Annual Report 2007 - Severstal

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Business review Severstal performance review Severstal revenue US$ million Severstal EBITDA US$ million 20,000 4,000 3,680 15,000 10,000 10,452 12,449 15,245 3,000 2,000 2,839 2,957 5,000 1,000 0 2005 2006 2007 0 2005 2006 2007 Severstal is an international, vertically-integrated metals and mining company that sells high-quality metal and mining products to customers all over the world. In 2007, we became the world’s 15th largest steel producer. We are a full production cycle company comprising ore mining enterprises, steel mills and rolled product plants as well as downstream production businesses. Our production facilities are geographically diversified, with locations in Russia, the United States, Italy, France, Great Britain, Ukraine and elsewhere. Following a corporate restructuring in April 2008, our company is made up of three divisions: Severstal Russian Steel, Severstal Resources and Severstal International. Severstal Russian Steel division includes Russian Steel, Izhora Pipe Mill, and Metalware. Resources comprises Severstal’s assets relating to iron ore, coal and gold mining. International includes North America operations and Lucchini. Key production figures In 2007, Severstal reported record revenues of US$15,245 million, 22.5% more than in 2006. The volume of crude steel production remained at the same level – 17.5 million tonnes. EBITDA was US$3,680 million, 24.5% more than in the previous year. This strong performance was due to favourable market conditions and growing demand for our products in Russia and internationally as well as management efforts to improve efficiency and control costs. EBITDA margin grew from 23.8% to 24.1%. Russian Steel remained the most important business by share of total revenue, which grew from 45.4% in 2006 to 46.4% in 2007. Izhora Pipe Plant contributed 3.2% to the company’s total revenues, or US$551 million. Metalware’s share remained almost unchanged, while its sales grew by US$173 million. Mining’s share of consolidated revenues increased to 12.8% in 2007 compared with 10.7% a year earlier. Severstal North America contributed 9.8% to total revenues in 2007, a decrease from 13.5% in 2006. This is due to lower sales during the planned repair of the C blast furnace, which took place in the third quarter. The share of Lucchini was 21.9% in 2007, while in 2006 it was 24.2%. Russian Steel also remained the most profitable segment of the company. In 2007 its EBITDA margin amounted to 31.8%, compared with 31.6% in 2006. In its first year of operations Izhora Pipe Plant also demonstrated a high EBITDA margin of 27.3%, illustrating the effectiveness of our focus on high-valueadded products. Mining’s EBITDA margin was down to 22.8% due to lower production volumes at the Vorkutaugol mines. Lucchini increased its EBITDA margin to 11.1% in 2007 from 10.0% in 2006 following a programme to reduce expenses. Severstal North America’s EBITDA margin fell to 1.2% in 2007 due to weaker market conditions and reduced production due to the aforementioned furnace repair. In 2007, the principal products we manufactured were hot-rolled strip and plate (24.1%), long products (20.3%), galvanised and other metallic coated sheet (8.6%). In 2007 our sales of long products grew by 34.6%, metalware products by 20.2%, galvanised and other metallic coated sheet by 18.3% and semi-finished products by 17.3%. Strategy Following a number of successful acquisitions made in 2006, our main strategic focus in 2007 was organic growth in production, both by modernising existing equipment and by building new production facilities. Our strategic goal is to increase our value through stable growth, and resilience to the cyclical nature of the metallurgic market. The principal elements of the strategy: – Retain our position as one of the top global steel companies by profit – Pursue organic growth coupled with a disciplined approach to M&A – Increase international diversification and vertical integration – Focus on high-value-added and niche steel products – Build a strong global platform for profitable growth. 32 Severstal Annual Report 2007
Severstal revenue by segments,* 2007 Severstal EBITDA by segments,* 2007 Russian Steel 46.4% Lucchini 21.9% Mining 12.8% North America 9.8% Metalware 5.9% IPM 3.2% Russian Steel 68.3% Mining 13.5% Lucchini 11.2% IPM 4.0% Metalware 2.4% North America 0.6% *Excludes intersegment adjustments of US$1,932 million decrease in revenue. *Excludes intersegment adjustments of US$26 million decrease in EBITDA. To achieve these goals we plan to: – Strengthen the vertically integrated business model to secure our supply of raw materials, by modernising our mining equipment and collecting more scrap metal. – Increase our manufacturing of high value added and niche products such as: – sheet with metallic and polymer coating for the construction and automotive industries – high-quality long products and customised products for the construction industry – large-diameter pipes for infrastructure projects and the construction of oil and gas pipelines. – Control expenditure and preserve competitive advantages in profitability. Capital investments In 2007, we invested US$1.625 billion, 29.8% more than in the previous year, mainly in Russian Steel, Mining and Severstal North America equipment modernisation programmes. You will find more detailed information in the description of each business. In 2007–2011, we will invest approximately US$10 billion, both in modernising existing assets and in constructing new mini-mills to manufacture long products for the construction industry. Severstal capital investments (US$ million) 2007 2006 Change year-onyear % Mining 394 351 12.3 Russian Steel 495 554 (10.7) North America 483 83 481.9 Lucchini 199 127 56.7 Metalware 30 10 200.0 IPM 23 127 (81.9) Total capex 1,625 1,252 29.8 Severstal capex by segments, 2007 Russian Steel 30.5% North America 29.7% Mining 24.3% Lucchini 12.3% Metalware 1.8% IPM 1.4% Implementing new technologies in SeverCorr (USA) SeverCorr is a unique combination of mini-mill steelmaking technology and integrated finishing process. It produces highquality steel by melting scrap in an electric arc furnace, feeding a thin-slab caster coupled with a high-powered hot strip mill. Steel is further processed in a highly sophisticated cold-rolling mill and galvanising line. Flexible production system allows us to quickly react to changes in consumer tastes and seasonal market demands. Our experience at SeverCorr will help us implement similar technology at low cost across our operations. We plan to build the mini-mill unit at Cherepovets Steel Mill and thin slab caster unit at Lucchini Piombino, and will build two new mini-mills in Russia. Developing promising steel grades To gain competitive advantages in plate production for pipe production, we have started to develop new grades of steel that will meet the highest demands of international strip consumers. The development programme includes scientific research to improve existing strip production steel and analysing the needs of clients in the oil and gas sector. To implement the programme, we have established the Competence Centre for Plate, where activities include research, intellectual property, and co-ordination of work with experts, customers and research institutes. Severstal Annual Report 2007 33
Page 1 and 2: Annual Report 2007
Page 3 and 4: We are a leading international stee
Page 5 and 6: Sales by delivery destination 2007
Page 7 and 8: Corporate structure In April 2008,
Page 9 and 10: Dividend payments were 40.1% of 200
Page 11 and 12: Our strategy for growth is to: - Re
Page 13 and 14: Principal events of 2007 January Ch
Page 15 and 16: Reconstructed in 1996 using steel p
Page 17 and 18: The mining area of Vorkutaugol cons
Page 19 and 20: Severgal, Cherepovets is equipped w
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Page 27 and 28: In 2007, Izhora Pipe Mill produced
Page 29 and 30: Crude steel production Million tonn
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Page 37 and 38: Mining Severstal’s Mining segment
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Shareholder information and financi
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