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It also has a unique competitive advantage– a continuous production line, which significantlyreduces costs. Slabs are manufactured at Severstal’sCherepovets Steel Mill, and subsequently rolled intoplate on the wide plate mill-5000. The plate is thendelivered to the pipe mill (located on the same site), tobe made into large-diameter pipes. Other Russian pipeproducers have to buy slabs in Russia or abroad, whichincreases their costs and their dependency on risingpipe plate prices.Izhora Pipe Mill’s other competitive advantages includethe fact it produces extended-length pipes, and it issituated close to the St. Petersburg transport hub, aswell as the construction route of the North-Europeangas pipeline (the Nord Stream project). Nord Stream isone of the main consumers of the plant’s products.Strategyalso begin supplying the BTS II project (Baltic pipelineIzhora Pipe Mill’s principal goal is to increase thecompany).company’s market share of large-diameter pipes for theoil and gas industry.Key performance indicatorsMarket conditionsIn the next few years, a deficit of large-diameter pipes isforecast in Russia, as a result of several major pipelinesystems being constructed.Main projectsIn 2008, Gazprom began building a new gas pipeline,Yamal-Bovanenkovo-Ukhta, as well as continuingconstruction of the Nord Stream gas pipeline system. In2009 the gas monopoly also plans to continue buildinga gas pipeline, Yamal-Bovanenkovo-Ukhta, and startcontracting for the Shtokman gas field in the BarentsSea, as well as building the Altai pipeline to deliverRussian gas to China.In 2009, Transneft plans to continue construction of theEast Siberia-Pacific Ocean oil pipeline system, and will2008 2007 Change year-on-year %Production of pipes (Thousand tonnes) 437.9 299.3 46.3Revenue (US$ million) 823.7 550.7 49.6Gross profit (US$ million) 286.0 170.9 67.3Profit from operations (US$ million) 200.8 127.1 58.0Operating margin (%) 24.4 23.1 n/aEBITDA (US$ million) 227.0 150.6 50.7EBITDA per tonne (US$/tonne) 771.4 500.5 54.1EBITDA margin (%) 27.6 27.3 n/aAverage product price (US$/tonne) 2,789 1,764 58.1Sales and marketingIzhora Pipe Mill’s priority sales target is the Russiandomestic market. In 2008, the plant sold more then99% of its total output in Russia. Export accounted forless than 1% of sales. The principal consumers of theplant’s products are Russia’s gas and oil industries.Gazprom is the principal client, accounting for almost95.8% of shipments, or 281,840 tonnes.The mill has all the necessary certificates confirmingthe quality of its products (API, ISO, and DNV).CostsMaterialsDecisive managementactions:• Reducing capital expenditure• Reducing operational costs and general andadministrative expenses• Implementing a strong policy to reduce net workingcapitalCost of sales structure• Optimising workforce and staff expenses.US$ million % of total US$ million % of total2008 2007 Change year-onyear%Metal - roll 641.5 119.3 296.1 78.0 116.6Other materials 54.2 10.1 35.9 9.4 51.0Total materials 695.7 129.4 332.0 87.4 109.5EnergyCapital investmentsIn 2008, capital investments amounted to US$8.3million, 64% less than in 2007. The reduction wasmainly because the construction of the plant’s principalfacilities has now been completed.CostsThe total cost of sales in 2008 amounted to US$537.7million, 84.7% of which was raw materials costs due tochanges in inventories. Depreciation costs were 4.7%,and labour costs were 4.7% of the total cost of sales.Electric power 2.7 0.5 1.8 0.5 50.0Gas 0.1 0.0 0.1 0.0 -Other energy resources 0.4 0.1 0.3 0.1 33.3Total energy 3.2 0.6 2.2 0.6 45.5Staff costs 24.9 4.7 17.8 4.7 39.9Depreciation and amortization 25.4 4.7 22.8 6.0 11.4Services 28.2 5.2 2.3 0.6 1,126.1Other 0.5 0.0 2.7 0.7 (81.5)Change in inventories (240.2) (44.6) - - n/aTotal 537.7 100.0 379.8 100.0 41.682 83