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  In October 1980, for the first time in the history of the ECSC,
  the Commission had to impose strict production quotas on the
  Community's steel industries in order to save the common market
  in steel from falling apart.
  Since then, with the underpinning afforded by this market control
  system which brought supply and demand into better balance,
  restructuring on an unprecedented scale has been carried out: the
  steel industry has shed some 31.2 million tonnes of surplus
  production capacity since 1980.
  At the end of 1985, as it was clear that Europe's steel industry
  was recovering from its long malaise, the Commission proposed a
  first market liberalization measure, to come into force on
  1 January  1986.  Two categories of products were removed from
  the production quota system, concrete reinforcing bars and sheet
  known as "other coated sheet".
  The Commission is proposing for the Community of Twelve a further
  liberalization of the market from 1 January 1987 which will not
  be merely symbolic but will have a real impact.  At present 65%
  of the Community's total steel production (Community of Ten, as
  Spain and Portugal are not subject to the quota system) is
  covered by quotas.  If the governments accept the Commission's
  proposals, only 45% of total output will be covered by quotas
  from 1 January 1987.
  The measure concerns the following products:
  - wire rod
  - merchant bars
  - galvanized sheet, and products used for their manufacture
  - certain types of small sections which are included in the
    present category of heavy sections now subject to the quota
  After the ECSC Consultative Committee has been consulted, the
  proposals will be debated by the Council meeting of Ministers for
  Industry of the Twelve on 20 October.
                           - 2 -
  The Commission and Eurofer do not see eye-to-eye
  Production costs plummet
  As the Commission observes, since the summer of 1985 the
  Community's macroeconomic situation has been radically changed by
  a series of events: the decline in the dollar, plummeting energy
  and raw material prices, lower inflation and falling interest
  rates.  The result for steel undertakings has been a significant
  cut in costs of between 15 and 25%, which in turn has led to
  major price reductions.  Even so, in the first quarter of 1986
  most steel firms made large profits through the dual impact of
  falling production costs and continuing fairly high level of
  Community prices.
  Prices within the Community may have fallen, but they are still
  stronger than world prices;  this has reduced Community exports
  and boosted imports.
  Imports are not exploding
  The Commission does not agree with the major steel groups in
  Eurofer when they speak of an "imports explosion".  The
  Commission points out that the first half of 1986 should not be
  compared with the first half of 1985.  Although imports have
  increased substantially (up by 23.3% in the first six months of
  this year), it should be remembered that in the first half of
  1985 the European market attracted very low imports and that
  period should therefore not be regarded as representative.  If
  the comparison is made with previous years - 1982, 1983 and 1984
  - the increase in 1986, at about 10% gives much less cause for
  In any case, no true comparison can be made without determining
  the share of imported steel in the consumption of steel products
  in the Community.   In the first half of 1986 net imports from
  all sources stood at 4.8 million tonnes, 9.1% of total apparent
  consumption of 52.7 million tonnes.  By comparison, only in 1981
  and 1985 were the import penetration rates lower, and that was
  because prices on the Community market were very low.  In 1977
  and 1982 (two difficult years for the European steel industry)
  the penetration rates, at 11.5% and 11.1% respectively, were even
  higher than in the first six months of 1986.  Since 1978 the
  Commission has negotiated bilateral arrangements with several
  non-Community countries whose sales of steel to the Community
  traditionally account for between 75 and 80% of all imports.
                                - 3 -
  In the first half of 1986 the tonnages delivered by these
  countries with arrangements* covering annual reference
  quantities reached only 32.8% of their "ceilings" on average, or
  1.4 million tonnes, which represents only 2.6% of apparent steel
  consumption in the Community in the first six months of 1986.
  The pressure that is now felt in the Community is the result of
  imports from non-Community countries which have not concluded
  such arrangements.   Their share in total imports represents only
  about 25%, and the increase in percentage terms, though large,
  affects the global rate of imports only marginally.
  Exports: 1985 was an exceptional year
  Exports fell by an estimated 3 million tonnes in the first six
  months of 1986.  The point must be made that 1985 was an
  outstanding year for exporters of European steel, largely thanks
  to the pull of a soaring dollar.  Another factor was that in 1985
  such countries as China and the USSR imported exceptionally large
  quantities of European steel, which they did not do in 1986.
  The Commission does not accept the status quo
  The Commission is well aware that the large Community steel
  companies in Eurofer, whether because they fear they are not
  sufficiently prepared to cope with a liberalized market or
  because they wish to consolidate the good results of the previous
  year, are advocating that the quota system be continued without
  change: in other words they want to keep the status quo.
  The Commission cannot agree to this.  The story of the steel
  industry over the last few years has shown up the differences in
  competitiveness between Community firms.  Some have taken
  advantage of the period 1980-85 to make major improvements to
  their production structures, but others have fallen sadly behind
  in the restructuring process.  The Commission must repeat its
  warning: further state aid in future to wipe out the deficits of
  companies in the red is out of the question.  Even though
  restructuring has eliminated some 31 million tonnes of production
  capacity, excess capacities still exist.  The Commission
  emphasizes that firms must therefore take advantage of the last
  respite afforded by the remaining months during which the quota
  system will remain partly in force in order to carry through any
  further restructuring needed to make them competitive enough to
  survive without external aid from 1988.
  * These countries are: Poland, Czechoslovakia, Hungary, Romania,
  Bulgaria, South Korea, Brazil, Australia, South Africa and Japan;
  and also four EFTA countries (Sweden, Austria, Norway and
  Finland), which are not relevant to this argument as their
  exports to the Community have more to do with trade reciprocity
  than with reference quantities.
                           - 4 -
  To all this must be added the fact that the quota system is
  essentially based on references derived from the results of steel
  firms in the 1970s: that situation no longer has much relevance
  to the reality of 1986 as regards either demand or the structure
  of production.
  As regards demand, industry's fortunes have varied. Some, like
  shipbuilding, have suffered severe cutbacks; others are
  developing the use of new products, like certain types of coated
  sheet in the car industry.  The structure of demand has radically
  changed as regards the nature, quality and specifications of the
  products in demand.  Nor should we overlook the impact of steel substitutes and the
  increased competition from producers in non-member countries.
  Steel manufacturing processes have also undergone considerable
  technical development which, together with the pressure of the
  crisis, has brought about profound changes in the structure,
  output and productivity of steel firms.
  The status quo is enemy of profitability
  In these conditions, maintaining the quota system would introduce
  a rigidity which would create growing difficulties with every  quarter for the sound management of firms, to the point where
  each of them would demand changes in its favour or some
  relaxation of the rules.  The difficulties of adapting to market
  and technical changes would become more and more apparent; as
  things now stand, continuing the status quo would be a severe
  damper on the industry, precisely because it has been in force
  without a break since 1980.
  The implication is clearly the system which was indispenable when
  collapsing demand brought about the state of manifest crisis in
  1980 is now an obstacle to the return to profitability because of
  its obsolete reference framework and rigid rules.
  The Commission is convinced that the progressive restoration of
  free competition in a liberalized steel market is the necessary
  condition for continuing the restructuring process.  It would be
  the incentive for firms to strengthen their productivity and shed
  surplus capacities.  The Commission therefore feels that some
  further measure of liberalization is essential.
  Why liberalize certain products?
  First, the Commission wishes to remove from the quota system the
  long, light products wire rod and merchant bars.  The
  Commission's arguments in 1985 still hold good.  In this sector
  there has been major structural change in the last few years:
  the production of these products has been largely transferred
  from integrated steelworks to electric steelworks.  These are so
  structured that they can adjust without difficulty to an early
  return to full competition.
                          - 5 -
  Secondly, the Commission wishes to liberalize the range of small
  sections which are still classified in the category of heavy
  sections covered by quotas. Most of the small and medium-sized
  firms manufacturing these small sections are suffering under the
  strict quotas imposed because of the stagnation of the market for
  heavy sections.
  These firms are calling for an end to the quota system for small
  sections, especially as these products sometimes compete with
  certain merchant bars which the Commission wishes to liberalize.
  Lastly, for flat products, the Commission thinks, as it proposed
  in 1985, that galvanized sheet should be removed from the quota
  system, on the grounds that there is little capacity in this
  sector and that a considerable degree of flexibility in
  production quotas has already had to be introduced for this
  product to safeguard it from unfair competition from other coated
  sheet not covered by the quota system as from 1 January 1986.
  Utilization (net imports) in the first half of 1986 of the
  reference quantities agreed in the arrangements concluded for
  1986 (excluding EFTA countries)
                                   (EUR 12)           ('000 tonnes)
                        Arrangement     Net             Rates of
                        quantities      imports         utilization
  Poland                  432 889       152 376          35.1
  Czechoslovakia          716 869       293 927          41.0
  Hungary                 383 316       123 841          32.3
  Romania                 427 825       178 316          41.6
  Bulgaria                308 482       125 418          40.6
  South Korea             235 812        54 407          23.0
  Brazil (steel           226 325        94 745          41.8
         (pig iron        295 499       158 181          53.5
  Australia               417 150         3 855           0.9
  South Africa            361 397       156 552          43.3
  Imports of ECSC steel products (pig iron + ferromanganese +
  steel) into the Community of Ten ('OOO t)
                       86     85     84     83     82     81
                    (I - VI)
  Countries with
  arrangements        3425.4 6264.5 5819.6 5921.2 5654.2 5242.6
  Countries without
  arrangements        1413.O 2026.7 2261.O 2263.6 2665.7 1293.7
  Total               4838.4 8291.2 8080.6 8184.8 8319.9 6536.3
                                - 6 -
  Imports subject to anti-dumping procedures (heavy plates from
  Yugoslavia and Mexico) as a share of total imports of these
                          EUR 10
                      I - VI          I - VI         I - VI
                       1984            1985           1986
  Total imports
  Tonnes             540 357         681 492         843 964
  %                    100%           100%            100%
  of which
  Tonnes             17 488          66 281           73 210
  %                   3.2%            9.7%             8.7%
  of which
  Tonnes              1 518           2 537           41 718
  %                   0.3%            0.4%             4.9%
  Procedure concerning Yugoslavia: on 5 September, imposition of a
  provisional anti-dumping duty of 68 ECU/tonne.
  Procedure concerning Mexico: first scrutiny by the Commission of
  the complaint lodged by Eurofer in early August; no notice of the
  initiation of the procedure has yet been given.
  Community exports (EUR 10) of ECSC steel products to the rest of
                              the world
  1981       1982      1983       1984      1985     1986(I - VI)
  2 003 861 1 555 786 1 595 246 1 895 037  2 125 943 1 510 617

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