Romania - Otelinox Special Steel Project

CIRCULATING COPY #3 Report No. 359a-RO m BE REURNE TO REPORTS DESK Appraisal of the RETURN TO Otelinox Special Steel Project REPORTS CS{ Romania ONE WEE,s - May 21, 1974 Industrial Projects Department Not for Public Use Document of the International Bank for Reconstruction and Development International Development Association This report was prepared tor official use only by the Bank Group. It may not be published, quoted or cited without Bank Group aijthorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  G CURRENCY EQUIVALENTS Except where otherwise indicated, all figures are quoted in Romanian Lei. For all calculations, the following conversion rate has been used: US$1 Lei 20 Lei 1 = US$0.O5 Lei 1,000 = US$50.00 WEIGHTS AND MEASURES All units are metric. 1 metric ton = 1,000 kilograms (kg) 1 metric ton = 2,204.6 pounds 1 kilometer (km) - 0.62 miles 1 cubic meter (m3) = 35.32 cubic feet (cu.ft.) ABBREVIATIONS AND ACRONYMS AISI - American Iron and Steel Institute HSLA Steel - High-,Strength Low-Alloy Steel (High Tensile Steel) _B - Banca De Investitii (Investment Bank) IPROLAM - Institute for Eagineering of Rolling Mills METAROM - Equipment Export-Import Agency under the Ministry of Metalbrghical Industries NB - Banca Nationala a Republicii Socialiste Romania (National Bank) Otelinox, the Enterprise, the Project - Second Stage of TirgoviFte Alloy Steel Complex Fteel Central - Centrala Industriala de Prelucrari Metalurgice Tirgoviste I - First Stage of Tirgoviste Alloy Steel Complex TPY - (Metric) Tons Per Year ROMANIAN FISCAL YEAR January 1 - December 31 Industrial Projects Department March 11, 1974  ROMLANIA APPRAISAL OF THE OTELINOX SPECIAL STEEL PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ...............................*... i - iii I. INTRODUCTION ..................... 1 II. THE ENTERPRISE ................... 1 A. Background ............... ....................... 1 B. Enterprise ......... ............................. 2 C. Relationship with Government Agencies .... ....... 2 1. Steel Central ...... 3 2. IPROLAM and METAROM ...... ....... .......... 3 3. Investment Bank - The Borrower .... ......... 3 4. National Bank ................................... 4 D. Management ................4..... .... ...........* 4 III. THE MARKET . 5 A. Introduction ..... ......................... .. 5 B. Overall Market ....................... 6 C. Market for Otelinox Products .................... 7 D. Production of Special Steels ............ .......... 8 E. Product Mix ....................................... 9 F. Imports and Exports ........ 10 G. Steel Prices .............................................. 11 H. Location, Distribution and Transportation *..*..* 11 IV. THE PROJECT .................... ,... 12 A. Physical Description of Project ................. 12 B. Processes to be Utilized ........................ 13 C. Project Execution--Division of Responsibilities . 13 D. Staffing ......... .............. 14 E* Ecology ......... *6...... .*..**.......... 14 F. Future Expansion Plans .......................... 15 This report was prepared by Messrs. W. P. O'Neil, S. P. Nayar, Y. T. Shetty and Miss Judith Graves.  Table of Contents (Cont'd) Page No. V. CAPITAL COST AND FINANCING PLAN ...................... 15 A. Project Cost . ................................... 15 3. Working Capital ............ ............ 17 C. Financing Plan .................................... 0...... 17 VI. ALLOCATION OF BANK LOAN, DISBURSEMENT AND PROCUREMENT 18 A. Allocation of Bank Loan . ........ 18 B. Disbursement . ................ ................... 19 C. Bidding Procedures ...............a.... *. .... 19 D. Bidding Consortia ......*............. ... 19 E. Local Supply ............... * .................... * * * * * * * *, 20 F. Procurement Responsibilities .......... .......... 20 G. Implementation Schedule ...... # .................. 20 VII. RAW MATERIALS, PRODUCTION COSTS AND REVENUE ........ .. 21 A. Raw Materials and Utilities ................... . . 21 B. Production Costs ..................... ........ 21 C. Revenue ...................... 22 VIII. FINANCIAL ANALYSIS .................. .. 23 A. Romanian System .............. 23 B. Profitability ...................... 23 C. Allocation of Benefits . ......... 24 D. Financial Position ...... ... ... 24 E. Reporting Requirements ... ....................... 25 F. Auditing Requirements ........................... 25 G. Financial Rate of Return ........................ 25 H. Break-even Points ... ........ ..... ........ 26 IX. ECONOMIC JUSTIFICATION .. .................. . , , 26 A. Economic Rate of Return . . 26 B. Foreign Exchange Rates .......... 26 C. Sensitivity Tests and Risks ........... 27 D. Competitiveness ...#, .... .................o... 28 E. Employment .. ...... ... -.ooooo, ... .... .. 28 F. Estimated Foreign Exchange Effects 28 G. Transfer of Technology ................. 28 X. AGREEMENTS ............. 29  Table of Contents (Cont'd) ANNEXES 1 Description of Technical Terms 2-1 Organizational Chart and Functions of the Ministry of Metallurgical Industries 2-2 Role of the Enterprise, Central and Ministry 2-3 Enterprise Management and Organizational Chart 3-1 Market for Steel in Romania 3-2 Special Steel Prices 4-1 Types and Grades of Special Steel to be Produced 4-2 List of Basic Facilities 4-3 Description of Processes and Processing Sequences 4-4 Process Flow Charts for Cold Mill and Bar Mill 4-5 Employment and Training 4-6 Ecology 4-7 Long-Range Planning and Future Expansion 5-1 Capital Cost Estimates 5-2 Working Capital Requirements 5-3 Investment in New Projects 6-1 Equipment and Services to be Financed by the Bank 6-2 Estimated Disbursement Schedule 6-3 Implementation Schedule 7-1 Raw Materials 7-2 Production Cost Estimates 7-3 Romanian Pricing System 7-4 Revenue Forecast 8-1 Cash Flow and Allocation of Profits 8-2 Projected Income Statements 8-3 Sources and Application of Funds Projections (1974-1984) 8-4 Balance Sheet Projections 8-5 Major Accounting Practices 8-6 Control and Audit System 8-7 Financial Rate of Return 8-8 Break-Even Point 9-1 Economic Rate of Return and Sensitivity Tests 9-2 Foreign Exchange Savings MAP IBRD - 10895   ROMANI-A APPRAISAL OF THE OTELINOX SPECIAL STEEL PROJECT SUMMARY AND CONCLUSIONS i. This report appraises the proposed Otelinox Special Steel Project, the independently-managed second stage development of the Tirgoviste Alloy Steel Complex, located some 80 km northwest of Bucharest, the Romanian capital. The project will include a cold-rolling mill, the first of its kind in Romania, to produce 30,000 tons per year (TPY) of stainless steel sheet and strip, and a bar mill to make 120,000 TPY of rod and bar products. The main raw material for the cold mill (40,500 TPY of hot-rolled coils) will be supplied from the country's largest integrated steelworks at Galati (capacity: 7 million TPY by 1980), and the main input for the bar mill (146,500 TPY of billets) will come from the adjacent Tirgoviste (Stage I) alloy steel plant, which by 1975 is expected to have a capacity of 600,000 TPY. Total financing required for the project, including interest during construction and working capital, is nearly Lei 3.7 billion (US$185 million equivalent), of which the foreign exchange component is about 52%. ii. The proposed Bank loan of US$70 million equivalent will be made to the Investment Bank, which is involved in the preparation and execution of all industrial projects in Romania. The beneficiary of the loan will be Otelinox, the Enterprise that is to carry out and operate the project. Another industrial project for the production of fertilizer has recently been presented for Board review (Report No. 459-Ro). The loan will be for 15 years, including 5 years of grace, at the prevailing interest rate of 7-1/4% plus a guarantee fee of 1-3/4%, bringing the total cost to the Enterprise to 9%. The Bank loan will cover about 38% of the total financing required for the project, with the rest -- U.S.t115.3 million equivalent including US$25.8 million in foreign exchange -- to be provided by the Government in the form of interest-free advances. The Government wqill also cover any cost overrun, operational losses, and working capital requirements as and when necessary. iii. The loan will cover the entire cost of competitively bid equipment and spares, including technical assistance, know-how and engineering, (US$40 million) of the cold mill and 65% (US$30 million) of such costs of the bar mill, as well as the foreign exchange cost of foreign consultant services for the project. Tenders are intended to be issued for two large equipment packages, one for each mill, including the technical assistance, know-how and engineering; procurement will follow Bank guidelines. While no Romanian sup- plier is expected to be prequalified as consortium leader for any of the two contracts, it is possible that a Romanian firm might become a member of a consortium as a sub-supplier for the bar mill. Civil construction will not be part of the bid packages; it is to be carried out by a specialized Romanian construction firm on the basis of fixed unit prices. Implementation of the project is about to commence and production is to start early in 1978 with full capacity to be reached in 1980.  - ii - iv. The project is crucial for the development of a wide range of indus- tries including engineering and metal-transforming, industrial consumer goods and chemicals. Engineering and metal-transforming industries are among the fastest growing sectors in Romania with a substantial export orientation. They grew at an impressive rate of close to 16% annually between 1966 and 1970 and, during the current Five-Year Plan (1971-1975), are planned to expand at 15% a year. The performance of the first half of the current Plan indicates that this target is likely to be reached. In 1972, machinery and equipment exports accounted for about 25% of the country's total export earnings of US$2.6 billion equivalent. Next to machinery and equipment, the leading exports of Romania are industrial consumer goods and chemicals which together accounted for about 27% of total exports in 1972. Exports in general expanded by 23% in 1972 compared to about 13.5% in each of the preceeding two years. Romania has also succeeded in diversifying its markets abroad while maintain- ing a high export growth. For example, in 1972 the share of its total exports to outside the COMECON countries was nearly 53% compared with 44% in 1966. V. The Otelinox project is primarily oriented towards the domestic market for substituting for importg. Nevertheless, exports may reach a maxi- mum of 7,000 tons annually during the early operating years, until local demand will have caught up with production. However, the overall surplus available from Otelinox for exports would be hardly 5% of its production and although no specific plans exist yet as to where these exports will go, no major problem is foreseen in disposing of this moderate amount. The domestic market to which the bulk of the project output is to be directed, appears assured mainly be- cause of: (i) expected continuing high growth of the major special steel con- suming industries; and (ii) increased local supply of special steel will help meet the existing latent demand on account of current foreign exchange con- straints. Also because of the modern technology used in the project, an effi- cient and hard-working labor force, low wage costs and labor incentives in Romania, Otelinox is expected to be able to produce special steel competitively with industrialized countries elsewhere. vi. Otelinox has been established and its General Manager has already been appointed and recruitment of other key personnel is underway. In addition to him, the management of the Enterprise will consist of the Workers' General Assembly (includes all employees), the Working People's Committee, and the Management Committee. The Working People's Committee will be the decision-making body of the Enterprise on general matters, while the General Manager, who will be chairman of both committees, will make all day-to-day decisions on their behalf. This decision-making process allows a satisfactory implementation of the project and its subsequent operation. No difficulties are foreseen in obtaining adequately trained manpower, in part because it will be drawn from other existing steel mills in the country and in part due to the specific training that forms part of project execution. vii. The financial results of Otelinox are expected to be satisfactory after the first year of operations (1978) when the Enterprise will incur losses. However, the usual Bank standards to measure the Enterprise's financial via- bility have limited significance in the Romanian context because all fund flows  - ili - in and out of the Enterprise are handled and controlled by the Government and all inputs and outputs are traded at prices also set by the Government. The financial rate of return, which is 13%, is, therefore, not a guide to investment decisions. The economic rate of return -- probably the most meaningful indicator of the soundness of an investment decision in Romania although rather difficult to determine - is fairly high for Otelinox; it would exceed 14% and the proba- bility of its falling below 10% is low under moderately adverse conditions. Net foreign exchange earnings and savings to the economy at full production are estimated at US$59 million equivalent, offsetting in less than two years the project's entire foreign exchange cost. Further, the project would provide direct employment to about 1,600 persons, while opening up many more job oppor- tunities indirectly in the special steel consuming industries; these industries are expected to grow at a faster rate than if dependent on controlled and re- stricted imports of special steel. viii. The project was appraised prior to the recent sharp increase of petroleum prices in the world. However, this increase in fuel prices is not likely to affect Otelinox financial results to an appreciable extent not only because of the administered prices of all goods and services in Romania but also because the country's dependence on petroleum imports is low (20%) and, if necessary, local production could be stepped up. Therefore, with respect to fuel costs and, possibly, availability, Otelinox will enjoy a significant advantage over most European and Japanese special steel producers as long as the present level of oil prices persists. As for meeting oil-induced future increases in imported equipment prices, adequate price contingency provisions have been made. ix. There is no other country in which the Bank has lent for industry where the Government has such a direct and major influence on the conception, preparation, financing and operations of industrial projects as in Romania. However, while investment decisions are seemingly made primarily to meet pro- duction targets, economic considerations are also taken into account when determining the scope, size and location of industrial enterprises and so are social factors. Romania has succeeded in developing its industry in a reasonably efficient manner and in locating it fairly evenly throughout the country rather than have it concentrated only in major population centers. But with so different an approach to industrial planning and project execu- tion from what Bank staff had been accustomed to and with all its ramifica- tions on such matters as the industrial structure, management, the control mechanism, financial accounting and auditing, there had first to be establish- ed a common basis for concepts and words that often have meanings in Romania different from those in market economy countries. Still some gaps in the Bank's knowledge of the working of the complex decision-making process and planning mechanism in Romania's industry remain and will need to be closed as the Bank does more industrial lending in the country. While meeting foreign exchange needs on a long-term basis, Bank lending to industry in Romania would also help adopt modern technologies, improve product quality and make better use of factors of production. x. Based on the agreements reached on necessary conditions for the loan as summarized at the end of this report, the project is suitable for a Bank loan equivalent to US$70 million.   I. INTRODUCTION 1.01 This report appraises the proposed Otelinox Special Steel Project at Tirgoviste, an industrial town (population: 35,000) located some 80 km northwest of the capital city of Bucharest, Romania (Map IBRD-10895). The project, an independent enterprise within the new Tirgoviste Special Steel Complex, will have (1) a cold-rolling mill--the first of its kind in Romania -with an annual production capacity of 30,000 tons of stainless sheet and strip; and (2) a bar mill with an annual capacity of 120,000 tons of alloy rod and bar products. Construction of the project is about to begin and would be completed in early 1978. 1.02 Total financing requirements of the project, including interest during construction and working capital, are estimated at about Lei 3,706 million (US$185 million), of which Lei 1,729 million (US$86 million) would be the cost of imported equipment and spares, and foreign technical know-how and training. The proposed Bank loan of US$70 million would cover about 73% of the project's total foreign exchange requirements. This loan would result from the first Bank appraisal initiated in Romania, which became a member of IBRD in December 1972. The borrower would be the Investment Bank (IB) which is involved in the preparation and execution of all industrial pro- jects in Romania (para. 2.08). The loan would be guaranteed by the State, which controls all enterprises in the country. 1.03 The project is considered vital for the development of a broad spectrum of special steel consuming industries whose projected annual growth rates exceed 15% for the near future. Currently, the country's entire requirements of stainless sheet and strip and part of its needs of alloy rod and bar products are met from imports. The project would help Romania achieve self-sufficiency in these products by 1980, thus easing the burden of the country's scarce foreign exchange resources. 1.04 The project was identified in March 1973; in August 1973, a mission assisted the Romanian authorities in preparing the project, followed by an appraisal mission in November 1973 consisting of Messrs. O'Neil, Nayar, Shetty and Miss Graves of the Industrial Projects Department and Messrs. Shields and Gibbs, Consultants. Technical terms used in this report are explained in Annex 1. II. THE ENTERPRISE A. Background 2.01 The project represents the second stage of the Tirgoviste Special Steel Complex. Work on Stage I - the so-called Tirgoviste I - which con- sists mainly of a plant to produce 600,000 tons per year (TPY) of raw alloy steel, was begun in 1971 and part of the plant started production in  -2- late 1973, slightly ahead of schedule. Otelinox will receive its principal raw material--semi-finished steel--from two sources: Tirgoviste I will supply 146,500 TPY of billets across the road to the project's 120,000-TPY alloy bar mill, and the Galati Steelworks will supply about 40,500 TPY of hot-rolled bands to feed Otelinox's 30,000-TPY stainless sheet and strip mill (cold mill). The Galati Steelworks, which is some 270 km away, is the country's largest integrated plant and is expected to have an annual production capacity of about 7 million tons of raw steel by 1980. 2.02 Under the Romanian system, a project becomes the State Plan for execution only after financing arrangements are completed and the final technical and economic study of the project is approved by the Council of Ministers, the supreme administrative body in the country. This study which is prepared after receipt and evaluation of equipment tenders and subsequent award of contracts, is ex- pected to be completed by early 1975. However, the Romanian authorities have accelerated this procedure for this project and the implementation of the project is underway on basis of a preliminary technical and economic study approved by the Council of Ministers. B. Enterprise 2.03 The Enterprise has been established, and although it is part of the Tirgoviste complex, is planned to be a separate, autonomous entity, at least initially. This is intended to give the new plant particular management attention and facilitate project implementation and control as well as loan processing. The possibility of a future merger of Otelinox with Tirgoviste I, however, can- not be precluded. Although such a merger in the context of the Romanian centrally- planned economy, may not have the same significance as in most other Bank member countries, the Bank wishes to be assured that such a merger would not adversely affect the project. Moreover, agreement has been reached that the Enterprise will not be dissolved without the prior consent of the Bank. 2.04 Otelinox, as all enterprises in Romania, will be essentially a pro- duction-oriented organization whose principal function is to meet the output targets set in the annual plan. Any major changes in production volume, product mix, organizational structure and enterprise's investments have to be approved by higher authorities. Furthermore, an enterprise's financial requirements are met from State funds and its net benefits (net profits after statutory and other allocations) are, in turn, transferred to the State Budget. In short, an enterprise has only limited independence. C. Relationship with Government Agencies 2.05 Various government bodies are concerned with the development and coordination of industry in Romania. In the case of Otelinox, the Ministry of Metallurgical Industries is the main authority. A detailed description of the organization and functions of this Ministry is given in Annex 2-1.  - 3 - The main agencies of that Ministry concerned with the project are the Steel Central, IPROLAM and METAROM. Other organizations actively involved in the implementation of the Otelinox project and its operations are the Investment Bank and the National Bank. The role of these various organizations is ex- plained below. 1. Steel Central 2.06 Otelinox falls under the Steel Central which is the planning, coor- dinating and supervisory agency and thus, in a sense, the holding company for all steel plants in Romania. The responsibilities of the Steel Central are given in Annex 2-2. It has competent and experienced management experts, engineers, scientists, technicians and other specialists to perform those services including research and development, which the seven individual enterprises belonging to the Steel Central cannot efficiently support by themselves. More recently, the Steel Central as well as Centrals for other industries have gained in importance, thus reducing somewhat the detailed control that the technical ministries concerned have traditionally exercised over the member enterprises. Usually, the General Manager of the Central is also the General Manager of the largest enterprise under it. The Steel Central coordinates the annual production plans of its members, monitors their performance and, after consolidation, forwards their annual financial statements to the Ministry of Metallurgical Industries and the Ministry of Finance. Although it deals with all matters of the steel sector as a whole and is thus involved in major facility planning decisions and supervision of enterprise operations, the Steel Central does not play a significant role in the physical execution of projects. 2. IPROLAM and METAROM 2.07 IPROLAM, the Institute for Engineering of Rolling Mills and one of the design institutes of the Ministry of Metallurgical Industries, has pre- pared the basic engineering designs for the project, and will act as Otelinox's technical consultant. METAROM, the Ministry's equipment import and export agen- cy, will deal with commercial aspects relating to the import of equipment for the project on the basis of instructions received from Otelinox and IPROLAM. 3. Investment Bank - The Borrower 2.08 The Investment Bank is the channel for all sources of major domestic investment financing including (a) budget allocations; (b) depreciation funds; and (c) the share of earnings of enterprises allocated for investment. Recently, IB has also started to make credits on its own, though funds avail- able for this purpose are still relatively small. However, IB administers and controls all investment funds of the State Budget (except for agriculture and food processing) and acts as the main fiscal agent of the Government. The President of IB reports directly to the Ministry of Finance which has compre- hensive authority in the planning and financing of all projects.  - 4 - 2.09 The Investment Bank is a competent organization and has wide-ranging responsibilities in the implementation of projects. It plays a key role in the preparation, evaluation, procurement, execution, disbursement of investment funds and supervision of all enterprises (para. 2.08). For all projects, IB reviews the technical and economic study before submission to the Council of Ministers for formal approval. Thereafter, IB ensures that the project is executed according to the approved plan. In the case of Otelinox, it will check, with the assistance of IPROLAM and METAROM, all orders for equipment--domestic and foreign--before they are placed, will comment on any change in contracts, and can impose penalties on defaulting parties. Its inspectors check the appropriate- ness of equipment deliveries and whether the projects are progressing according to schedule. All local project-cost financing is channeled through and author- ized by IB which also keeps complete accounting records for each project until completion and which is therefore well suited for reporting to the Bank on the progress in the implementation of Otelinox Project. 2.10 During the operational phase of a project, IB's functions are limited to checking whether the enterprise is meeting the targets set in the Investment Plan. IB has no legal authority to bring its views to bear directly on the management of an enterprise. In practice, however, IB can recommend necessary operational action to the Ministry of Finance, which, in turn, can act through the Ministry concerned with the project. It is for reason of the important and broad role that the Investment Bank is playing in the industrial field, particularly in the project's implementation, that it has been chosen as the Borrower of the Bank loan. 4. National Bank 2.11 The National Bank (NB), which combines the functions of a Central bank and a commercial bank, is responsible for planning, coordinating and meeting the working capital needs of enterprises once they go into operation. Every operating enterprise maintains its current accounts with NB and is re- quired to do all transactions through these accounts. Each year, enterprises have to negotiate with NB their working capital needs for the coming year. D. Management 2.12 The management of Otelinox will consist of the Workers' General Assembly, the Working People's Committee, and the General Manager who will be assisted by a Management Committee composed of three to seven key personnel of the Enterprise. The Workers' General Assembly, which will include all the workers of Otelinox will meet twice a year to examine the operating results of the Enterprise and review the performance of the Working People's Committee, which will consist of 13-15 members of whom 4-5 will be elected by the Assembly and the rest will be those who hold specific positions within the Enterprise. The Committee will be the decision-making body of the Enterprise on general matters. The General Manager, who will be chairman of the Committee, will make all day-to-day decisions. For details of management responsibilities see Annex 2-3.  -5- 2.13 In Romania, General Managers are usually appointed by the Ministers of the relevant Technical Ministries for an indefinite period. In the case of Otelinox, the Minister of Metallurgical Industries appointed Mr. Constantin Gingarasu, 42, as General Manager in 1973. A graduate in mechanical engineer- ing of the University of Bucharest, Mr. Gingarasu has had about 15 years experience in steel plant operations. For the eight years prior to his new assignment, he was Plant Manager of the Heavy Plate Mill of the Galati Steel- works. He is well-trained and experienced and is considered capable of managing Otelinox efficiently. 2.14 Most of the key personnel to support him are expected to be drawn from the existing steel plants under the Romanian system of transferring selected employees from existing to newly-created enterprises. The Romanian authorities have confirmed that they will appoint well-qualified personnel to fill these other key positions according to a time schedule which is satisfactory to the Bank. No problem is foreseen in getting adequate trained manpower for the project. During project implementation, the primary respon- sibility of the General Manager is to coordinate the functions of IPROLAM, local contractors, and other entities involved to ensure the plant's proper and timely execution. After the commissioning of the plant, his major concern will be to provide operating management under the guidance of the Working People's Committee to see that Otelinox meets the production and efficiency targets set in Romania's annual plans. II. THE MARKET A. Introduction 3.01 The Romanian steel market and prices are described in detail in Annexes 3-1 and 3-2. This chapter deals with these subjects only insofar as they specifically relate to the types of steel to be produced by Otelinox, i.e., stainless steel sheet and strip and alloy steel rod and bar products. The main consumers of these products encompass a broad range of industries such as producers of equipment for food processing, chemicals, paper, glass textiles, ship-building, power distribution as well as industries producing cutlery, domestic appliances, machine tools, motor vehicles, farm implements and tractors, railway rolling stock, electronic and electrical equipment, precision instruments, construction machinery and cranes. These industries have been growing rapidly--at over 13% a year on average--during the past two decades (1950-1970) and are planned to maintain the momentum. 3.02 Certain heavy consumers of special steel, with a substantial export orientation primarily towards the COMECON countries, are targeted to expand at an accelerated pace. For example, during the current Five-Year Plan (1971-1975), machine tool production is to grow at an average rate of 32%; electrical equipment, at 27%; precision instruments, at 39%; and chemicals,  -6- at 16-18%. Engineering and metal-transforming industries as a whole are planned to expand at about 15% a year compared to about 15.8% per annum during 1966-1970. At the halfway point of the current Plan, indications are that the above goal will be met. For example, engineering and metal-transforming industries actually exceeded the targets in 1971 and 1972 by growing at 15.9% and 16.1% respectively. These industries have attained high significance both as domestic capital goods suppliers and as earners of foreign exchange through exports. B. Overall Market 3.03 Romania is one of the fastest growing economies in Eastern Europe and is likely to remain so in the near future. Per capita steel consumption (in crude steel equivalent), which may be considered as an indicator of the economic advancement of the country, has increased from 132 kg in 1960 to 318 kg 1/ in 1970, reflecting an annual growth rate of 11%; it is projected by the Romanian authorities to reach the high level of 682 kg in 1980, com- parable to the U.S. consumption in 1969. This is an ambitious target but, considering the rapid pace of industrial development in Romania, that level may be reached. If so, total steel consumption in crude steel equivalent would rise to 15.8 million tons in 1980 from about 7 million tons in 1970. During the same period, crude steel production is planned to jump from 6.5 million tons to 17 million tons, with Romania becoming a small net exporter of steel. 3.04 Total consumption of special steels (in crude steel equivalent) grew from about 238,000 tons in 1965 to 668,000 tons in 1970, or by about 16% per year. Further, with industrialization, the share of special steels in total crude steel consumption in Romania increased from 5.8% to 9.1% during1965- 1972, when total steel usage nearly doubled. In 1980, special steels are expected to account for about 2 million tons or about 12% of total crude steel consumption. Due to differences in the classification standards for special steels in various countries and their very wide variety, inter-country comparisons of special steel consumption are difficult. However, the pro- jected proportion of special steels in total steel consumption in Romania in 1980 appears to be more or less in line with that at present in the U.S. but lower than that in Sweden. In terms of finished products, domestic special steel consumption is likely to reach about 1.37 million tons 2/, with high-alloy steels (including stainless) and high-strength low-alloy (HSLA) steels each accounting for about half. 1/ U.N. figures. The Romanian authorities estimate is 348 kg. 2/ Assuming 1.46 tons of crude steel is required to produce 1 ton of special steel products.  -7- 3.05 Special steels can be divided into two broad categories: (1) stainless steels; and (2) alloy steels. In 1970, total consumption 1/ of stainless steel in Romania was about 17,700 tons, entirely imported. Con- sumption rose significantly during the next three years, by about 15% annually reaching 26,600 tons in 1973, i.e. 1.25 kg per capita. This is still a relatively low consumption compared to recent levels of about 4 kg in Italy and over 20 kg in Sweden. 2/ In the developed countries as a whole, the average present per capita consumption is estimated at around 5 kg. 3.06 Consumption of stainless steel in the world is increasing at about 8-10% a year and of special steel as a whole at a lower rate of 5%. However, in countries such as Romania with low current consumption levels and in the process of rapid industrialization, consumption can be expected to grow sig- nificantly faster. In Romania it is forecast to increase by an annual rate of 19.5% during the current decade reaching 104,000 tons in 1980; however, this seems somewhat optimistic judging from the actual growth rate of 15% during 1970-1973. In the case of alloy steels, Romanian authorities have projected that consumption would increase by 15% annually, in line with the expected expansion rate of the engineering and metal-transforming industries, the main consumers of alloy steels; this appears realistic. C. Market for Otelinox Products 3.07 As mentioned previously, Otelinox is to produce stainless sheet and strip 3/ (30,000 TPY) and high-alloy (110,000 TPY) as well as RSLA (10,000 TPY) rod and bar products. The following table shows the past and projected trend in consumption (1968-1980) of Otelinox's products: Consumption of Products of the Type to be Made by Otelinox, 1968-1980 (in 000 tons) 1968 1970 1973 1980 /a Growth Rates (x) actual Proj. 1968-73 1970-80 Stainless Sheet and Strip 3.9 4.7 8.7 23.0 17.5 17.0 Rod and Bar Products: - High alloy (incl. stainless) 43.0 52.0 73.0 209.0 11.2 15.0 - Low Alloy (HSLA) 32.0 35.0 49.0 211.0 9.0 19.5 Total 78.9 91.7 130.7 443.0 % of All Special Steel n.a. 27% 28% 32% /a By the Romanian Ministry of Metallurgical Industries. 1/ The past consumption trend in Romania does not reflect actual demand, mainly because of restricted imports due to foreign exchange difficulties. However, with increased local production, the consumption will be gradually freed from the foreign exchange constraint. 2/ It is one of the major exporters of industrial goods containing stainless steel. 3/ Up to 3 mm thickness. Stainless plates will be produced at the integrated Galati Steelworks.  -8- 3.08 Total consumption of stainless sheet and strip in 1973 was about 8,710 tons, representing some 32% of total consumption of stainless steel pro- ducts that year. During the last five years (1968-1973), consumption of stainless sheet and strip, based entirely on imports, increased at an annual rate of 17.5% and even at 22% between 1970 and 1973 and thus considerably faster than stainless steel as a whole in spite of the general foreign ex- change constraint. Still, the consumption level is low compared to that in developed countries. In the future, because of the rise in domestic production and thus increased availability of such products, consumption could be expected to grow at a faster rate than in the past; however, the Romanian authorities have assumed that the future rate would be more or less in line with the past rate and that consumption, therefore, would reach about 23,000 tons in 1980. Considering the Romanian record of exceeding planned targets, particularly in the stainless steel consuming industries, it is likely that the requirements for stainless sheet and strip will grow at a higher rate of 19-20%. On this basis, total consumption of such products in 1980 might be expected to range between 27,000 and 29,000 tons, i.e. 4,000 - 6,000 tons above the Plan projec- tion. 3.09 In the case of high-alloy rod and bar products, demand is projected by the Romanian authorities to increase, during the present decade, in step with the production growth envisaged in engineering and metal-transforming industries, i.e. at 15%. As for HSLA rod and bar products, total consumption is forecast to rise at an annual rate of 19.5% which appears high when com- pared to the 9% annual rate during 1968-1973. However, any shortfall in domes- tic demand for HSLA steels is not expected to have much of an adverse impact on Otelinox due to its small share in the domestic market (about 5%); good demand prospects internationally; and export incentives that the State would be prepared to give, if necessary. Furthermore, it must be realized that any temporary demand shortfall in special steels can be countered by shifting production of certain special steels away from the less efficient Romanian producers to Otelinox and, in extreme situations to even roll ordinary carbon steels. D. Production of Special Steels 3.10 Otelinox would be the first and only producer of stainless sheet and strip in Romania and, since its production is expected to cover demand through the early 1980's, no further capacity is planned to be added for the time being. For alloy rod and bar products, however, there are already three other producers in existence and new production capacities, besides that of Otelinox, will come on stream as shown in the following table:  -9- Production of Alloy Rod and Bar Products in Romania (tons) Year of Start of Plants 1970 1977 1980 /1 Alloy Steel Production Resita 21,000 25,000 25,000(20,000) 1913 Cimpia Turzii 22,000 30,000 30,000(26,000) 1956 Braila 10,000 20,000 20,000(17,000) 1968 Tirgoviste I - 143,500 190,000(105,000) 1975 Otelul Rosu - 30,000 35,000(33,000) 1977 Otelinox - - 120,000(10,000) Total 53,000 248,500 420,000(211,000) /1 Shown within brackets is the quantity of HSLA steel variety in the total. 3.11 In conceiving the Tirgoviste complex, i.e., Tirgoviste I and Otelinox, several other alternatives for expanding special steel capacity were considered, including the possible expansion of Galati and other existing steel plants having production facilities for special steels. However, it was found preferable to establish a new, large, modern and efficient mill at Tirgoviste because of good location with respect to its proximity to principal markets; good rail and road connections to the rest of the country, and other suitable infrastructure facilities; and the availability of trained manpower in the area. Otelinox would primarily produce high-alloy grades, accounting for about 53% of Romanian production of these grades in 1980, and together with Tirgoviste I would contribute nearly three-fourths to Romania's total production of alloy rod and bar products. There will be very limited com- petition among the special steel producers not only because their production is fully planned but their product mix and dimensions largely differ, with Otelinox concentrating on the smaller, and thus more difficult to produce, dimensions of higher-grade steels. E. Product Mix 3.12 In the case of stainless sheet and strip, Otelinox's product mix appears at variance with that commonly used in industrialized countries. For example, in the U.S., the most popular grade of stainless steel is AISI 304, 1/ while in Romania it is envisaged to be AISI 321, a higher-quality product, which at present sells for about 35% more than the former. Other high-value grades also seem to have been given more emphasis in the product mix than is usual in other countries. 1/ Grade numbers as given by the American Iron and Steel Institute (AISI).  - 10 - 3.13 Therefore, Otelinox intends to employ metallurgists with experience in product applications to review the proposed end uses and advise the Enterprise on the appropriate grades for production from both technical and economic consideration and will submit to the Bank a report on the principal findings of the metallurgists by March 1976. It should be noted that any resulting modification in the Otelinox product mix will have no effect on equipment selection of the project and only a minor impact on its financial and economic viability, but may avoid the use of higher grade, and therefore more expensive, steels where lower grades would suffice. 3.14 The product mix of the Enterprise's 120,000 TPY alloy rod and bar mill output in 1980 is projected as follows: Product Mix of Otelinox Rod and Bar Mill tons % High-Alloy Steels Alloy Steel for Machine building 48,340 40.0 Ball bearing steel 26,300 22.0 Spring steel 23,300 19.5 Tool steels 8,300 6.9 High-speed steels 2,550 2.1 Stainless and heat-resistant steels 1,210 1.0 HSLA Steels 10,000 8.5 120,000 100.0 This product mix is based on the input requirements of the engineering and machine-building industries and appears realistic. F. Imports and Exports 3.15 As already noted, the Romanian demand for stainless sheet and strip is at present met almost entirely from imports and this situation will con- tinue until 1978, when Otelinox goes into production. In 1972, the import of such products reached 8,120 tons and is forecast to nearly double by 1977. However, with the commissioning of Otelinox, Romania is expected to become a net exporter of stainless sheet and strip from 1979 to 1982, with net exports peaking at 7,000 tons in 1980--equivalent to about 23% of the Enterprise's planned stainless steel production -and tapering off thereafter. It is not yet clear where these exports would go, especially in the face of possible keen competition from Japan, France, Sweden and Italy. Furthermore, Otelinox will have no control over such exports; they will be handled by Metal Import- Export, a government agency in charge of foreign trade in semi-finished and finished metal products. However, these exports are not a major factor in the project as at most they would account for only 5% and 14% of Otelinox's  - 11 - total volume of output and net sales revenue respectively in 1980 and would by mid-1980's be fully absorbed by increasing domestic demand. Moreover, the exportable surplus may be lower than projected by the Romanian authorities as their domestic demand projections for stainless sheet and strip appear to be conservative (para. 3.09). 3.16 In the case of the alloy rod and bar products, net imports are ex- pected to rise from 51,000 tons in 1972 to 100,000 tons in 1975, but decline gradually during the following years with the commissioning of Tirgoviste I, Otelul Rosu and Otelinox until 1980 when Romania will have reached self-suffi- ciency in these products. It is likely that a small part of production will be available for exports (para. 3.10) while some quantities of specific alloy rod and bar products, which cannot be produced economically in the country, will be imported. The Ministry of Metallurgical Industries has agreed to carry out a study of the export potential for Romanian special steel with a view to developing an export strategy in market economy countries and submit a report to the Bank by March 1976. C. Steel Prices 3.17 In Romania, steel products are sold at constant prices fixed by the State. Prices are established by type, grade, shape and dimension of the products. In addition, there is an extensive system of additional charges for special characteristics such as heat treatment, higher strengths, degree of finish, and packing. In fixing prices for steel products, consideration is given to production costs and economic benefit (profit) levels as recom- mended by the Steel Central. 3.18 The established prices for alloy rod and bar products have remained virtually unchanged since they were fixed in the mid-1960's. In the case of stainless sheet and strip, which are not yet locally produced, comprehensive prices were set only in 1973, when IPROLAM prepared its feasibility study for the Otelinox project. In establishing these prices, the Romanian authorities have used the actual import prices (c.i.f. Romanian border) of early 1973, when steel prices in general were rising steeply and exporting countries were charging export premiums because of steel shortages in many parts of the world. As a result, compared to 1973 listed basic domestic prices in Western Europe and the U.S., the Romanian prices 1/ for stainless sheet and strip are considerably higher and those for alloy rod and bar products are considerably lower than in Western Europe, Japan and the U.S. Details are given in Annex 3-2. H. Location, Distribution and Transportation 3.19 Tirgoviste is in a favorable location with respect to major indus- trial centers such as Arad, Bucharest, Brasov, Braila, Constanta, Craiova, Jassy, Ploiesti and Timisoara among others. Most of Otelinox products are expected to be marketed within a radius of 200 km, and most of the transporta- tion to consuming industries is expected to be by rail. According to the 1/ Based on a conversion rate of Lei 20= 1 US$.  - 12 - distribution system in Romania, consumers are obligated to take deliveries from steel plants in accordance with predetermined quantities established by advance contracts and to maintain on the average, a two-week inventory. Any consumer failing to accept delivery in time is liable for penalties. 3.20 There are, at present, no warehouses or service centers for special steel products. However, for efficient distribution and service, the establish- ment of warehouses-some with shearing and finishing equipment--for Otelinox products and possibly others, near major centers of consumption may become advisable. Further, it is to be noted that Otelinox tentatively plans to ship 50% of its stainless flat products and 58% of its alloy rod and bar products in the form of coils, with the rest in cut lengths. In the absence of intermediate warehouses or coilhandling facilities near consuming industries, it may be necessary to ship more of Otelinox products in the form of cut lengths than is currently foreseen. This aspect and the future establishment of intermediate warehouse facilities will therefore be examined in detail by the Steel Central and Otelinox with prospective technical know-how suppliers before equipment orders are placed (para. 4.03). IV. THE PROJECT A. Physical Description of Project 4.01 The project consists of two rolling mills with related finishing equipment and support facilities designed to produce 150,000 TPY of finished products. Otelinox will not be an integrated steelworks; it will receive semi-finished products (billets and hot-rolled coils) from other enterprises and will roll these semis into finished steel products for sale. The project consists basically of two separate plants which will operate independently: a cold mill to produce annually 30,000 tons of stainless steel sheet and strip; and a bar mill to produce 120,000 tons of alloy rod and bar products per year. 1/ The types and grades of steel to be produced are shown in Annex 4-1. 4.02 The cold mill consists of a coil preparation line, pickling and annealing facilities, a grinding line, a Sendzimir-type cold reduction mill, and a two-high temper mill. The bar mill consists of one 70-ton/hour billet reheat furnace, one single-strand continuous two-high hot-rolling mill with up to 28 stands, cooling beds, coilers, and equipment for heat treatment. In addition, the project will have grinding, polishing, slitting, shearing, levelling, inspection, packaging and shipping facilities. Suitable support facilities, including offices, maintenance shops, laboratories, roll shops, utilities and transportation will also be provided. A more detailed list of processing equipment in each plant as well as general facilities is given in Annex 4-2. 1/ The basic rolling mill will be scheduled for effective operation for only 6,000 hours/year in the operating plan for the project as against about 7,000 hours/year ultimately attainable, indicating that additional poten- tiai capacity does exist for increased production.  - 13 - B. Processes to be Utilized 4.03 The basic processes selected for Otelinox in the course of studying its feasibility are judged to be efficient, modern and economically competi- tive among world producers of special steels; they will not be altered except that specifications of some equipment may be modified after the selection of equipment and technical know-how suppliers to take advantage of the latest technological improvements. A detailed description of the processes and pro- cessing sequences selected for both mills is given in Annex 4-3 and process flow charts are shown in Annex 4-4. C. Project Execution - Division of Responsibilities 4.04 Although responsibilities for the execution of the project will largely be delegated to various Government bodies, the Enterprise will have overall responsibility for the coordination of the project and related activ- ities of the other agencies and for ensuring an acceptable plant from the operational viewpoint. The Enterprise will also be responsible for review and approval of final acceptance tests and commissioning of the plant, in addition to its subsequent operations. 4.05 The principal organizations responsible for project implementation will be IPROLAM and METAROM, two agencies of the Ministry of Metallurgical Industries, working closely with the Ministry of Industrial Construction and the Investment Bank. The basic division of their functions in project exe- cution is described below: IPROLAM acts as a technical consultant for the project and as such is responsible for general process engineering, detailed civil engineering, engineering for part of the local equipment and for support (including infrastructure) facilities, preparation of bid documents and techni- cal aspects of bid evaluation. It will coordinate construction and erection schedules, and carry out technical supervision through start-up and follow-up until production targets are achieved. It will also supervise the progress of civil works and equipment supply. Inasmuch as IPROLAM has the right to make certain changes in project design in consultation with the Government, it was agreed that major design modifications can be made only with the prior consent of the Bank; METAROM is responsible for the importation of machinery and equipment. It also looks after commercial aspects of bid evaluation and contract negotiations with foreign suppliers; the Ministry of Industrial Construction or the Ministry of Metallurgical Industries will be in charge of plant construction and erection in accord with the contracts; the Investment Bank (the Borrower) will provide the accounting functions for the project, arrange for funds for project completion and supervise disbursements and utilization of project funds in line with their broad role described in para. 2.08. 4.06 The above agencies are staffed with adequate, qualified and experi- enced personnel to carry out these responsibilities within the established organizational framework and have done so on numerous previous occasions. Overall, the arrangements are adequate to assure satisfactory project imple- mentation.  - 14 - D. Staffing 4.07 The Otelinox plant is expected to employ about 1,612 persons, of whom 625 will work in the cold mill, 673 in the bar mill and 314 in plant management and services common to both plants. More detailed manning tables are given in Annex 4-5. The above staffing proposed by the project sponsors appears to include a rather generous workforce compared to similar plants in Europe and it may be possible to eventually reduce this level by approximately 20%. But even if such a reduction were not made, economics of the project would not be significantly affected since prevailing Romanian wage scales are low. However, as labor costs increase in the future, this factor could become more important. 4.08 The project is in a favorable position with respect to staffing and training due to: (1) existence of a large, relatively experienced industrial work force in Romania, especially in the basic steel/metal processing fields; and (2) the Government practice of transferring skilled and experienced per- sonnel from existing enterprises to new plants as required. Otelinox may, therefore, be able to achieve a somewhat faster production buildup than other similar new steel plants in the less developed countries. Training and recruitment plans have already been worked out in some detail; they are de- scribed in Annex 4-5. Personnel selection for management positions has also started: many key managers will be hired by the end of 1974. 4.09 Specific training arrangements have been worked out. Training activities both in Romania and abroad and their proper coordination will be included in the scope of the technical assistance and know-how to be provided by one or more foreign operating steel companies as a part of major equipment supply contracts. The training program will cover all operations at Otelinox including specialized operating and maintenance techniques and standard prac- tices, training at selected facilities at Galati and Trigoviste (to assure maximum and most efficient utilization of the project's rolling mills) and the supply of training manuals, standard practice manuals, and a continuing interchange of information. Operational assistance is expected to last for at least five years after project completion. In general, the plans for staffing and training are considered satisfactory. E. Ecology 4.10 Otelinox, being a rolling operation, presents fewer ecological hazards than an integrated steel plant. However, Otelinox does have pickling operations which result in effluents containing sulfuric, nitric and hydra- fluoric acids. Acids released by pickling will not be regenerated as in some larger operations, but will be neutralized in a special facility built for that purpose. Liquid effluents will be treated for removal of oil, grease, suspended solids, and scale prior to dumping. A description of these facili- ties and their expected costs, along with pertinent ecology legislation, is contained in Annex 4-6.  - 15 - 4.11 The plan to neutralize and treat pickling line effluents and, other liquids is generally acceptable. However, the release of neutralized acids with fluorine compounds may still pose some health hazards including toxic side effects. Since the final selection of processes for the project has not yet been made, additional review will be necessary to evaluate the over- all ecology aspects, particularly the reasonableness of the existing standards and degree of compliance thereto. Assurances were obtained, that Otelinox carry out such additional review and take whatever subsequent action is necessary to comply with environmental requirements. F. Future Expansion Plans 4.12 The Bank is satisfied that the project sponsors have carefully considered the relationship between the present project and subsequent expan- sion stages, thus providing for economic expansion in the future. The basic plan is to double the capacity of the bar mill and to increase the flat pro- duct capacity by about 30% in the second stage of plant development, probably in the early 1980's. Additional details on long-range facility planning are given in Annex 4-7. These plans appear to be technically sound. However, Otelinox will exchange views with the Bank prior to any expansion of its plant. V. CAPITAL COST AND FINANCING PLAN A. Project Cost 5.01 Capital costs of the project, detailed in Annex 5-1, are summarized below:  - 16 - Summary of Capital Cost Estimates Lei Million US$ Million Local Foreign Total Local Foreign Total % Equipment & Spares /1 381.6 1,247.5 1,629.1 19.1 62.4 81.5 46.8 Engineering, Know-How and Technical Assistance 122.2 102.8 225.0 6.1 5.1 11.2 6.4 Construction and Installation 905.7 - 905.7 45.3 - 45.3 26.0 Supervision and Start-up 33.5 - 33.5 1.7 - 1.7 1.0 Preoperating Expenses 14.1 4.0 18.1 0.7 0.2 0.9 0.5 Sub-total 1,457.1 1,354.3 2,811.4 72.9 67.7 140.6 80.7 Contingencies: Physical 138.4 149.0 287.4 6.9 7.4 14.3 8.2 Price - 225.2 225.2 - 11.3 11.3 6.4 Total Fixed Assets 1,595.5 1,728.5 3,324.0 79.8 86.4 166.2 95.3 Working Capital Requirement 156.3 3.7 160.0 7.8 0.2 8.0 4.7 Total Project Cost 1,751.8 1,732.2 3,484.0 87.6 86.6 174.2 100.0 Interest During Construction /2 38.5 183.4 221.9 1.9 9.2 11.1 Total Financing Required 1,790.3 1,915.6 3,705.9 89.5 95.8 185.3 /1 CIF plant site. This project will be exempted from all duties on imported equipment and spares. /2 Entirely attributable to the Bank loan. 5.02 The original capital cost estimates prepared by IPROLAM in mid-1973 on the basis of preliminary discussions with prospective equipment suppliers were revised upward by the Bank in early 1974 anticipating the expected price level of late 1974 to arrive at the above estimates; they reflect consultation with prospective suppliers and evaluation of the capability of Romanian equipment manufacturers. Local equipment as well as civil construction and installation costs are based on Romanian estimates prepared by using published fixed prices. Local cost estimates in Romania are usually very accurate, not only because they use fixed prices, but also because the volume of civil works and the materials used are assessed in great detail. While in the case of this project, such detailed assessment will only be made at the time the final technical and economic study is prepared (i.e., in early 1975), they are sufficiently accurate now to serve as a basis for a reasonably firm estimate of costs. Costs of technical assistance, know-how and engineering are based on U.S. and European experience, and supervision, start-up and preoperating expenses reflect past experience in Romania on similar works.  - 17 - 5.03 A physical contingency of 10% has been added to total fixed cost, and a 10% per year price escalation is included in the foreign exchange costs of equipment and technical assistance. Compared with past Bank practice, this is an unusually high price escalation provision but is considered justi- fied in view of expected added cost increases due to some delayed effects of the higher energy costs, and also near-full order books of steel equipment manufacturers. No price escalation has been added to local costs, since they are based on fixed prices. In all, the contingency provisions - accounting for 15% of total project cost - are considered adequate and the capital cost estimates realistic. 5.04 Of total financing required for the project of about Lei 3.7 bil- lion (US$185 million), nearly Lei 1.9 billion (US$96 million) -- about 52% of the total - is in foreign exchange, including about Lei 183 million (US$9 million) for interest during construction. Project costs are about equally divided between the cold mill and the bar mill. B. Working Capital 5.05 Permanent working capital requirements (Annex 5-2) are estimated at Lei 160 million (US$8 million), of which only about Lei 4 million would be needed in foreign exchange. They are comparatively low partly because de- livery of raw materials and finished products is strictly planned and coordi- nated by the State and partly because funds are required only for operational and not for commercial needs. Moreover, since the National Bank, which on behalf of the State is in charge of working capital financing for industry, provides prompt credits to cover accounts receivable, no provision for such credits has been made in the above calculation. Adequate funds for working capital will be made available by the State as and when required. C. Financing Plan 5.06 The financing plan is as follows: Financing Plan Lei million US$ million Local Foreign Total Local Foreign Total Loan Funds IBRD - 1,400.0 1,400.0 - 70.0 70.0 State Funds for: Fixed Capital 1,595.5 328.5 1,924.0 79.8 16.4 96.2 Working Capital 156.3 3.7 160.0 7.8 0.2 8.0 Interest during Construction 38.5 183.4 221.9 1.9 9.2 11.1 1J7903. :1,915.6 3,705.9 89.5 95.8 185.3  - 18 - 5.07 The proposed Bank loan of US$70 million equivalent will be made to the Investment Bank (para. 1.02) and guaranteed by the State. The loan will be for 15 years, including 5 years of grace, at the prevailing interest rate of 7-1/4% per annum. Otelinox will receive the loan proceeds at a cost of 9% and on otherwise identical terms, with a guarantee fee of 1-3/42 accruing to the State. 5.08 The Bank loan would cover about four-fifths of total foreign exchange requirements of the project. The rest of the foreign exchange and all the local financing requirements would be met by the State by way of budget allo- cations and in the form of interest-free advances. Details on the type of financing and the procedures used in making it available for investments in Romania are given in Annex 5-3. All funds for fixed investments for projects are channelled through the Investment Bank and those for working capital through the National Bank. Any funds, whether in foreign exchange or local currency, needed to (1) complete the project; (2) cover any possible cash losses in the initial operating years; and (3) provide adequate working capital, will be met promptly as needed by the State. VI. ALLOCATION OF BANK LOAN, DISBURSEMENT AND PROCUREMENT A. Allocation of Bank Loan 6.01 The project is to be bid in two large single-responsibility packages -- cold mill and bar mill -- with the engineering, know-how and technical as- sistance, including training, attached to them (para. 4.09). The Bank loan is to be used to meet the costs of a major portion of equipment (mostly im- ported) and engineering, know-how and technical assistance, including training, of these two packages and the foreign exchange component of foreign consultant services. Detailed information on the specific equipment packages and other items to be financed by the Bank is given in Annex 6-1 and summarized below: Allocation of Bank Loan (US$ million) Cold Mill Bar Mill Total % Equipment and Spares 26.2 23.5 49.7 70.0 Engineering, Know-how and Technical Assistance 4.1 /1 0.8 4.9 7.0 Contingencies 9.5 5.9 15.4 22.0 Total 39.8 30.2 70.0 100.0 Z of total internationally bid packages /2 100% 64.8% 73.1% /1 Includes consultant services for procurement (para. 6.06). /2 Excludes the foreign exchange component of working capital and interest during construction.  - 19 - 6.02 The Romanian authorities have requested the Bank to finance 100% of the cost of the internationally-bid cold mill package with the balance of the loan to be utilized for the bar mill package. With respect to the latter, the Bank loan would finance 65% of the cost of internationally bid equipment and spares, technical assistance, know-how and engineering. All foreign pro- curement for both mills will be in accordance with Bank guidelines. While no Romanian supplier is expected to participate in the cold mill package, local sub-supply in the bar mill is possible. B. Disbursement 6.03 The Bank loan would be disbursed against the cost of eligible categories of the cold and bar mill packages as mentioned above (para. 6.01). A schedule of estimated quarterly disbursements is given in Annex 6-2. Although the current cost estimates indicate that the proceeds of the Bank loan will be fully needed for these eligible categories, it was agreed that any undisbursed loan portion, on account of cost savings, could be used for interest during construction on the Bank loan. Also, in order to avoid any delays in the exe- cution of the project the Bank has agreed to disburse up to US$3 million for downpayment on each of the two contracts but make subsequent disbursement con- tingent on the formal approval of the final technical and economic study (para. 2.02). C. Bidding Procedures 6.04 As noted above, only non-Romanian Consortium leaders are expected to be pre-qualified for the two mill packages although there may be some additional Romanian sub-supplies in the bar mill package (para. 6.02). A modified two stage bidding procedure will be utilized for the two packages: initially, preliminary technical offers are to be submitted and discussed at pre-bid meetings; subsequently, firm technical proposals and separate price bids will be submitted followed by consultation and modification of the technical bids to achieve reasonable uniformity among the final technical bids; and finally, (and only at this stage) will the original price bids be opened accompanied, where necessary, by supplemental price bids to reflect the technical changes. Any Romanian equipment which is to form part of these two mills but which will not be included in the two foreign bid packages will be prescribed to all foreign bidders alike. D. Bidding Consortia 6.05 Each bidding consortium will be asked to supply a complete equip- ment package together with detailed engineering, process know-how, and technical assistance and will be composed of one or more suppliers of major equipment associated with a suitable operating steel company. The bidder will also supply supervision during equipment manufacture and erection, and provide performance guarantees for at least one year after the commissioning of the plant. Responsibility for supply and performance guarantees will fully rest  - 20 - with the consortium leader. Although this procedure is satisfactory, there is a likelihood that the number of bidders will be low because of the stringent guarantee requirements in Romania coupled with the higher cost of preparing single-responsibility bids on account of a high degree of engineering work required to prepare bids of this type and the current uncertainties in the equipment supply market. E. Local Supply 6.06 Local equipment 1/, unless forming part of the internationally bid packages, will not be financed by the Bank nor will civil works and building construction which will be executed by the Ministry of Industrial Construction or the Ministry of Metallurgical Industries, the latter having accumulated highly specialized experience in the construction of metallurgical industries. The Bank is satisfied that the type of equipment specified to be supplied locally can be produced in Romanian shops and within the time required, and that the quality of civil construction is adequate. F. Procurement Responsibilities 6.07 As mentioned earlier (paras. 4.05 and 4.06), responsibility for procurement will rest with IPROLAM for technical aspects and METAROM for comnercial aspects under the supervision of Otelinox's General Manager. In view of the past experience of the agencies involved in procurement, these arrangements are generally sound. However, since the cold mill will be the first of its kind in Romania involving the production of light gauge flat-rolled stainless steel products, additional specialized expertise may become neces- sary to assist IPROLAM in ensuring optimal design and equipment selection. Since the need and extent for such additional expertise cannot be determined until the technical offers are received, an understanding was reached that con- sultants will be employed for this purpose, unless the Borrower and the Bank agree that such assistance is not needed. G. Implementation Schedule 6.08 The expected timing of key events in project implementation is given in Annex 6-3. It calls for the receipt of initial technical offers in September 1974, with the award of contracts to begin in March 1975 and mechanical completion of the project in the second quarter of 1978. 1/ Foreign engineering required for local equipment as well as Romanian components included in foreign bids woild be financed by the Bank.  - 21 - VII. RAW MATERIALS, PRODUCTION COSTS AND REVENUE A. Raw Materials and Utilities 7.01 At full production, the project would require about 40,500 TPY of hot-rolled coils (from Galati) and about 146,500 TPY of billets (from Tirgo- viste I). Otelinox is well assured of these two main raw materials and their quality is to be controlled through adherence to strict standards with tech- nical assistance to be supplied, as needed, by the same firm giving such assist- ance to Otelinox (para. 4.09). 7.02 Most of the auxiliary materials such as chemicals, refractories and rolls, which are required in small quantities, will be procured locally and no problem is foreseen in their availability. Further details are contained in Annex 7-1. The necessary infrastructure facilities -- principally elec- tricity, natural gas, water and transport -- have already been installed as part of the development of the Tirgoviste complex, with the exception of the steam supply which needs to be expanded. B. Production Costs 7.03 Production cost estimates are based on an overall material yield of 74% in the cold mill and 82% in the bar mill. These assumptions should be conservative, in the light of experience in similar plants in Western Europe and the U.S., as well as the skilled labor force availability in Romania. The following table summarizes the direct production cost for the cold mill and the bar mill as given in Annex 7-2. Otelinox - Direct Production Cost at Planned Capacity /1 Otelinox Total Cold Mill Bar Mill (Weighted Average) (Lei/T) ( TT7 (%) (Lei/T) (%) Main Raw Materials 25,263 82.1 5,353 85.8 9,335 83.8 Auxiliary Materials 2,280 7.4 141 2.2 569 5.1 Labor 723 2.4 198 3.2 289 2.6 Utilities 767 2.5 170 2.7 303 2.7 Maintenance 1,730 5.6 380 6.1 650 5.8 Total 30,763 100.0 6 242 1000 100.0 US$ Equivalent 1,538 - 312 - 557 - /1 At assumed product mix. Excludes depreciation, overheads and financial charges.  - 22 - 7.04 In both mills, material costs would account for about 90% of total direct production costs - the high percentage level being a particular fea- ture of special steel rolling mills. Labor costs as a percentage of total production costs are low in both mills partly due to the nature of proces- sing - only rolling operation - and partly due to low direct wage costs in Romania. Overall, Otelinox direct production costs per ton of products are comparable to similar plants in Western Europe and the U.S. and reflect a modern operation. The above production costs are those presently in force (May, 1974) with the exception of labor costs which have been escalated by 7% per year between 1973 and 1980 to reflect increases in real wages. C. Revenue 7.05 All prices - of both input and output - are set and controlled by the Government and reflect the average cost of production of all units in a particular industry plus a margin of profit 1/ which is determined by the State. Details of how these prices are determined are given in Annex 7-3. Some price revisions are scheduled before the end of 1975 to reflect: (1) recent technological innovations and productivity increases which have led to cost reductions; (2) possibly higher costs of energy; and (3) elimination of relative price distortions among various commodities (Annex 7-3). 7.06 However, it is not known at this time what new level of prices will be set by the Government and which prices will be affected. Therefore, in the financial projections, the presently established prices for Otelinox products have been used. For Otelinox these prices are the same for domestic and export sales, with the State either gaining from or subsidizing export prices, as the case may be, depending on the differential between domestic and export prices at a given time and the exchange rates applied by the Government. Whatever adjustments in Otelinox input and output prices may be made, these should not affect the financial viability of the Enterprise in view of the procedure of considering costs of production plus a reasonable profit in fixing prices and the expected efficiency of Otelinox production relative to other existing producers. 7.07 Revenue forecasts are based on completion of the project in the first half of 1978 and gradual production build-up until full production is reached in 1980, when total revenue is estimated at about Lei 2.22 billion (US$111 million). To this revenue, based on the proposed product mix, the cold mill would contribute 56% and the bar mill 44% (Annex 7-4) despite the fact that the tonnage output of the bar mill would be four times that of the cold mill. This reflects the great difference in raw material costs and sel- ling prices between the two mills. 1/ This varies from industry to industry and is a function of capital intensity.  - 23 - VIIIo FINANCIAL ANALYSIS A. Romanian System 8.01 Under the Romanian system, targets are set in the Plan for each enterprise with respect to annual production volume, revenue, production costs, and benefit (profit) along with those for allocations of an enter- prise's earnings (Annex 8-1). As a result, the primary responsibility of an enterprise is to meet these targets and operate in such a way as to optimize utilization of resources. This includes achieving the planned benefit, any upward deviations from which reflect higher than normal efficiency of an enterprise's operations. Generally, enterprises in Romania have limited scope to change the product mix to maximize benefits and benefits are not a guide for future investments, which are determined by the State. As all investment financing and key operational decisions are centrally coordinated and necessary funds are provided by the State or other sources of financing, the financial viability of a Romanian enterprise cannot necessarily be judged by its benefits. Consequently, the usual conventional financial ratios as applied to Romanian enterprises have limited significance. B. Profitability 8.02 Detailed income and cash flow forecasts through 1984 are given in Annexes 8-2 and 8-3 respectively. Selected items are summarized below: Otelinox - Selected Income Statement Items (Lei million) 1978 1979 1980 1984 Capacity Utilization (X) 40% 93% 100% 100% Net Sales 631 2,030 2,221 2,221 Benefits -99 257 350 350 Benefits after financial charges -162 135 237 271 % of net sales -25.7 6.7 10.7 12.2 7 of production cost -22.0 7.6 12.6 14.4 Cash Generation /1 -14 311 413 447 /1 Depreciation plus benefits after compulsory deductions. 8.03 Net benefits after compulsory deductions as a percentage of net sales are expected to increase from a loss in 1978 to 10.7% in 1980 and then increase gradually because of reduced financial charges. Cash generation does not actually reflect the funds available to the Enterprise because the depreciation allowance automatically goes into a depreciation fund held by the Investment Bank, and even the remaining net benefits are distributed according to predetermined criteria set by the State (para. 8.04). The funds actually available to an enterprise are the amounts predetermined in the allocations for so-called non-centralized investments 1/ and for the reserve funds. 1/ Mainly for repairs and replacements.  - 24 - C. Allocation of Benefits 8.04 Allocation of benefits is planned on the following basis and in the following order of priority as explained in detail in Annex 8-1: (i) mandatory allocation to the State budget (10% of total planned benefits); (ii) bonus payments to employees, up to 2% of the actual total wages and salaries; (iii) repayment of short-term loans; (iv) allocation to centralized investments approved by the State; (v) allocation to non-centralized invest- ments 1/; (vi) allocation to reserve funds; (vii) certain appropriations to the Central; and (viii) the remainder is allocated to the State budget. During the actual allocations, obligations to the State - items (i) and (viii) -- have first priority and are based on the planned benefits ir- respective of whether an enterprise actually realizes them or not. The mandatory depreciation remittances and annual benefits will be sufficient to cover the payments of interest and principal on the Bank loan. 8.05 In the early years of operations (1978 and 1979), profitability is expected to be negative or low and funds available to the Enterprise from operations may not be adequate to meet all its cash, including debt service, obligations (para. 8.04). Therefore, as also mentioned in para. 5.08, agree- ment was obtained that the State will provide funds necessary to cover any shortfall and maintain an adequate level of working capital. D. Financial Position 8.06 Balance sheet projections put into the usual Bank format are con- tained in Annex 8-4 and are summarized below: Otelinox - Selected Balance Sheet Items (Lei million) 1978 1979 1980 1984 As of December 31: Net Working Capital - 45.6 51.0 17.8 Equity /1 2,021 1,995 1,941 1,755 Long-term Debt 1,351 1,248 1,137 606 Ratios: Current Ratio 1.1 1.4 1.5 1.1 Long-term Debt/Equity Ratio 40:60 38:62 37:63 26:74 Debt Service Coverage - 3.2 3.0 2.8 /1 All State funds (interest free) to the Enterprise are considered as equity. The drop in equity is because the initial advances for the project are recouped through depreciation. 8.07 The above ratios, based on the Bank's usual standard measurements, are satisfactory except during the first two years of operation when they are low or even inadequate. However, since the State will guarantee to provide 1/ Mainly for repairs and replacements.  - 25 - Otelinox sufficient cash to allow it to meet its obligations at any time (para. 8.05) and all funds required for the Enterprise's operations are provided by the State, there is no danger of financial stringency. E. Reporting Requirements 8.08 Romanian enterprises in general have elaborate reporting requirements including weekly, monthly, quarterly, and annual reports to their respective Centrals and the National Bank and the Investment Bank. On the whole, these reports provide adequate information except that, as explained in Annex 8-5, funds on the liability side of the balance sheet are identified by their applications rather than by sources. Therefore, for the Bank to keep abreast of the financial position of Otelinox, it is necessary for the Enterprise to submit balance sheets in sufficient detail giving a breakdown of liabilities by major sources and type of funds, e.g., credits from the National Bank and the Investment Bank, State advances, the Bank loan and other borrowings. Types, formats and frequency of reports were agreed upon with the Guarantor and the Borrower. P. Auditing Requirements 8.09 Romania has a fairly elaborate control and audit system as detailed in Annex 8-6. The primary objective of these audits is to ensure that the activities of commercial enterprises dovetail into the national plan and are in conformity with the set targets and allow any deviations to be brought to the attention of the appropriate authorities. Nevertheless, the information provided in the audit reports (submitted quarterly) is adequate for Bank purposes. The Enterprise's financial statements will be periodically audited by the Steel Central, the Ministry of Metallurgical Industries and the Ministry of Finance. There is no separate organization as such for auditing although the Court of Superior Control established in May 1973 may perform this function in the future. The audits performed by the Steel Central and the Ministry of Metallurgical Industries may not be completely independent as they are also responsible for operations of the enterprises. The Ministry of Finance which monitors activities of all Ministries and their enterprises, is in a better position to conduct an impartial audit. Therefore, it was agreed that the annual audit and report on the accounts of the Enterprise be carried out by the Ministry of Finance. G. Financial Rate of Return 8.10 All the projections are based on constant prices as is the normal practice in Romania. Thus, in constant value terms, the project provides a suitable financial return of about 13%. Details of assumptions used are given in Annex 8-7. The financial rate of return for the cold mill separately would be somewhat higher and for the bar mill slightly lower than the overall return. For reasons stated earlier (para. 8.01), the rate of return calcul- ations in the Romanian context are no guide for investment decisions among various projects. Therefore, no sensitivity tests have been made for the financial analysis.  - 26 - H. Break-Even Points 8.11 The profit break-even point in 1980, after reaching full production, would be at about 62% of the effective capacity of the plant. Considered separately, the break-even point for the cold mill would be at 55% and for the bar mill at 73%. The comparatively low break-even for the cold mill is partly due to the fact that the fixed cost for the cold mill as a percentage of its revenue is only 15% and thus lower than for the bar and partly due to relative price distortions between the products of these two mills (para. 3.18). Further details on break-even are provided in Annex 8-8. IX. ECONOMIC JUSTIFICATION A. Economic Rate of Return 9.01 The economic rate of return for the cold mill is about 14.9%, slightly higher than that of the bar mill - approximately 14.3%. As a result, the rate of return for the project as a whole is satisfactory at about 14.6% Prices used for this calculation and the economic sensitivity analysis as well as the basis for calculation of input costs and revenues are given in Annex 9-1. International prices (CIF Romanian border) for 1972, when the strong upswing in steel prices had not yet started but prices had recovered from the slump of 1970 and 1971, have been used as the base for calculating the accounting prices for valuing Otelinox inputs and outputs. As for labor, no shadow rate has been assumed because the share of labor cost in total operating cost is insignificant (para. 7.04). 9.02 The effect of the recent upward movement of petroleum prices on the project is limited because: (a) Romania is relatively independent of petroleum Imports (imports account for only about 20% of consumption) and is in this respect more favorably placed than other major special steel producers in Western Europe and Japan; (b) it can be assumed that prices of special steel, the production of which is concentrated in developed countries, will eventually reflect such increases in input costs; and (c) the fact that even if one were to assume that energy costs would go up to the same extent as the recent petroleum price hikes (i.e., by three times), Otelinox's direct production costs would not increase by more than 4%. B. Foreign Exchange Rates 9.03 The official rate of Lei 4.97 US$1 is used only for accounting purposes. Since 1970, the rate frequently used for invisible and capital transactions has been Lei 14.38 per US$1. Under a new system introduced in January, 1974, the prices of all traded goods are converted at a uniform rate of Lei 20 per US$1.00, a rate which is considered by the Romanians as being representative of the cost of convertible foreign exchange. For imported goods, the domestic Lei price is found by adding to the converted foreign price a tariff rate which varies  - 27 - for different types of goods. The rate of Lei 20 per US$1.00 has also been used to convert national income statistics from Lei to dollars. Consequently, this rate has been used as the base rate for calculations in the appraisal. Sensitivity analysis has been conducted on the conversion rate by also using a rate of Lei 25 - US$1.00. If this higher rate is used the economic rate of return for the project increases to about 18% from 14.6%. C. Sensitivity Tests and Risks 9.04 The economic rates of return are higher than the financial rates for both cold and bar mills because the prices for major inputs and outputs fixed by the Romanian authorities are at variance with the world prices as shown in Annex 3-2. Sensitivity tests have been made to determine the effects of various events on the economic rates of return; they are shown in Annex 9-1 and are summarized below: Sensitivity Tests on Economic Rates of Return (%) Case Description Rate of Return 1. Base Case 14.6 2. Sales Revenue Decrease 5% 11.7 3. Operating Cost Increase 10% 10.3 4. One Year Project Delay plus 15% Cost Overrun 8.8 5. Sales Revenue Decrease 5% and Operating Cost Increase 5% 9.8 6. Project Cost Increase 10% and Operating Cost Increase 10% 9.2 9.05 Since Romanian authorities have not provided sufficient data to fully justify their proposed product mix (para. 3.12), the Bank has assumed a modified product mix reflecting the commonly used product mix in Western Europe to test the sensitivity of the rate of return. Even under this assump- tion, the project provides a satisfactory return of about 12.6%. The rates of return are, however, slightly understated due to the excess capacity built into the bar mill. Nevertheless, the project is sensitive to moderately adverse conditions, particularly delays in project completion. Considering the past Romanian experience in implementing projects successfully, the return for Otelinox is expected to be satisfactory. 9.06 There are basically three major risks that this project could face. First, unfamiliarity with the international bidding procedures of the Bank may prolong the project implementation period somewhat with a resulting in- crease in project costs. However, the Romanian authorities are aware of this problem, and continued close contact between them and the Bank during pro- curement should minimize such delays. Second, indirect impact of continuing high energy costs may cause the demand abroad for Romanian goods using special steel to be lower than now expected. However, in such a case, the project will have sufficient in-built flexibility to temporarily roll special steel products usually rolled in less efficient mills or roll some ordinary carbon  - 28 - steels and thus counteract any serious fall in demand for special steel in Romania because of external factors. Finally, the present situation in the equipment supply market coupled with the high costs in preparing bids of this type may result in reduced competition for equipment supply. D. Competitiveness 9.07 The supply of raw materials and utilities seems assured to the project and so is the provision of well-trained labor. Wage costs are much lower in Romania than in developed countries, the average direct wage cost being about Lei 8.0 (US$0.40) an hour. Further, labor is relatively efficient and hard-working, the scale of operation planned for the project is economic and the machinery proposed for Otelinox is up-to-date. Based on all these factors, the project is expected to be able to produce special steel compe- titively with Western Europe. E. Employment 9.08 The project would generate employment directly for about 1,600 persons. It will also help open up a large number of jobs in the consuming industries, especially engineering and metal-transforming industries which are projected to grow at the rate of 15% a year during the current decade. But for the project, Romania would be importing much less than the production envisaged by Otelinox over the years because of its continuing foreign ex- change shortages, with corresponding reduction in the rate of growth of the above-mentioned industries and employment generation in them. However, the impact of the project on employment creation upstream is limited because mDst raw materials (barring scrap) required for the production of main inputs - hot-rolled bands and billets - are imported. F. Estimated Foreign Exchange Effects 9.09 One of the most important benefits from the project is the annual net foreign exchange earnings to the economy after deducting all foreign operating costs and debt service payments associated with the project. As shown in Annex 9-2, such net annual savings at 1973 adjusted world prices would be about US$59 million after the project achieves full production in 1980. In other words, the total foreign exchange financing required for the project - US$96 million - would be more than covered in two years of opera- tion of the plant at full capacity. Thus the project has a significant and beneficial impact on Romania's foreign exchange situation. Even at the lower world prices in effect in 1972, net annual savings would still be US$53 million. G. Transfer of Technology 9.10 Transfer of technology is also an important aspect of the project as Romania does not have previous experience in operating cold-rolling mills for stainless sheet and strip. Further,-under the project, it is envisaged to help adopt new technology in the existing steel plants which are proposed to provide semi-finished products for rolling at Otelinox.  - 29 - X. AGREEMENTS 10.01 The Loan Agreement and Guarantee Agreement will record the following major agreements and assurances: (a) the Enterprise will not be dissolved without prior consent of the Bank (para. 2.03); (b) well-qualified personnel to fill key positions will be appointed in a manner which is satisfactory to the Bank (para. 2.14); (c) the proposed product mix will be reviewed (para. 3.13); (d) a study of export markets for special steels will be carried out (para. 3.16); (e) possible establishment of steel service centers will be examined (para. 3.20); (f) any major modification in project designs will only be made with prior consent of the Bank (para. 4.05); (g) arrangements for adequate training will be made (para. 4.09); (h) adequate measures will be taken for environmental protection (para. 4.11); (i) expansion of Otelinox plant will be done only after exchange of views with the Bank (para. 4.12); (j) funds to ensure project completion, cover any possible operational losses and maintain adequate working capital will be provided (paras. 5.05 and 5.08); (k) Disbursement of Bank loan beyond US$3 million for any one contract will be subject to approval of final technical and economic study (para. 6.03); (1) procurement consultant will be appointed, if necessary (para. 6.07); (m) Annual depreciation remittances and benefits will be sufficient to cover payments of interest and principal on the Bank loan (para. 8.04); (n) reports will be submitted in agreed form and substance (para. 8.08); and  - 30 - (o) annual audit and report on accounts of the Enterprise will be carried out by the Ministry of Finance (para. 8.09). 10.02 Based on the foregoing agreements and assurances received the project provides a sound basis for a loan for the Otelinox-project equivalent to US$70 million for 15 years, including a 5-year grace period. Industrial Projects Department May 21, 1974.  ANNEX 1 ROMANIA: OTELINOX STEEL PROJECT DESCRIPTION OF TECHNICAL TERMS Hot-Rolled Coil: This is the basic semi-finished flAt rolled steel product from which cold-rolled products are produced. It is rolled hot from semi- finished steel in the slab form. The hot-rolling operation is usually done on a continuous or semi-continuous casting basis at temperatures frequently exceeding 12000 C. The hot-rolled coil used at Otelinox will weigh approxi- mately 6-12 tons with thicknesses ranging from 3-5 mm and width, 0.6-1.5 m. Cold-Rolled Sheet: This is a general term for a flat-rolled steel product which is hot-rolled first and, subsequently, cold reduced. Typical size for Otelinox cold-rolled sheet will be 1 to 1.5 mm thick and 1 m wide. Cold-Rolling: This rolling operation is done initially at ambient tempera- ture without additional heating; during this operation, the product fre- quently reaches temperatures exceeding 1700 C. Pickling: It is a process of removing oxide, mill scale, and oil by subjecting strip to flexing, and processing withshot blast, and with acids such as hydrochloric, nitric and hydrofluoric acids in the Otelinox opera- tion. Sendzimir Mill Processing: The cold reduction of steel on a cluster-type cold- rolling mill. This mill frequently has small work rolls of 50-60 mm dia- meter. Multiple processing is frequently required on stainless steel with maximum possible reduction of about 70% without intermediate annealing. Cold Roll, Anneal and Pickling Line: The process line wherein strip is heated to approximately 8OO