws attention to the following issues which need to be addressed if the future viability of Irish Steel is to be assured;

(i)the need to link up with a suitable joint venture partner.

(ii)improvements in marketing.

(iii)further product diversification.

(iv)improvements in energy utilisation and/or reduction in energy costs. (Ref. Par. 82)

IRISH STEEL LIMITED

1. INTRODUCTION

1.The steel industry at Haulbowline is now 50 years old and there has been a direct State involvement for 41 years. Operations commenced in 1938 with the formation of a private limited company. This company leased land and buildings which, originally, had formed part of the old British Naval Dockyard. The reason for the establishment of the industry and its location was partly political and partly commercial, Cobh being in those days a depressed area following the withdrawal of the British Navy. The deep water facilities, as well as the large buildings and cranage, were a considerable attraction and the promoter of the new company was heavily involved in the scrap trade in this country.

2.This venture, which was largely based on second hand equipment purchased on the Continent, suffered a severe set back when World War II broke out within a few days of the official opening of the plant. Although the company limped on for a few years, raw materials and essential parts were almost impossible to procure. It was eventually placed in the hands of a Receiver, who offered it for sale as a going concern.

3.With no interest being expressed by private industry, the Government in 1947 decided to purchase the undertaking. On 23 June 1947, the State Company, then known as Irish Steel Holdings Limited, was incorporated as a private limited liability company under the Companies Acts, 1908 to 1924.

4.The original authorised share capital of the new company was £100 and the issued capital £3, consisting of three Shares of £1 each taken up by the directors. Some thirteen years elapsed before the State made its first equity investment in the Company.

5.With the prospects of entry into the Common Market in the 1950’s and the freeing of trade, two limited expansion programmes were carried out; one in the early 1960’s when a more modern steel making furnace, soaking pits, and better rolling facilities were installed, and the other, at the beginning of the 1970’s when electric steel making was introduced for the first time. This latter step was largely an interim measure pending a decision as to the direction which the Company should ultimately take.

6.On joining the European Economic Community in 1973, Ireland also acceded to the European Coal and Steel Community (ECSC), set up under the Treaty of Paris, the forerunner of the Treaty of Rome which, in 1956, established the European Economic Community.

7.The Treaty of Paris established a common market for coal and steel products and conferred considerable powers on the institutions set up to control and operate the provisions of the Treaty, particularly in matters such as production, pricing, competition, agreements, over-dominance by one or more producers and investments. Irish Steel is subject to the provisions of the Treaty of Paris and the regulations made thereunder by the Council of Ministers or the Commission.

8.Following the sudden decline in the fortunes of the European steel industry in the mid 1970’s, the Council of Ministers and the Commission were forced to intervene and to invoke powers provided under the Treaty of Paris for the regulation of production and sales, and the monitoring and control of pricing. Pursuant to Article 58 of the European Coal & Steel Community Treaty the Commission has operated a number of anti-crisis measures aimed at reducing steel production capacity, stabilising the market and restoring undertakings to financial viability. The principal measures currently in operation are listed in Appendix 1 from which it will be noted that with effect from 31 December, 1985, further State aid to steel undertakings within the Community is now restricted.

9.Despite the rationalisation and restructuring carried out during the 1980’s which led to the elimination of some 30/35 million tonnes of surplus capacity, problems of over capacity still persist within the ECSC. The Commission holds the view that there still exists a further 30 millions tonnes of excess capacity *.

10.In 1975 a detailed feasibility study, which formed the basis for a submission by the Board to Government in 1976, was carried out on the future of the industry. The Board was satisfied on the basis of this study, subsequently verified by an international firm of consultants, that a viable enterprise could be created at Haulbowline and it, therefore, sought Government approval to proceed with the necessary modernisation work. As well as Government approval the agreement of the EEC Commission was also required in relation to the Company’s plans and investment proposals and, after protracted consideration, final approval to proceed was given in mid 1978. The re-equipment programme commenced in October 1978 and was completed by July 1981.

11.Since 1981 the Company has established itself as a significant and regular supplier of steel products to most of the other EEC and EFTA countries as well as servicing the home market within its product range. The Company’s policy has been to achieve its sales objectives by pursuing an orderly marketing strategy throughout Europe, its approach based on building its reputation as a small producer offering high standards of service, reliability, delivery and quality.

12.A summary of the trading performance of the Company, drawn mainly from the audited accounts for the years ended 30 June 1983 to 1987 is contained in Appendix 2.

13.Sales of finished product, measured in tonnes, have grown from 89,000 tonnes in 1983 to 199,000 tonnes in 1987 - a volume growth rate in excess of 23% per annum. This growth is shown graphically in Appendix 3 Fig. 1

II. PRODUCTION

14.Following completion of the feasibility study in 1975, the Company was actively engaged with its technical consultants in considering and refining the concepts of the new plant, which in many respects would follow the mini mill mode. Mini mills are based on electric steel making and continuous casting allied to a bar or rod rolling mill.

Mini steel plants, because of significantly lower capital costs per installed tonne, as well as inherent flexibility, are able to compete with the much larger integrated plants, which normally have a higher break-even level for the product range in question.

15.The term ‘mini’ does not so much denote size as relativity to the giant integrated steel plants, which typically have a production capacity within a range 1 - 10 million tonnes and in some cases higher. Mini plants are generally in the range 50,000 - 500,000 tonnes of steel per annum. A mini plant consists of an electric are furnace based upon scrap, a continuous casting plant which converts the molten steel from the furnace into billets, usually within a range of 80mm to 200mm square, and a rolling mill which processes the reheated billets into finished products, generally merchant bars - small angles, channels and flats - and reinforcing bars and rods.

16.The raw material for the integrated process is iron are which is processed into iron in a blast furnace and then transformed into liquid steel in an oxygen converter. In the case of the mini plant, the basic raw material is ferrous scrap which is melted and refined in an electric are furnace.

17.The new plant was designed to conform to the main criteria for a mini steel plant *, although the continuous universal rolling mill is more versatile and sophisticated than the generality of rolling mills associated with such miniplants.

18.The old plant and equipment became mainly redundant and the new facility was planned to avail of the most up-to-date technology. In specifying the design of the new universal rolling mill, the Company sought a unit which would, from a production and marketing viewpoint, be versatile and broad ranged and through the use of pre-set cartridges could be changed from one product to another much more quickly than in the case of a conventional mill. The plant would have the capability of producing parallel flanged, as well as tapered flange, products aiming for what was perceived to be a niche in the market, viz. above the normal mini plant ceiling of 3” dimension and up to 8” dimension. This latter dimension is perceived to be the level at which the great majority of integrated plants become less competitive at the lower end of their size range.

19.The mill installed at Haulbowline was specifically designed to meet the Company’s requirements. It gives the Company a distinct advantage because of its versatility, quick change facility and its ability to produce parallel flanged sections which, from a structural design point of view, have positive advantages in terms of strength, weight and usability over the traditional tapered flange steel sections.

20.The main items of steel making equipment, following the extensive re-equipment programme undertaken at Irish Steel, are :

(1)A 90/100 tonne electric arc furnace with a transformer capacity of 50 MVA and drawing in excess of 40 megawatts of power, with an annual capacity of liquid steel of 350,000 tonnes, approximately.

(2)A three strand continuous casting machine, producing a billet cross-section of 205mm x 175mm up to 6.3 metres in length. Each billet weights approximately 1½ tonnes. Recently, this machine has been adapted to enable billets of a size 240mm x 200mm to be cast in order to meet the size requirement for some new products which are now being introduced at the top end of the production range and outside the original design capacity of the plant.

(3)A continuous universal rolling mill, consisting of a reheating furnace fired by natural gas, a 15 stand mill train together with cooling, straightening, saving, shearing, stacking and handling facilities to produce a product range consisting of:

21.Following commissioning of the new plant in mid 1981. the Company recommenced trading, which had in large measure been suspended during the installation programme. It was obvious from the pre-design stage that the home market would not be able to absorb anything like the full output of the new plant and that the bulk of the production would have to be exported.

22.In bringing the new plant on stream, the Company was required by the terms of the Commission’s approval to adhere to a five year phased build up of production and sales. The Commission’s approval also involved the Company in a market sharing arrangement with a French steel plant, which was also seeking Commission approval for their own modernisation plans at that time. This arrangement has been fruitful for both companies.

23.Appendix 3, Fig. 2 shows how employee productivity has increased in the five year period. The statistics reveal that output per man has increased almost 3 fold. Output per employee recorded in 1986 at 375 tonnes, is comparable with similar mini plants elsewhere in Europe as seen from the table under;

24.The figures quoted for different European countries are not strictly comparable for the output from each individual plant differs significantly depending upon the mix of products manufactured. For example, it would be expected that a plant continuously producing heavy rolled sections would have a larger output per man than one producing a mix of lighter sections and/or reinforcing bars. Subject to this qualification the figures show that productivity at the Haulbowline plant was the best of all figures recorded.

25.The three main constituents of the Company’s energy consumption are electricity, natural gas and liquid oxygen. In usage and price terms, electricity is by far the most significant, representing approximately 75% of total energy consumption. The Company states that by virtue of the Electricity Supply Board tariff structure and despite recent price reductions for electricity supplies it is still at a disadvantage of up to 10% with, for example, a similar sized UK mini mill. **

The Committee sought the views of the Electricity Supply Board on this matter who, in the course of their reply, commented as follows;

“The prices paid by steel producing companies in other countries will depend on the pattern of consumption involved. A more intensive use of demand will generally result in a lower unit price. In the case of Irish of Steel, demand is intermittent and largely confined to week days resulting in an annual load factor of only 47%. It is likely that their steel producing counterparts in Europe have a much higher load factor and thereby a price advantage.”

The Joint Committee was informed that price increases of approximately 9% were implemented in the UK in April 1988. When coupled with adverse movements in the IR£/UKStg exchange rates which have occurred since January 1988 this suggests that the average price now payable by Irish Steel, when compared to a similar sized mill in the UK, is broadly comparable.

26.In view of the high overall proportion of energy costs represented by electricity, the high electrical load drawn and the average price payable for electricity within the present tariff structure, the Company should explore the feasibility of increasing its annual load factor, for example through the option of week-end working, in order to negotiate a more favourable tariff structure with the Electricity Supply Board. However, in these circumstances there would be a need to carry out a careful cost benefit analysis which would, inter alia, compare the marginal revenues earned from additional sales with the corresponding marginal costs.

27.The Company pays an energy related price for its natural gas supplies, which is in line with the price payable by similar sized mills elsewhere in Europe. In order to meet gaseous oxygen needs Irish Steel contracted with Irish Industrial Gases, a subsidiary of British Oxygen, for the erection of an oxygen producing plant at Haulbowline. This plant, which was finally commissioned in June 1988, will result in significant economies *. Because of the cost implications, but more especially the strategic importance to the Company of having access to its own liquid oxygen supplies the Company is to be commended on the installation of this item of equipment.

28.The company informed the Joint Committee that a number of projects have been examined with regard to the possibility of recovering waste heat. Energy recovery projects such as recuperation of the reheat furnace and the hot connection between the continuous casting machine and the rolling mill have been implemented. In addition, a microprocessor has been installed in order to more effectively control energy consumption in the reheat furnace. The involvement with Badische Stahlwerke has enabled Irish Steel to set competitive targets, which are now part of the budgetary process, for the coming years based on the Badische experience. Nevertheless, in view of the substantial amounts of energy utilised in steel production, the Joint Committee would urge that the Company continue to investigate possible economic methods of waste heat recovery.

III. SALES & MARKETING

29.While the Company will always be reliant mainly on export markets, sales on a wider home market, which would give a stronger structural base, would be preferred. Given the depressed state of the construction industry in Ireland and the extent of cost pruning in public capital programmes, it is most unlikely that there will be any material improvement in domestic demand for its products in the foreseeable future.

30.Sustaining the necessary level of exports to meet overall objectives has, in the past, been a difficult task as demand throughout Europe, with the exception of the United Kingdom, was stagnant. Notwithstanding these difficulties, the Company became a regular and accepted supplier to eleven different European markets and has sold to other European countries together with some third world countries on an ad hoc basis. The abolition of quotas has had no impact nor is it likely to have in the medium term due to an increased demand for steel throughout the Community during the latter half of 1988. Irish Steel has benefited significantly from this increased demand because of its market spread throughout Europe and its broad product base. The Company informed the Committee that the current order book is the largest in the Company’s history, necessitating the introduction of a fourth shift.

31.The Joint Committee was informed that it is company policy to develop the product range at the upper end of the size range for merchant bars where both a greater contribution per shift can be earned and where the impact of competition from the larger European mills is likely to be less.** It notes the Company’s efforts to improve overall profitability through the strategy of developing the sale of (Category III) section products and it would encourage the Company to explore additional possibilities for the sale of these products.

32.With over-capacity prevailing within the industry, selling prices had, up to the middle of 1988, fallen significantly in real terms since completion of the re-equipment programme. Price reductions can be attributed to a number of factors, many of which are inter-linked, namely;

33.Whereas the problems of the European steel industry have been identified fully, solutions will be difficult to find given the diversity of interests and problems. Nevertheless, it is undoubtedly clear that, unless the imbalance between installed steel making capacity and finished product demand is resolved, and unless effective controls are imposed on third country imports into the Community, the recurring crises which have been besetting the European steel industry for many years will persist.

34.On the other hand, the Joint Committee was informed that there are now more grounds for optimism that the identification of the specific problems affecting the European steel industry will produce the necessary solutions. The EC Commission at its meeting on 15 June 1988 decided not to request the prolongation of the Article 58 measures subsequent to 30 June 1988 due to the fact that the targets set for the reduction in excess production capacity for the various categories had not been met. This decision was endorsed by the Council of Ministers at their meeting at the end of June, in consequence of which the quota system provided for under Article 58 came to an end with effect from 1 July 1988.

35.The Joint Committee was informed that the production configuration at the plant restricted the Company’s potential market in Ireland to 20% of the total market for steel products. The Committee understands, however, that the company holds approximately 65% of this market segment. The Company informed the Committee that its association with Unimetale (part of the Usinor-Sacilor group in France) has helped to market products not currently produced at Haulbowline. The Joint Committee is of the opinion that the Company should endeavour to sell increased product volumes on the domestic market through an extension of its product range - probably through continued association with producers of such complementary products.

36.The Joint Committee concludes that, as a consequence of Commission Decision No 3484/85/ECSC of 27 November 1985 which restricts further State aid to steel undertakings and to the terms associated with the Government loan of £18 million made in December 1985, it is incumbent upon the Company to reach profitability at an early date - through the implementation of appropriate marketing and financial strategies. The Company should, as part of its niche marketing strategy, broaden, where possible, both its product range and its customer base.

37.The Joint Committee is aware of the Company’s success in exporting colliery arches to the UK which, prior to the abolition of quotas, were specifically excluded from ECSC production quotas. It would urge that the Company seek to extend the sale of these products to prospective customers both within and outside the EC. It understands that negotiations have been taking place with a European company in relation to the sale of additional tonnages of colliery arches and, further, that some small tonnages have already been sold in the U.S.

IV. FINANCE

38.The Exchequer has provided a total of £171m to the Company in the 25 year period to December 1985. This is made up as follows;

The Exchequer loan, advanced in December, 1985, is repayable “having due regard to the Company’s financial position”.*

39.The Minister for Finance has provided a Ministerial guarantee covering liabilities to lenders which at 30 June, 1987, amounted to £30.7m. An EC directive precludes the State from providing further “investment and operating aids” with effect from 31 December, 1985. The introduction by the Exchequer of the funding, specified in the preceding paragraph, has placed the Company in a position where, within a period of four years ** a return to profitability can now be anticipated.

40.Turnover has increased by, on average, 20% per annum - from £23.7m. in 1983 to £48.0m. in 1987. In 1987 exports accounted for 82% of total turnover. It was always intended that exports would form the major part of sales. The depressed state of the home market, in particular, the construction industry has led to the Company seeking and securing new export markets for its products, resulting in this exceptionally high percentage of export sales. The volume of sales, both finished steel and coated sheet, reached 197,000 tonnes for the year ended 30 June 1987.

41.Total sales, subdivided between domestic and export sales, are graphically reproduced in Appendix 3, Fig. 3. While it is noted that sales revenue has declined in 1987, total tonnage produced, both of finished steel products and coated sheet, has increased on average by 23% per annum in the latest five year period. (See also Appendix 3, Fig. 1).

42.The reason for the decline in turnover in 1987 is a reduced average selling price per tonne. Overall surplus capacity within the EC and import penetration were the main factors affecting these price reductions during the year. The average prices obtained by the Company during the 5 years under review is shown in Appendix 3, Fig. 4. The Joint Committee was informed that a movement in selling price of £10 per tonne would affect profitability by £2 million either way. *

(a)ferrous scrap,

(b)wages and salaries, and

(c)energy.

In combination, they account for 72% approximately of total expenditure, exclusive of financial charges and depreciation.

44.Scrap, the basic raw material for mini plants used in electric are furnaces (as employed by the Company) accounts for approximately 25% to 30% of the selling price per tonne of finished product. The quantities of ferrous scrap which have been purchased annually since the commissioning of the new facilities has grown from 74,000 tonnes in 1983 to 197,000 tonnes in 1987.

45.Scrap supplies are procured at existing commercial prices, the dominant influence being international market prices. Scrap is an internationally traded commodity. The reduced figure for 1986/87 reflects lower scrap stocks and a greater use of internally produced scrap.

46.The price payable per tonne is largely determined by the international demand for scrap and the US dollar exchange rate. The actual price paid per tonne for the five year period under review, is shown in Appendix 3, Fig. 5.

47.The price of scrap is subject to highly volatile movements. For example, since June, 1987, average prices have increased because of an upturn in demand in the U.S. However, more recently this rate of price increase has been moderated by the fall in the US dollar against all major currencies including the IR£.

48.Based upon the average number employed throughout the year, Appendix 3, Fig. 6 shows total employment cost per head (viz. wages and salaries, PRSI, pension scheme premiums and insurance costs) over the five year period 1983 to 1987.

49.An analysis of the Company’s energy purchases since 1983 shows that whereas expenditure peaked at £8.4 million in 1985 it has since fallen to £6.2 million for 1987, reflecting substantial reductions in the cost of electricity and natural gas during that year.

50.The overall profit performance of the Company for the 5 year period under review is shown in Appendix 3, Fig. 7. Considerable selling effort was required to regain sales volumes lost during the commissioning period. This resulted in significant trading losses being incurred for each year 1983, 1984 and 1985.

51.While trading losses decreased in 1984 and 1985, mainly as a result of increasing volumes and improved contributions, it was only as a result of the following factors that a net profit of £501,000 was recorded for 1986 - the year in which the final Government loan was introduced;

(a)extra sales volumes,

(b)favourable product selling prices,

(c)reduced scrap prices, and

(d)reduced costs - as a result of the Company’s rationalisation measures - with a consequent sharp rise in productivity (output per man).

52.For the year ended 30 June 1986 the average selling price of £271 / tonne for finished product, which coincided with a reduction in the price payable for scrap, was the maximum payable in the 5 year period. Large foreign currency translation gains also helped achieve a profit for 1986, the first occasion in more than a decade that a profit was recorded.

53.Notwithstanding further increases in throughput during the year lower product selling prices yielded yet again a net loss of £5.4 million for 1987. The reduction in operating costs, particularly scrap and energy, was insufficient to offset reduced selling prices obtained during the year.

54.The overall profit / loss, shown in Appendix 3, Fig. 7 is arrived at having allowed for extremely heavy interest and depreciation charges. Total plant costs are being written off over 15 years. These high interest charges arose because of the imbalance between equity and loan capital in the company’s capital structure. However, from 1986 onwards, following the final State equity investment of £75m., net financial charges declined from £6m. for the year ended 30 June 1985 to £0.12m.* for the year ended 30 June 1987.

55.The net loss for the financial year ended 30 June 1988 was £4.54m. The corresponding figure for the previous year was a loss of £4.99m. A return to profitability is anticipated by the Company within a further three year period. ** However, if the recent demand for steel is sustained it is possible that profitability will be achieved at an earlier date. However, if the earlier loss making trend continues the future viability of the Company must be seriously in question. (The current examination by the Joint Committee began on the basis of a review of the Company’s operations for the five year period to 30 June 1987. While the Committee

is aware that the Company has published its annual report and accounts for the year to 30 June 1988, on 10 November 1988, all the latest financial figures contained in these accounts have not been incorporated in this review.)

56.One of the more frequently employed ratios used to measure overall Company profitability is the return on capital employed. It is derived by expressing profits as a percentage of total capital invested. Appendix 3, Fig. 8 shows this ratio for the 5 year period under review from which it is noted that it was positive for 1986 only; all other years yielded negative values.

57.The current ratio is depicted in Appendix 3, Fig. 9 where it is seen to continue to have a satisfactory value as at 30 June 1987. This improvement has resulted mainly from the Exchequer equity injection of £75m. in 1985 and 1986 and a further loan of £18m. in 1986.

58.The gearing, which measures total borrowings as a percentage of capital employed, is shown in Appendix 3, Fig. 10. The gearing has declined from an unsupportable level of 129% in 1986 to the present acceptable level of 54.6% for 1987. The introduction of the aforementioned Exchequer funding not only improved the Company’s gearing but as a consequence also reduced the extraordinarily high annual financial charges incurred up to and including 1986.

59.One useful measure of performance is turnover of stock, shown in Appendix 3, Fig. 11. For a heavy industry such as the Company a stock turn of 4.1 recorded for 1987 is regarded as satisfactory.

60.Appendix 3, Fig. 12, a Source and Application of Funds statement, summarises for the five year period to 30 June 1987 where the Company received funding and how in turn this funding was utilised.

61.In summary, the Exchequer, in the 5 year period under review, has provided £100m. by way of share capital in order to;

62.Financial charges, incurred as a direct consequence of the unfavourable capital structure which existed for three out of the total five year period examined, amounted to £32m and are included in the total losses of £47m. These charges correspond to almost 70% of losses incurred. The overall effect of Exchequer funding is thus seen to have;

(a)redressed the Company’s adverse capital structure caused by earlier heavy losses, and

(b)placed the Company in a relatively strong position to meet future fixed and working capital needs.

63.The increase in working capital, during the five years, has been contained at £2m., representing an increase of 26%, while sales have increased by more than four times this amount (113%) during the same period. This reflects capable internal financial and treasury management.

64.A review of the Company’s performance from 1983 to 1985 indicates that losses incurred during this period stemmed mainly from under-capitalisation which in turn resulted in heavy loan interest charges. Contributory factors were insufficient sales volumes, high scrap prices and low productivity. As mentioned previously there still remains an excess capacity of 10 million tonnes despite reductions in capacity throughout the EC. This over capacity had, prior to the abolition of the quota system, continued to depress prices obtainable within the Community for all classes of steel products.

65.Profits recorded in 1986 were caused mainly by higher selling prices but also as a result of lower financial charges resulting from the Exchequer’s equity investment in December, 1985. Unfortunately the lower prices obtainable in 1987, despite lower scrap prices, again yielded a lower gross margin which translated directly into a net trading loss for the year.

66.As the Haulbowline plant is close to its rated maximum output future profitability will be achieved through a combination of one or more of the following factors;

(1)increased selling prices (difficult to obtain in a market with excess capacity). For every £10 increase in selling price net profits improve by £2m.,

67.The financial performance of Irish Steel Limited over the past decade would not, in the opinion of the Joint Committee, have justified the investment by the Exchequer of an amount totalling in excess of £170m. It seems to the Joint Committee that the Government support in the future would not be warranted, even if allowed by the EC unless the Company clearly demonstrates an early return to commercial viability.

V. STRUCTURE & ORGANISATION

68.The Company is governed by the Irish Steel Acts 1960 - 1985 which, in the main, deal with the Minister for Finance’s authority to take up shares in the Company, the provision of share capital, guarantee of borrowings and the format and submission of accounts.

69.Under the 1985 Act, the share capital of the Company was increased to £125,000,000, divided into shares of £1 each. The Minister for Finance, after consultation with the Minister for Industry and Commerce, is empowered to take up, by subscription or purchase, shares amounting in the aggregate to that figure. Apart from Directors’ qualification shares amounting to £10, the remaining 124,999,990 shares have been allotted to and are held by the Minister for Finance. The 1985 Act also provided for a reduction in the level of Ministerial guarantee of borrowings by the Company from £100 m. to £32m. There were liabilities of £30.7m. outstanding at 30 June 1987 under Ministerial guarantee.

70.The Board of Irish Steel Limited consists of nine members, all of whom are appointed by the Minister for Industry and Commerce. The Chief Executive, who is not a member of the Board, is responsible for the formulation and implementation of Board policy and for the attainment of the corporate objectives. Reporting to the Chief Executive, with responsibility for specific functions are general managers in the functional areas of Sales and Marketing, Administration, Finance and Company Secretariat. The Joint Committee was informed that the Company has well developed management information and accounting systems which produce monthly operating statements for submission both to the board and to the Department of Industry & Commerce.

71.Appendix 3 Fig. 13 shows the effect of the Company’s rationalisation programme. The total number of employees over the 15 year period 1974 - 1988 declined from 1129 to 552. The most recent rationalisation programme was described in the Company’s annual report for the year ended 30 June 1986 in the following terms;

“In order to address the acute financial position of the Company a series of cost-cutting measures were implemented during the latter part of 1985. These included 118 redundancies, a pay freeze until at least the end of 1986, the elimination of restrictive practices, and the acceptance of further efficiencies by employees. By the end of December this year, the Company will have had in place a pay freeze covering effectively a 2½ to 3 year time span.”

72.An organisation chart is reproduced at Appendix 4. The Company’s staff, which totalled 553 as at 30 June 1988, includes a high proportion of skilled managerial and technical personnel;

The recent increase in orders has involved the temporary recruitment of some 90 persons.

73.The industrial relations climate in Irish Steel since the start of the major redevelopment programme in 1978 has been generally good, notwithstanding the fact that in the intervening period -

(a)there was a major lay off because of suspension of production while installation work was being completed,

(b)short time working was introduced for a period in 1982 due to a difficult market situation, and

74.The survival package which the Company put to the work force in 1985 involved a further 120 redundancies as well as a freeze on all pay increases from the beginning of 1984 to end of 1986. In conjunction with these measures, aimed at restoring the Company’s competitive position, agreement was reached with the trade unions for greater co-operation and flexibility in relation to work practices, including the further use of outside contractors. Some initial difficulties were experienced with the introduction of contractors but, hopefully, these have now been resolved.

75.Apart from some 50 persons in managerial grades, the remainder of the work force is unionised and is represented by nine unions, the largest union being the ITGWU, which currently represents some 290 members. The next largest is IDATU, with some 70 members; other unions, including the combined membership of craft unions, have 110 members approximately.

76.Having emerged from the three year pay pause already referred to, the Company determined that future pay increases should be tied in large measure to improvements in the overall performance of the Company. The wage agreement concluded for 1987 provided for the introduction of an incentive scheme related to improvements in employment and energy costs above an agreed datum line.

VI. POLICY

77.The Joint Committee was informed that the Company’s primary corporate objective is to manufacture and sell steel at a profit so as to remunerate its share capital and, ultimately, to pay a dividend to the main shareholder, the Minister for Finance. Unfortunately, the steel industry world wide is suffering from gross over capacity and demand is poor within the product range which is allied to the construction industry. Much of the industry is loss making and it is management’s opinion that it will take some time for the Company to reach ultimate viability.

78.The Objects clause of the Company’s Memorandum of Association is extremely wide ranging and empowers the Company to engage in a great variety of businesses, besides steel making and steel rolling. Apart from the criteria laid down by the Government in connection with its advance of £18 millions in December, 1985, no formal written general objectives have been laid down for the Company, either by statute or by Government directive.

79.The corporate objectives and financial projections are set out in the Company’s Five Year Corporate Plan * which is updated every year. The Committee requested to have sight of the Company’s Corporate Plan but this document was not made available. In the Committee’s view it is regrettable that the plan - or alternatively a synopsis of it - was not made available for examination having regard to the fact that the Company’s plans are of such importance to its future viability. On the basis of past performance the Committee questions the Company’s capability to attain the objectives of any such plan. The Committee was informed that the corporate goals are:

(a)to secure the long term viability of the Company as an independent steel producer,

(b)to achieve a progressive improvement in corporate profitability and to preserve the cash resources of the business,

(c)to continue to seek an investing partner with the objective of achieving commercial synergy which would improve the long term prospects of the organisation.

(2)to minimise unit costs with the best achievable standard of operating efficiency;

[The Committee was informed * that in order to achieve this objective, a three year technology agreement with a German steel producer, Badische Stahl, had been completed. Badische Stahl is acknowledged to be a leader in the field of electric steel making, world wide. This agreement will enable the Company to keep abreast of modern developments in the steel industry and will result in a programme for increased productivity and cost improvement together with the implementation of ongoing investment proposals to ensure that the organisation remains efficient and effective.]

(3)to achieve greater control of the steel market in Ireland outside the range of products actually produced by the Company itself;

[The product range has been expanded recently at the upper end through the introduction of larger sections and further large sizes will be introduced during the current year. These heavier sizes are not generally provided by mini mill operations and will expand the presence of the Company at the bottom of the range traditionally supplied by the integrated producers where prices have tended to be firmer.]

(5)to increase sales volumes by further geographical expansion within Europe; and

[For example, during 1987 the Company succeeded in securing a three year contract to provide a significant tonnage of mine arch sections for use by the coal industry in the UK.]

81.The Joint Committee was informed * of the Company’s strategy to strengthen its marketing, financial and technological base through the search for an appropriate external joint venture partner. The views of the Department of Industry and Commerce were also sought in this matter and the Department in its reply stated that it -

“shares the conviction that (the Company) could gain a substantial advantage from an association with an external partner possessing complementary attributes and will continue to assist the company in its endeavours to find such a partner.”

“Contacts are being maintained with a number of European producers in an ongoing attempt to identify synergies that would make a joint venture arrangement attractive to both parties.

With continued surplus steel capacity the logical joint venture arrangement is one which enables production capacity to be rationalised and costs reduced. There is little opportunity in this for Irish Steel because it is located peripherally to its markets with cost penalties not shared by the local producer. In other words, any rationalisation of production capacity will favour facilities closer to the market with lower infrastructural and other costs than obtain in Ireland.

Nevertheless, Irish Steel has some degree of leverage in markets where it has already achieved a degree of penetration that is creating difficulties for the local producer. In these situations, it can be advantageous for the local producer to enter a joint venture arrangement that allows Irish Steel concentrate on the product range best suited to its production capabilities and removes the depressing influence of its need to compete at lower prices in that market. Discussions have taken place along these lines with a number of steel producers world-wide and, within the past year, discussions have been reactivated with two European producers . . . . . . .”

82.The Company informed the Joint Committee that long-term profitability would be achieved through the implementation of one or more of the following elements, each of which go to make up part of the overall corporate strategy;

(d)improvements in productivity mainly through staff training in modern steel-making methods.

In addition to these elements the Joint Committee draws attention to the following issues which, inter alia, the Company needs to address if its future viability is to be assured;

83.The Joint Committee welcomes the recent statement of the Minister for Industry and Commerce with regard to progress in the search for an appropriate joint venture partner. Such an association would have the effect of strengthening the Company’s marketing and, possibly, financial capabilities. Having regard to -

(a)the embargo imposed by the ECSC on further State aid for steel enterprises (Appendix 1 refers) and,

(b)the effect of the ongoing trading losses, both for the current year and the next three years,*

the Joint Committee is concerned about delay in linking up with a joint venture partner and the implications which this could have for the overall future viability of the Company.

(i)the singularly unimpressive financial track record of the Company to date and

(ii)the ongoing losses which are progressively eroding the equity base of the Company

ACKNOWLEDGEMENT

85.The Committee appointed Eamon Dundon & Associates Ltd., Business Consultants, as specialist advisers for the purpose of this inquiry. It wishes to express its appreciation of the advice and help given by Mr. Eamon Dundon at all stages of the inquiry.

MEMBERS OF JOINT COMMITTEE

SUMMARY OF OBSERVATIONS AND RECOMMENDATIONS

OBSERVATIONS:

RECOMMENDATIONS:

IRISH STEEL LIMITED

1. INTRODUCTION

II. PRODUCTION

III. SALES & MARKETING

IV. FINANCE

V. STRUCTURE & ORGANISATION

VI. POLICY

ACKNOWLEDGEMENT