Annual report and accounts 2012

Operations

OAO Severstal and Subsidiaries
Notes to the Consolidated Financial Statements
1. Operations

for the years ended December 31, 2012, 2011 and 2010
(Amounts expressed in thousands of US dollars, except as otherwise stated)

These consolidated financial statements of OAO Severstal and subsidiaries comprise the parent company, OAO Severstal (‘Severstal’ or ‘the Parent Company’) and its subsidiaries (collectively ‘the Group’) as listed in Note 28.

Severstal began operations on August 24, 1955 and completed the development of an integrated iron and steel mill in Cherepovets during February 1959 when the first steel was rolled. On September 24, 1993, as a part of the Russian privatization program, Severstal was registered as a Joint Stock Company (‘OAO’) and privatized. Through participating in Severstal’s privatization auctions and other purchases, Alexey Mordashov (the ‘Majority Shareholder’) had purchased shares in Severstal such that as at December 31, 2012 he controlled indirectly 79.17% of Severstal’s share capital (at December 31, 2011 - 82.94%; at December 31, 2010 - 77.98% and had an option to purchase another 4.96%).

Severstal’s global depositary receipts (GDRs) have been quoted on the London Stock Exchange since November 2006. Severstal’s shares are quoted on the Moscow Exchange (‘MICEX’). Severstal’s registered office is located at Ul. Mira 30, Cherepovets, Russia.

The Group comprises the following segments:

  • Severstal Resources (formerly Steel Resources) – this segment comprises two iron ore complexes, Karelsky Okatysh and Olcon in northwest Russia, and two coal mining complexes, Vorkutaugol in northwest Russia and PBS Coals Limited located in the USA.
  • Gold (discontinued, Note 27) – this segment comprised the extraction and refining facilities that were located in the Russian Federation, Burkina Faso, Guinea and Kazakhstan which was classified as held for sale and discontinued operations as at December 31, 2011 and separated in 2012.
  • Severstal Russian Steel (formerly Russian Steel) – this segment consists primarily of the Group’s steel production and high-grade automotive galvanizing facilities in Cherepovets; rolling mill 5000 in Kolpino; a large-diameter pipe mill in Izhora, all in northwest Russia; metalware plants located in Russia, Ukraine and Italy; a ferrous scrap metal recycling business operating in northwest and central Russia, as well as various worldwide supporting functions for trading, maintenance and transportation.
  • Severstal International (formerly Severstal North America)this segment includes an integrated iron and steel mill, Severstal Dearborn LLC, in the Midwest region; a mini-mill, Severstal Columbus LLC, in the southeast of the USA. The Severstal International segment also included three integrated iron and steel mills: Severstal Sparrows Point LLC, in the South Atlantic located on the East Coast of the USA, Severstal Wheeling Inc (formerly the Esmark group of companies) in the Midwest region of the USA, Severstal Warren LLC (formerly WCI Steel Inc) in the Midwest region of the USA and a coking coal production facility, Mountain State Carbon LLC located on the border of the South and Midwest regions of the USA, which were classified as held for sale and discontinued operations as at December 31, 2010 and disposed in 2011 (Note 27).
  • Lucchini (discontinued, Note 27) this segment included two integrated steel producers in Italy, four electric furnace based steel plants in France and several processing plants and joint ventures in Italy. All Lucchini segment assets were combined into the Piombino and Ascometal business units based on geographical location (Italy and France, respectively). Products of the segment included rails, wire rod, special and high quality bars and commercial slabs. The segment also included a distribution network serving both business units from locations primarily in Western Europe and an engineering research center located in France.

A segmental analysis of the consolidated statements of financial position and consolidated income statements is given in Note 29.

Economic environment

A large part of the Group is based in the Russian Federation and is consequently exposed to the economic and political effects of the policies adopted by the Russian government. These conditions and future policy changes could affect the operations of the Group and the realization and settlement of its assets and liabilities.

International sales of rolled steel from the Group’s Russian operations have been the subject of several anti-dumping investigations. The Group has taken steps to address the concerns of such investigations and participates actively in their resolution. A brief description of protective measures effective at Severstal’s key export markets is given below:

  • Exports of hot-rolled coils and thin sheets from Russia to the USA are subject to annual quotas and minimum prices issued quarterly by the US Department of Commerce;
  • Exports of hot-rolled plates from Russia to the USA are subject to minimum prices established based on the producer’s actual cost and profit on the domestic market. Severstal is the first and currently only Russian company, for which, since September 2005, the hot-rolled plates market is open.

In the past years the European Union (‘EU’) market was also protected by quotas, however, on August 22, 2012 the Russian Federation acceded to the World Trade Organization (‘WTO’). Therefore beginning from August 23, 2012, there are no quantitative restrictions against import of certain steel products originating from the Russian Federation into the EU. Despite the Russian Federation accession to the WTO, the risk of new trade restrictions in the EU against the Russian Federation steel producers persists in the long-term.