Annual report and accounts 2012

Business overview

Severstal achieved a solid set of results in 2012, despite worsening economic conditions, maintaining the Group’s EBITDA margin at 15.0%, reflecting the resilience of the business. A deteriorating market backdrop and lower selling prices negatively affected our financial results. However, our position as a low-cost steel producer in Russia, with full vertical integration, allowed us to maintain almost full utilisation rates during the year at our steel, iron ore and coking coal operations. In the US we successfully ramped-up the facilities launched in 2011, and reached good levels of capacity utilisation. Our business initiatives continued to yield efficiency and cost advantages.

Revenue in 2012 (US$ million)

EBITDA in 2012 (US$ million)

EBITDA margin in 2012 (ratio)

Our Key Financial Policy KPIs throughout the cycle

  • 0.5–1.5x Net Debt/EBITDA
  • Cash on balance not less than US$1 bln
  • Dividend policy at 25% of net profit
  • ROCE of >20%
  • NWC of c.18% of revenues

Status as at the end of 2012

  • Net Debt/EBITDA of 1.9x
  • Cash on balance in excess of US$1.7 billion
  • Dividend payout reached 36% for 2012 1
  • ROCE of 11.0% 2
  • NWC of 14.5% of revenues


The global economic slowdown in 2012 led to a decrease in steel, iron ore and coking coal prices, affecting our results. Our full year revenue decreased by 10.8% to $14.1 billion, mostly due to slightly weaker sales volumes at Severstal Russian Steel and overall lower realised prices. Severstal International increased revenue after the ramp-up of new capacities.


Severstal revenueUS$ million

Severstal’s revenue by segment

Segments’ contribution to company revenue in 2012, US$ million

Our Russian steel business – commercial and market highlights for 2012:

In 2012, the Russian steel consumption grew by an estimated 5%, according to industry experts, and a similar 3% growth is forecast for 2013. Domestic steel production reached 71 million tonnes, 3.3% higher than in 2011. Average capacity utilisation was around 85%, almost the 2011 level. The market suffered from overcapacity, and hence average steel prices and volumes were declining during the year.

The Division continues to regard Russia as its most important market. Its main domestic customers include pipe mills and construction companies, machinery and automotive clients. In 2012, Severstal Russian Steel sold 10.3 million tonnes of steel products (excluding scrap), including 6.2 million tonnes to the domestic market. The share of sales volume to the Russian market grew to 60% in 2012 from 58% in 2011. In 2013, Severstal Russian Steel aims to further increase its share of domestic sales, and we expect that future growth will be driven primarily by increased sales to the construction industry and auto.

Against the decrease in volumes and prices due to the lower demand, Severstal Russian Steel managed to improve its sales portfolio by increasing the share of HVA, more profitable products like colour-coated steel.

We also managed to keep our utilisation rate at around 95%, above the local industry average of 85%.

Our mining business – commercial and market highlights for 2012:

In 2012, the Russian coking coal market mostly followed the global trend of weakening prices. According to market experts, domestic coking coal production output reached 60.1 million tonnes, 5.8% higher than in 2011. Severstal’ s Vorkutaugol sold a total of 5.3 million tonnes of coking coal concentrate in 2012, that is 3% above the level of 2011, on a weaker market, compared to the year of 2011. This was due to the fact that Vorkutaugol almost exclusively supplies to Russia for its high-quality coking coal (the ‘Zh’ brand), and hence has stable demand. The geography of export sales expanded through Ukrainian and European contracts.

In the USA, the local coking coal market contracted in 2012 due to low export prices. To preserve earnings, PBS Coals company had to idle some of its mines producing coal for export spot supply. As a result, PBS Coals coking coal production reached 2.2 million tonnes, 15.4% below the level of 2011. The geography of export sales expanded through Brazilian, European and Asian contracts.

Prices for iron ore in Russia moved largely in line with Chinese spot prices, with the time lag of few months. Like coking coal, domestic iron ore prices demonstrate a certain degree of inertia compared to the international benchmarks. In 2012, the Russian iron ore production reached 96.2 million tonnes, 0.4% above the level of 2011. Karelsky Okatysh and Olkon increased their sales of iron ore products by 3% to 15.2 million tonnes, to both domestic and international clients. The geography of export sales expanded through European and Asian contracts.

Our US business – commercial and market highlights for 2012:

In 2012, NAFTA (North American Free Trade Agreement) light flat rolled steel demand growth was moderate, at an estimated 5.3% from 65.7 million tonnes in 2011 to 69.2 million tonnes in 2012. According to industry experts, 2013 is expected to remain stable with an increase of 2.1% forecast.

US capacity utilisation was 75.7% in 2012, slightly higher than the 74.4% in 2011. The market suffered from overcapacity and imports, which had a negative impact on steel prices, and both volume and capacity utilisation declined throughout most of the year. Including preliminary census data, flat rolled imports finished the year 16.9% higher than 2011.

Severstal shipped 4.5 million tonnes in 2012, or a market share of 6.5% of NAFTA shipments. As a result of the ramp-up of Severstal’s new capacity, primarily in Columbus, we increased annual shipments by 17% compared to 2011. As we continue to ramp-up our new capacities, market share will continue to increase until we reach capacity. Severstal’s utilisation rate is approximately 80%, above the industry’s 2012 average of 75.7%.

Severstal’s key market sectors are automotive, energy (oil & gas) and service centres. Dearborn shipments are heavily focused on automotive, and total Severstal shipments to the automotive segment reached 1.4 million tonnes in 2012.


On an annual basis, weaker global prices for steel and raw materials resulted in a drop at the EBITDA level with Severstal International being more resilient due to the ramp-up of the new capacities. While Severstal Russian Steel and Severstal Resources contracted due to weaker pricing. EBITDA of Severstal Resources outpaced Severstal Russian Steel showing again the advantages of our vertically-integrated business model.

Severstal EBITDAUS$ million
2011            3,584  
2012            2,119  

Severstal’s EBITDA by segment 3

Segments’ input to Company EBITDA dynamics in 2012, US$m

We believe Severstal demonstrated a resilient performance in what was a very challenging year for the global steel industry. Whilst our revenue for the year, and EBITDA, were affected by softer realised prices and slightly lower sales volumes, our EBITDA margin held at 15.0%, reflecting our position as one of the most efficient producers in the global steel industry.

In February 2013, OAO Severstal was ranked as the third most competitive global steelmaker in 2012 in a report by World Steel Dynamics (WSD). Severstal was ranked ahead of other major international steelmakers including JSW Steel (India, 4th position), Nippon Sumitomo (Japan, 5th position), Gerdau (Brazil, 6th position) and Nucor (USA, 7th position).

The report ranked 35 leading global steel companies according to 25 parameters, including: profitability; cost efficiency; financial stability, health & safety and environmental performance. Severstal received its highest ratings in the commodity policy efficiency, high-growth markets and cost efficiency categories.

“The consistent implementation of our core strategy means that Severstal is well placed to perform competitively throughout the market cycle. We are delighted that this WSD report recognises the core strengths of our business as well as the efforts of all our employees.”

Thomas Veraszto,
Senior Vice-President of Severstal

Cash flow

Severstal has a strong cash position: US$1,726 million in cash and cash equivalents. Operating cash flow of US$1,750 million more than covered the 2012 cash capex of $1,448 million.

  US$ million
Cash and cash equivalents at the beginning of the period1,8642,013
Operating CF1,7502,579
Investing CF(1,102)(1,902)
Financing CF*(828)(609)
Less cash of cash equivalents of discontinued operations and assets held for sale at the end of the period-(217)
Less change in cash and cash equivalents of discontinued operations42-
Cash and cash equivalents at the end of the period1,7261,864

* Cash used in financing activities plus effect of exchange rates on cash and cash equivalents.

Capital expenditure

Our 2012 cash capex amounted to US$1,448 million. This was lower than initially planned. Capex was adjusted during the year in light of slowing market conditions.

FY12 capex development: adjusted on worsening market Conditions

Our major projects in 2012 included continuing construction of the Balakovo mini-mill, refurbishment of Coke Battery #7 at Cherepovets for full coke self-sufficiency and a coalmine methane power station at Vorkuta.

Group’s FY2012 cash capex, total $1,448m

Plans for 2013

Severstal is driven to deliver profitability and not to pursue volume growth. Key to achieving these goals is a robust business model focused on low costs through vertical integration, with steel-related mining assets providing full self-sufficiency in iron ore and coking coal. Where we have investment programmes, they are designed to improve efficiency and enhance our margins.

Our strategic focus is on steel production, and particularly in developing our product portfolio. This is not only to meet the evolving demands of our customers, but to increase the ratio of our product mix in favour of high value-added products and added-value services. This, combined with our presence in fast-growing markets as well as established markets with attractive growth dynamics, means we are well positioned to provide market-leading returns for our shareholders.

Hence our 2013 target capital expenditure programme will be US$1.3 billion, including completion of the Balakovo mini-mill construction and its launch in mid-2013; development of specialised steel service centres, construction of two inclined shafts and modernisation of the Pechorskaya preparation plant at Vorkutaugol, the construction of a steeply inclined conveyor and geological exploration at Olkon.

Group’s FY2013 target capex, total $1,336m

Selected 2013 Capex Projects
DivisionProjectExpected effectLaunch
Severstal Russian SteelBalakovo mini-mill+1 mtpa of long products capacity2013
 Specialised steel service centres developmentIncrease in high value-added steel products sales2013
 Installation of brand-new converter filters at Cherepovets MillEnvironment2013-14
Severstal ResourcesConstruction of incline shafts at the Vorgashorskaya and Zapolyarnaya minesHigher coal output, infrastructure costs decrease, efficiency gains2013-15
 4 mtpa capacity expansion (to 11 mtpa) at Pechorskaya Preparation PlantHigher coking coal concentrate output, efficiency2013-14
 Steeply inclined conveyor at OlkonHigher iron ore output, infrastructure costs decrease, efficiency2013
Severstal InternationalEnvironmental, health & safety, IT-infrastructure and customer careEfficiency gains2013

Liquidity and debt position

Severstal adheres to a conservative treasury approach to debt portfolio management. Positive relationships with the banking community and proven access to domestic and international debt capital markets have enabled us to form a well-diversified financing structure that does not depend on a single market or source of financing.

We reduced gross debt from US$5,976 million to US$5,710 million in 2012, and net debt from US$4,112 million to $3,983 million by the end of the year. Despite that, our liquidity position remains strong with US$1,726 million in cash and cash equivalents, exceeding short-term debt of US$1,382 million4, and committed unused credit lines of US$922 million.

We still prefer public debt as a long-term source of capital on attractive terms. At 31 December 2012, 81% of our debt was represented by public debt, 83% of which was denominated in US dollars.

Well-balanced, Manageable Debt structure as at 31 December 2012, %

Improvement of the debt maturity calendar and reduction in the cost of capital

Our strong credit metrics enabled us to improve our debt profile and refinance part of our public debt instruments with more favourable issuances in 2012. In September 2012, Severstal successfully placed US$475 million senior unsecured convertible bonds maturing in 2017, and in October 2012 we successfully placed US$750 million 10-year Eurobonds with an interest rate of 5.9%. Lower interest rates help us reduce interest payment, adding to the company’s financial stability and keeping liquidity in the company.

Liquidity and debt maturity schedule5, US$ million

We have a well-managed debt maturity profile: the majority of our debt is mid and long-term and we have no large sequential repayments.

Despite negative impact from the global market that decreased our FY2012 EBITDA compared to the level of FY2011, our financial position remained strong during the year. Though our net debt/ EBITDA ratio increased by the end of the year to 1.9x, which is above the internal target of 1.5x, this is still one of the lowest levels of debt ratio in the Russian steel sector. We will monitor our debt level closely in 2013, to return it to the targeted net debt/EBITDA of 1.5x, meanwhile we have already reduced our capex programme for 2013.

Debt and leverage dynamics6

Despite the challenging year for the industry, Severstal managed to improve its credit rating profile by being upgraded to BB+ by Standard & Poor’s and Ba1 by Moody’s.

Growing Market Trust
  • Since 2010 Severstal has been regaining ratings agencies’ confidence and seeing consistent upgrades
  • In 2012, S&P upgraded Severstal’s rating to BB+/Stable, Moody’s to Ba1/Stable, Fitch to BB/Stablе


1 Includes recommended dividend payment of 1.89 Roubles per share (approximately US$0.06) for the 12 months ended 31 December 2012. The dividend is to be approved at the AGM on 13 June 2013.

2 ROCE is calculated by the following formula: profit from operations / (total assets minus current liabilities average for the period), as reported in 2012 FS.

3 Here and thereafter Divisions’ EBITDA excludes intercompany dividend income.

4 Amount of debt as at 31/12/2012, where US$1,282 million represents only principal amount of debt. 

5 Represents principal amount of debt. 

Total debt, net debt were adjusted by the amounts related to the Group’s entities presented as discontinued operations.