Severstal’s forecasting system

Market uncertainty is one of the key elements we should closely track and mitigate in order to provide a sustainable basis for strategic decisions. In 2009 we launched a project aimed at building a comprehensive market forecasting system. As of 2010, this system (the Early Warning System), covering both long- and short-term horizons, was largely completed.

Long-term forecasting

We use long-term forecasting as a basis for developing our strategic business plan. It allows us to have a joint set of consistent assumptions on the future prospects of the global economy, and the mining and steel markets, which we can then use to evaluate all our investment projects.

In order to provide a systematic approach to long-term forecasting, we have developed a regulation that defines responsibilities and key dates in the preparation of forecasts, and sets guidelines for their use across all our business units globally. We review our forecasts fully once a year, and update them quarterly considering the most current market changes.

We recognise that the future is generally unpredictable, and this is why we concentrate on several possible outcomes following a scenario approach. The scenarios are based on the major uncertainty factors that could most drastically affect our markets.

While developing our forecasting system, one of our main goals was to provide a consistency of economic and industry forecasts. It is also important to remember that the global economy is cyclical, and periods of upturn are usually followed by downturns and vice versa. We use a bottom-up approach, starting with our global and regional GDP through steel and raw materials demand-supply balances, and ending up with a set of coherent price forecasts for steel and raw materials.

We also put a lot of effort into controlling our development of accurate forecasts. We systematically compare our views on the market with the opinions of other industry analysts, as well as with our previous forecasts.

Early Warning System

The Early Warning System (EWS) aims to keep up with the most current global economic, industry and market developments. We have identified a set of economic and industrial leading indicators, allowing us to predict pivot points on the global steel and raw materials markets three to six months in advance.

As in long-term forecasting, we always consider the opinions of industry analysts as well as those of our company experts. This gives us an understanding of the general industry mood, together with some marginal views, even though our opinion might differ from them both.

Also by working on the EWS we constantly track the convergence of short-term and long-term forecasts, and control forecast accuracy through a 90% confidence interval into which all our forecasts fall. If a forecast is out of the interval, we investigate it individually using a fishbone diagram.

One of the key applications for the EWS is a discussion at monthly senior management meetings, which helps managers keep track of the recent market situation and align their opinions with the near-term market development. The EWS is also available to anyone in the company by downloading it from an online database called Marketing Information System.

Even though professional forecasting is a relatively new function at our company, a lot of positive outcomes are already in place. We now have a centralised forecasting function, allowing our strategy planning to be carried out on a single basis. Also, our forecasts now work out better than a consensus of other analysts – and we can develop cyclical forecasts, always reminding the counterparties of the downside risks.