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Russian market- the biggest production unit of Severstal ResourcesPipe industryConstruction and steel service centresSteel market- became number one in the Russian mining industry inproduction of iron ore pellets.The pipe industry is divided into two segments:producers of pipes for the oil and gas industry andIn 2008, this segment consumed about 20 milliontonnes, more than 10% up on 2007. The growth ofIn 2008, Russia produced 56.6 million metric tonnes ofsteel products, down 5.0% compared to 2007 (source:Chermet). Consumption of steel products reducedThe market for metal-intensiveindustriesproducers of pipes for the public utilities and housingsector.consumption in first three quarters of 2008 was suchthat the fall in demand in fourth quarter didn’t offset it.by 14% from 40 million tonnes in 2007 to near 34.4Severstal’s major customers in Russia are the pipe-In 2008, the size of Russian pipe market was about 4.9However, the segment did experience a rapid fall inmillion tonnes in 2008. Export of steel products frommaking industry, auto-making industry, machinery-million tonnes, excluding seamless pipes, down 8% ondemand over short period. Reduced availability ofRussia decreased by 9.2% compared to 2007, from 29.5building industry, construction and steel service2007. The market is characterised by a high degree ofcredit financing and reduced demand for residentialmillion tonnes to 26.8 million tonnes (source: Chermet).centres, and all four are strategically important to us.industry consolidation with few major pipe-makers andconstruction led to review and curtailing of long-termImports of steel products into Russia decreased byOur export sales are divided into two segments - Balticsconsiderable deferred market demand.plans of construction companies, resulting in less27% compared to 2007, amounting to 4.6 million& CIS and foreign markets.demand for steel.tonnes. Imports of steel pipes decreased by 40.6% andamounted to 0.95 million tonnes (source: Chermet).Coal and iron ore marketsCoking coalAutomotive industryIn 2008, this industry bought 2.1 million tonnes of steelproducts, down 9% from 2007. The market is highlyconcentrated, with three major customers sharingWe expect a rise in competition in the pipes for oiland gas industry in the next few years, related to apossible increase in production volumes by existingcompetitors and introduction of new capacities. Untilrecently, the market for pipes for the public utilities andOutlook for 2009Steel demand has collapsed in 2008 and is likely toTotal volumes of Russian coal concentrate productionover 50% of steel purchases, though with a gradualhousing sector demonstrated growth in demand due toremain weak during 2009. It is possible that aggressivewere 50 million tonnes (source: Rasmin). In 2008,reduction of their share year on year. Until recently, theincreased residential construction activity.production cuts across the globe will stabilise pricesSeverstal Resources’ share of the overall coking coaldecline in domestic car production was compensatedsoon, but we do not anticipate an extensive rebound.concentrate production volumes in Russia was 9%,for by growth in foreign car production at RussianThe economic downturn has led to a reduction in steel3% less than the previous year. This reduction in sharejoint venture automotive companies, the majority ofdemand from the pipe-making industry. This reductionWeak steel demand combined with expected lower costwas caused by the sale of coal producer Kuzbassugol inwhich are assembling plants. Future prospects for thisis smaller for main-line pipes as the government, apressure from steelmaking raw materials’ prices, areApril 2008. However, Severstal Resources’ market sharemarket are linked to both production volumes at thesemajor customer, didn’t change its operational planslikely to result in lower steel prices that could be onlyin the Russian market of hard coking coal concentratejoint venture companies and to the increasing level ofsignificantly. However, economic instability may causeslightly above average global production costs. At thereached 20.0% in 2008, which is 2.2% higher than 2007.localisation of production. There is also a new trend ina decline in steel consumption in this sector despitesame time, Russian steel producers should be able tothe Russian automotive industry - growing cooperationdeferred demand. For pipes for the public utilities andbenefit from significantly lower than average productionTotal volumes of coking coal concentrate consumptionbetween major national automakers with the worldhousing sector the reduction in demand is larger due tocosts, supported by the depreciation of the rouble, andin Russia were 42 million tonnes in 2008, 0.4 millionleaders through strategic alliances.reduced activity in construction industry.continue to generate solid cash flows.tonnes less than in 2007. The volume of exportdeliveries was 8.9 million tonnes, 1.0 million tonnes lessDue to the sharp deterioration in financial conditionsMachinery buildingDemand may be stimulated successfully in China bythan in 2007. The majority (78%) of deliveries went toin the last months of 2008, steel demand from theIn 2008, the size of the Russian market for metalthe second half of 2009, though in many other regions,integrated steel mills, and 22% to chemical plants.industry has declined appreciably. The availability ofproducts for machinery was approximately 6.0 millionrecovery will be muted and unhurried. SignificantIron oreconsumer credits reduced sharply, demand for carsdropped and financing for automakers’ operationaltonnes, which is 10% lower than in 2007. The marketis still fragmented with a large number of smallinfrastructure investment stimulus packages announcedin the US and China should support steel markets, if notTotal volumes of Russian iron ore production were 89activity also became far less available. Many autoand medium-sized customers despite continuingin the short term, at least over two to three years.million tonnes (source: Rudprom). Severstal Resources’dealers try to minimise the effect of the economic crisisconsolidation.share of this was 15.7%, 1.1% more than 2007.by reducing car inventories. The Russian governmentEconomic growth may be lower than expected. Inprovides support to local car producers in the formThe industry shows considerable decline in steeladdition, the global economic downturn may be moreIn 2008, Severstal Resources’ share in the Russianof protective measures (increase of import duties forconsumption. Machinery building in general has aprotracted that currently assumed. These risks maymarket of iron ore pellets reached 34.1%, 4.5%foreign cars, government support of customer creditlong production-to-sale cycle so this industry is morecrystallise if economic policy responses to the currenthigher than 2007. Our share of the market of iron orefor domestic car purchases) which are already having adependent on credit financing. Reduced availability ofprecipitous economic situation are delayed, inadequateconcentrate reached 8.9% (0.4% up compared to 2007).positive effect.lending had a negative impact on operational activityor insufficiently coordinated where a global response isFor the second consecutive year, OAO Karelsky Okatyshand profitability of this sector.required.36 37