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CostsCosts of sales were US$985.3 million in 2008, a 14.3% increase on 2007. This was mainly due to the increase inprices of raw materials, primarily of wire rod.Costs of sales structure2008 2007 Change yearon-year%US$ million % of total US$ million % of totalMaterials, semi finished products, purchased component 792.9 80.5 674.6 78.2 17.5Energy 30.1 3.1 31.8 3.7 (5.3)Staff costs 81.4 8.3 73.4 8.5 10.9Depreciation and amortisation 24.5 2.5 22.6 2.6 8.4Other 56.4 5.6 60.0 7.0 (6.0)Total 985.3 100.0 862.4 100.0 14.3Izhora Pipe MillIzhora Pipe Mill is 100% owned by Severstal and since 2007 it has beenconsidered a separate business segment. The mill has an annual productioncapacity of 600,000 tonnes of large-diameter pipes.In 2008, the mill sold 294,259 tonnes of large-diameter pipes, accounting for24% of the Russian market. Based on our 2007-2008 results, Izhora was Russia’sthird largest large-diameter pipe producer.Production of large-diameterpipes in Russiabuyers in question and their shipments will start againin the first and second quarters of 2009.Decisive management actions:• Optimising our staff resources and staff expenses byimplementing part-time working and managing staffcosts according to sales volumes• Reducing our functional and operating budgets• Optimising our purchasing costs• Implementing a policy to reduce our net working capital,particularly by reducing our raw materials stocks toreflect changes in production volumes, and cancellingour prepayment schemes with suppliers• Prioritising those investment projects that will help usreduce costs, and those with a shorter payback period• Implementing additional measures to increase ourprofitability.Vyksa Steel Mill 40% Izhora Pipe Mill 24%Volzhsky Pipe Mill 26% Chelyabinsk Pipe Mill 10%In 2008, Izhora produced 437.9 thousand tones oflarge-diameter pipes, a 46.3% increase on 2007.Revenue was US$823.7 million, an increase of 49.6%on 2007. Revenue was higher thanks to favourablepricing and a focus on more value-added products.However, the 4th quarter results were offset bypipe shipped in previous quarters being returned,something we and the buyers concerned decided wasnecessary because of slow payments and increasingpast due accounts. The returned pipe has now beenpartially re-sold for another project. We have negotiateda new repayment schedule and delivery time with theEBITDA was US$227.0 million, up 50.7% on theprevious year. The EBITDA margin increased slightlyfrom 27.3% to 27.6%.Description of businessIzhora Pipe Mill produces pipes with a diameter of610-1,420 mm, and a thickness of 14-40 mm. The pipesare covered with a three-layer polymer coating on theoutside, and smooth or anti-corrosion coating on theinside. The mill is capable of producing pipes of up to18.3 metres in length, which are unique by Russianstandards (the standard length being 12 metres).Extended-length pipes help reduce construction costs,because the number of welded joints decreases by 1.5times, which speeds up construction and improvesreliability.Today, the Izhora Pipe Mill manufactures the X70 andX80 strength class pipes, for which there is highestdemand. It is capable of manufacturing large-diameterpipes with a strength class of up to X100. Theseproducts are designed for the construction of trunk oiland gas pipelines both on and offshore (DNV 450 IFD).The mill is located in Kolpino, the industrial zoneof St. Petersburg. It has a well-developed transportinfrastructure (railroad stations, river and sea ports)and a highly qualified workforce.80 81