In July this year the Government decided to provide up to £6 million to Irish Steel in the period to December 1985 on condition that the company's employees accepted the board's proposals for a rationalisation package to reduce the company's operating costs. The rationalisation package involved: a pay freeze to the end of 1986; a redundancy scheme which would have the effect of reducing the company's labour costs by at least 10 per cent and the elimination of restrictive practices.
The Government deferred a decision until the end of the year on whether to invest the balance of the £24 million for which the approval of the European Commission had been sought.
Despite the very obvious difficulties which the rationalisation measures and, in particular the redundancies, posed for the company's employees, I am pleased that they were accepted. 117 redundancies were subsequently identified by the company and nearly all of these have now been effected. The realism and co-operation displayed by the employees in accepting the measures put forward by the board augur well for the future of the company. This is not to say that the company's problems have been solved once and for all. Indeed, one could say that the first major step has been taken. However, in order to ensure its long term future, Irish Steel will have to continue to improve its efficiency and productivity and to reduce its costs.
Following the acceptance by the workforce of the rationalisation package, the Government invested £6 million in Irish Steel in the period September-November 1985, £1m by way of share capital under the Irish Steel Limited Acts, 1960-1984, and £5 million by way of grant, paid from a Supplementary Estimate passed by Dáil Éireann on 10 July 1985.
The purpose of the Bill is: (i) to increase the authorised share capital of Irish Steel Limited from £120 million to £125 million; (ii) to provide, as a consequence, a similar increase in the value of the shares which the Minister for Finance may take up; (iii) to reduce the limit to which the Minister may guarantee borrowings by Irish Steel from £100 million to £32 million; and (iv) to enable the Minister for Finance to advance up to £18 million to the company from the Central Fund.
Senators will be aware that under Community rules governing State aid to steel undertakings, no operating or investment aid may be paid after 1985. I must make it clear that this precludes the guaranteeing by member states of any future borrowings. There must be no misunderstanding about the position. After this year Irish Steel will have to operate without any further financial assistance from the Government. Accordingly, the statutory limit to which the Minister may guarantee borrowings by Irish Steel will be reduced to bring it into line with existing guaranteed borrowings. I should explain that £68 million of the £89 million aid package invested in 1984 was used to reduce the company's borrowings. This accounts for the proposed reduction, from £100 million to £32 million in the level of guaranteed borrowings.
The additional £18 million will be provided to Irish Steel in the form of an advance from the Central Fund. Certain conditions are being attached to this advance which could not be done if the investment was by way of additional equity. For instance, the Exchequer will be able to recoup all or part of these funds in due course. I should stress that there is no set time for the repayment of the advance and that any demand for repayment will take account of the company's financial position at the time and its ability to make a repayment. Given the vast investment which the Government has already made in the company, it is only reasonable that Irish Steel should repay part or all of the £18 million to the Exchequer when the company's financial position so permits. As I indicated to the Dail, the £5 million already paid to Irish Steel under the Supplementary Estimate will be converted into share capital following the enactment of this Bill.
The additional £18 million will be used by the company to repay one of its State guaranteed loans. This will reduce the Exchequer's exposure. The funds will also be used to meet the increased working capital requirements which will arise as the company continues to increase its level of output and to cover capital expenditure items.
In taking its decision to invest a further £18 million in Irish Steel, the Government took into account several factors, including the acceptance by the Irish Steel employees of the company's rationalisation measures, a modest recovery in steel prices in 1985, a reduction in scrap prices since March, and the prospect that Irish Steel could secure its long term future and make some return over time on the Exchequer's investment in the company.
Nevertheless, the House should be under no illusion about the harsh reality of the task ahead. The Community steel market and, indeed, the world steel market, are still quite depressed and the outlook is not very encouraging. The European Commission estimates that there is still approximately 25 million tonnes excess steel production capacity in the Community, notwithstanding the fact that production capacity was reduced by some 28 million tonnes between 1980 and mid-1985. The crisis affecting the steel industry and the restructuring measures to deal with it are continuing to give rise to redundancies. Between 1980 and mid-1985 the Community steel industry reduced its workforce by 163,000, that is a reduction of over 27 per cent. In its document General Objectives Steel 1990, the Commission cautions that forecasting employment in the iron and steel industry in 1990 is hazardous owing to the many factors to be taken into consideration. Nevertheless, the Commission considers that employment in the steel industry in the five year period to 1990 will suffer further severe cutbacks.
The recent redundancies in Irish Steel must be seen in this context. They were essential for the survival of the company. In saying this I am not detracting in any way from the very real difficulties for the people concerned and their families. I made a formal application to the Commission for ECSC funding to assist the redundant employees. I am hopeful that the Commission will take a positive decision on the application in the very near future.
Senators may be aware that the Council of the European Communities has accepted the need to return, as soon as possible and in an orderly manner, to a market situation in which steel undertakings compete freely. This will involve the gradual dismantling of the production and delivery quota system. As a first step, it has been decided to remove the reinforcing bar, which is one of Irish Steel's products, and coated sheet from the quota system with effect from 1 January 1986. Depending on the market situation, the Commission intends to put forward other proposals before the end of 1986 for the further liberalisation of the quota system. The effect on the market of the removal of products from the quota system will be monitored on an ongoing basis and quotas may be reintroduced if the market becomes disrupted.
I have already indicated to the Dáil that scrap prices in the Community rose sharply in 1984 and in early 1985. This of course was bad for Irish Steel. This was due largely to a rise in the value of the US dollar and increased exports from the Community to third countries. As scrap accounts for a substantial portion of the cost of finished steel, any major development in the price of this basic raw material impacts quite significantly on Irish Steel's financial results. The price of scrap has an effect on some steel plants but not on all. Irish Steel is what is known as a mini-mill and is using scrap as its raw material. There are other continuous rolling mills which are using essentially iron generated within the same complex. They are buying iron on the home market and they are insulated against fluctuations in scrap prices, whereas Irish Steel is very sensitive to it as are other minimills. This is the relevance of these developments. Between March and November 1985, however, the scrap composite price, which is fixed in US currency, fell by about US $18 per tonne, a reduction of almost 21 per cent, reversing the previous trend. Scrap prices in other currencies have also declined significantly since March 1985. Although recent trends in prices are encouraging, it is not possible to predict with any degree of certainty how prices will develop in the future. What is certain, however, is that seasonal fluctuations will occur during the course of each year. In an effort to reduce operating costs I understand that Irish Steel is examining ways and means of using scrap in the most efficient manner possible.
For some months now the company's chairman and chief executive have had discussions, on my instructions, with potential joint venture partners. I have asked the company's chairman to continue to search for a partner. I would add that the Government's commitment to support Irish Steel with additional investment will improve the company's prospect of finding a potential partner.
I will now digress from the script and stress that the finding of a joint venture partner is extremely important to Irish Steel. The amount of equity that the Government is putting in at this stage is the maximum that is permitted under the European currency rules and it can put in no more. However, even with all that equity going in Irish Steel has still got far too heavy a load of borrowing. That means of course that they have far too heavy a load of interest which they have to meet at a regular period out of current revenue. If Irish Steel is to get itself back into a situation where it is really able to compete effectively and have a good chance of survival, it makes sense to use every possible means to bring in other equity that will reduce the borrowing — substituting perhaps cash in hands for cash borrowed from the banks.
That is why I have been encouraging Irish Steel to go out and get a venture partner. It is not because I am keen to sell off shares in Irish Steel for some reason of political principle which might engender a lot of heated and not enlightening debate, but because I want to guarantee, as far as it is within my power to guarantee, the survival prospects of the plant. The more equity we can get in the better is the chance that Irish Steel will not run into difficulties in the future. If at any time in the future, let us say three or four years from now, Irish Steel were to get into financial difficulties — in other words, that the amount of their outgoings exceeded to an undue degree the amount of their incomings and the banks were not prepared to bridge the gap without the benefit of a State guarantee — there is precisely nothing that you in this House or we in the Dáil could do about it because we would be precluded by EC rules from giving them any aid and it would just have to close. If, on the other hand, we could get equity from outside that would make it easier for the company to weather such a storm because it would be a company that would have a stronger equity base. It is in that context that I have been asking the company to look for a joint venture partner.
I am very glad to say that the chairman of the company in particular, Mr. Kevin McCourt, has devoted prodigious efforts to travelling all over the world to meet potential joint venture partners. No negotiations have been opened up with any of them at this point. The discussions are purely exploratory and the drafting of a negotiating brief or provision in legislation — if such were necessary, which it may not be — for shares to be transferred is something that is quite a distance down the road if it ever does occur. We are taking preliminary steps to do everything possible to enable this company to survive on a viable footing. It is an efficient mill in technical terms. It is one of the most modern in Europe. It is, as I said in an earlier interruption of my script, sensitive to variations in scrap prices in a fashion that some other mills are not. That is really the main point that I want to make in support of a joint venture: that a mill which is sensitive to external variables such as movements in scrap prices should have a stronger equity base to enable it to weather such storms than perhaps a mill which is relatively more impervious to outside variables.
The House will appreciate from what I have already said that the path ahead for Irish Steel will be far from easy. The future is full of uncertainties and it would be unrealistic to expect a dramatic improvement in the steel market in the foreseeable future. The surplus production capacity in Europe, combined with the liberalisation of the quota system, may well put a downward pressure on prices. The behaviour of exchange rates and, in particular, changes in the dollar rate can have a substantial impact on results, either in a favourable or in an unfavourable way. Irrespective of these and other uncertainties, Irish Steel will have to make significant efforts to increase its productivity and competitiveness.
I would also say that it is not in our interests — on the other hand, the quota system may keep prices up — or Irish Steel's interest to maintain a restrictive quota system because we are a small operator trying to break into the market. The tendency of the quota system would be to support the position of the large existing producers. As long as Irish Steel's financial situation is sound — and that is the relevance of this equity — it is better off in a relatively free steel market where it can make additional efforts in this regard.
Progress has already been made in the area of more flexible working practices. In addition, other improved working methods and procedures have been identified and the board and management are examining ways of achieving potential savings in all areas of the company's operation. The measures already taken and those in train are a good start but much more remains to be done. Maximum efficiency must be realised and costs must be cut to the minimum. There are no substitutes for efficiency and competitiveness.
In conclusion, I would make an earnest appeal to Irish Steel employees to give their total commitment and co-operation to the company so as to ensure that all the measures necessary to secure the future of Irish Steel are implemented without delay. Irish Steel's employees should remember at all times that the Government has sustained the company over many years at considerable cost to the taxpayer. The future of the company now rests with the board, the management and the workforce. I am of the view that, if the essential commitment and co-operation are readily forthcoming, the company can indeed have a long term future.
I am confident that the Bill will commend itself to the Seanad and I recommend it for approval.
