Achieving Our Goals
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Achieving our goals Annual Report 2013 Our goal remains the same – it’s to be a leader in value creation Achieving our goals Strategic Priorities: See page 1 8 Increased Focus on FCF Generation The Business System of Severstal: See page 10 Delivering Benefi ts Cost reduction initiatives See page 22 Proactive deleveraging: Lowering the gross debt See page 39 by almost US$1 billion in 2013 Performance highlights The highest share of Highly diversifi ed sales high value-added geography (Severstal Group steel in Russia (in total steel Highly diversifi ed client base FY 2013 revenue breakdown shipments of Severstal (Severstal Russian Steel’s by region) Russian Steel , 2013) revenue by industry , 2013) Europe North Other 15% Central America 14% Asia and High value- 30% China Other steel added Automotive products 3% 6% Other 7% 48% 52% Tube and pipemaking 12% Machinery 9% Oil and Gas Construction 7% and processing Russia 52% 45% COMPANY OVERVIEW STRATEGY PERFORMANCE SUSTAINABILITY GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION Introduction Company overview Sustainability Severstal at a glance 6 Our Principles 66 Severstal’s Business Model 8 Occupational and industrial safety 68 The Business System of Severstal: 10 Environmental protection 70 Delivering Benefi ts Employees 74 Chairman statement 12 Social investment 78 CEO statement 14 Governance Strategy Board composition 82 Strategic Priorities: Increased Focus 18 Corporate governance statement 92 on Free Cash Flow Generation Risk report 104 Management Q&A 20 Case 1 – Improving the cost of production 22 Financial statements at our steel and mining operations Consolidated income statements 114 Case 2 – Smart CAPEX 24 Consolidated statements of comprehensive income 115 Case 3 – Flexibility of sales with sizable 26 export revenues Consolidated statements of fi nancial position 116 Case 4 – A reliable supplier to automotive industry 28 Consolidated statements of cash fl ows 117 Consolidated statements of changes in equity 118 Performance COO statement 32 Additional information CFO statement 34 Shareholder information 121 Business overview 36 Terms and abbreviations 123 Severstal Resources 40 Contacts 124 Severstal Russian Steel 48 Severstal International 58 Our online annual report can bee found at: www.reports.severstal.com THE HIGHEST SHARE OF HIGH VALUE-ADDED STEEL IN RUSSIA 48% 48% 52% 52% Severstal Annual Report and Accounts 2013 3 COMPANY OVERVIEW STRATEGY PERFORMANCE SUSTAINABILITY GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION Severstal at a glance 6 Company overview Severstal’s Business Model 8 The Business System of Severstal: Delivering Benefi ts 10 Chairman statement 12 CEO statement 14 Severstal at a glance OAO Severstal (“Severstal”, Severstal Resources “the Company”, or “the Group”) Severstal Resources manages all of Severstal’s mining assets, and forms the basis of Severstal’s vertically integrated business model. It is a vertically integrated steel satisfi es almost all the iron ore and hard coking coal requirements of Severstal Russian Steel and, some of the requirements of Severstal’s and steel-related mining company International steel operations, while also selling increasing volumes to external customers. The coal businesses are among Russia’s top with major assets in Russia fi ve coking coal producers, while the iron ore businesses are leaders and the USA, as well by extraction volume in their respective markets. as investments in other locations. Operations began in 1955 at Cherepovets Steel Mill in Russia. Since becoming a private company in 1993, Severstal has Severstal Russian Steel Severstal Russian Steel is a leading Russian steel producer, offering been growing and a broad product mix, with a high proportion of high value-added fl at steel products, and increased production of long products for expanding internationally. construction and downstream sales. Its fl agship Cherepovets steel mill is one of the lowest-cost steel mills in the world, and is conveni- The company is listed on the ently located for access from the company’s mining operations, and Moscow Exchange (MICEX) and its to the Baltic ports and Russia’s industrial heartland. GDRs are traded on the London Stock Exchange (LSE). Severstal’s strategic aim is building a healthy and high-quality business that would generate higher than market Severstal International average earnings through the cycle. Severstal International is a modern steel producer with two of the Severstal comprises three business most advanced facilities in North America, in Dearborn and Colum- bus. Modern facilities allow capital expenditure and maintenance divisions: Severstal Resources, levels to remain low, and production can focus on high value-added products. The division has long-standing, solid relationships with Severstal Russian Steel and leading customers in the automotive, construction, pipe and tube, Severstal International. and other sectors, and is well-positioned in these markets. Severstal 6 Annual Report and Accounts 2013 COMPANY OVERVIEW STRATEGY PERFORMANCE SUSTAINABILITY GOVERNANCE FINANCIAL STATEMENTSTATEMENTS ADDITIONAL INFORMATION Iron ore sales volumes at Coal sales volumes at Olenegorsk Severstal Resources Severstal Resources (mln tonnes) (mln tonnes) Kostomuksha Vorkuta 15.2 15.1 10.5 10.1 Friedens 2012 2013 2012 2013 Liberia Highly diversifi ed sales The highest share of geography (Severstal Group high value-added steel in FY 2013 revenue breakdown Russia (in total steel by region) shipments of Severstal Europe Sheksna North Russian Steel in 2013) 15% Central St. Petersburg Cherepovets America Kolpino Asia and High value- 30% China Other steel added products Vsevolzhsk Moscow 3% Kaluga 48% Orel Balakovo Other 7% 52% Dnepropetrovsk Volgograd Milan Russia 45% Highly diversifi ed client base The fastest growing (Severstal Russian Steel’s segments of the HVA revenue by industry in 2013) portfolio (in tonnes in total steel shipments of Severstal Russian Steel in 2013) Dearborn Other 14% Automotive Downstream 1,786,460 Friedens 6% products 1,920,722 Columbus Tube and 684,867 pipemaking Hot-rolled 12% plate 772,469 Machinery 9% Color coated 367,821 Oil and Gas Construction 7% and processing coil 447,827 52% 2012 2013 Severstal Annual Report and Accounts 2013 7 Severstal’s Business Model A resilient business model combining low-cost Our primary strategic objective is to steel production and self-suffi ciency in raw build a sustainable and high-quality materials business to generate higher than Russia is one of the world’s lowest cost regions for steel production. Severstal also enjoys a unique position in the steel industry thanks industry average earnings to almost full self-suffi ciency in iron ore and more than self-suffi - ciency in coking coal. Our mining assets are located close to the throughout the industry cycle. Company’s steel operations, and through producing a surplus of iron ore pellets and coking coal, Severstal is able to sell large volumes of Severstal’s fundamental strengths mining products to customers in Russia and internationally . to help achieve this include: Strong presence in the Russian markets with the fl exibility for export sales The domestic market in Russia remains Severstal’s priority, with a special focus on the North-Western and Central regions of the country. In these regions we benefi t from the highest levels of steel consumption in the country as well as enjoying a logistical advan- tage not available to our competitors thanks to the location and quality of our assets. Our focused approach to our target markets has enabled Severstal to increase its market share in Russia in 2013. Severstal’s operations enjoy a more favourable geographic position for serving export markets than the majority of its Russian competi- tors. This makes export sales more attractive and viable for Severstal as the difference between the cost of selling domestically and internationally is reduced. This provides Severstal with a more fl e- xible sales structure and therefore allows the Company to generate higher than industry average earnings. With two steel units in the USA (Severstal North America), Sever- stal has a diversifi ed end-market customer base with strong and established positions in the automotive, construction and pipe and tube industry segments. 2014 marks the ten year anniversary of Severstal’s presence in the US market. Severstal 8 Annual Report and Accounts 2013 COMPANY OVERVIEW STRATEGY PERFORMANCE SUSTAINABILITY GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION Growing our share in high margin segments Unlocking the value of self-help initiatives We have a clear value-over-volume strategy. Severstal has a leading Severstal’s Business System is a company-wide set of projects aimed position amongst its Russian steelmaking peers in terms of share at delivering operational improvements. The Business System of high value-added (HVA), higher margin products in its sales projects deliver operational, organisational and cultural changes. In portfolio, at around 50 per cent. Driving further growth in the high- 2013, these initiatives further enhanced our effi ciency and reduced margin segment requires continuous improvement to our product our costs, including through the optimisation of the Group’s mana- quality and the development of a wide range of premium services. gement structure. Our attention to detail and philosophy of “leaving Consequently, we have a constant dialogue with our customers in no stone unturned” to drive effi ciency enabled us to generate the order to develop