Annual report and accounts 2012

Case 2 – Efficiency, low cost of production

Severstal is one of the few international steel companies with a strong position in both iron ore and coking coal. This provides cost advantages and reduces exposure to raw material price fluctuations. In addition, Severstal also benefits from relatively lowcost supplies of electricity and natural gas. Historically, Russia is a low-cost steel producer, and as one of the largest producers of steel in Russia, Severstal benefits from economies of scale. To maintain its cost competitiveness, Severstal makes capital investments to improve productivity and efficiency.

Principally, it is vertical integration which help us keep costs lower than our peers, even in a raw materials market downturn, as shown by the graph “Cost control at Severstal Russian Steel”. Quality iron ore deposits are hard to find and quality hard coking coal is scarce, but we are able to supply our own needs with premium grades of primary raw materials, and also sell significant amounts of iron ore and coking coal to external parties.

However, only the right vertical integration helps – it must be efficient. Several years in a row we have been able to keep our cash costs at Vorkuta, Karelky Okatysh and Olkon at the same level, while for competitors, costs have been escalating. As a result, our mining assets are improving on the cost curve. For instance, on the graph “Cost control at Severstal Resources” below, cash costs are stable despite inflation in Russia being around 8% in 2012, and with a strong rouble.

We have achieved this through more efficient use of existing infrastructure and equipment, a sharp improvement in labour productivity, operational improvements such as the inclined shafts, and volume growth through plant expansion. The opportunity we are exploring for brownfield expansion through the adjacent Usinskoye coal deposit, would achieve costs at least 20-30% less than at Vorkuta today, by using the latest coal mining technologies, sharing the infrastructure and our world-leading labour productivity. In addition, the launch of a methane gas power plant at Vorkutaugol will secure 80% self-sufficiency in electricity at the Severnaya mine.

Even in North America, where only one of our assets is partially integrated in coking coal we also manage to reduce costs. Since we cannot affect the cost of raw materials we buy from the market, in the US we are focusing on improving our conversion costs through replacing older equipment with modern – graph “Cost control at Severstal International”.

Cost control at Severstal Russian Steel

Vertical integration helps us to benefit from mining margins regardless of the market environment Cherepovets Steel Mill production cash cost of slab, $/t

* Cash costs per tonne represent difference between price/t and EBITDA/t

Cost control at Severstal Resources

Vorkuta coking coal concentrate total cash costs*

Karelskiy Okatysh pellet total cash costs*

 

PBS coking coal concentrate total cash costs*

Olkon iron ore concentrate total cash costs*

Cost control at Severstal International

Dearborn HRC conversion costs from total cash costs, $/t

Dearborn CRC conversion costs from total cash costs, $/t

 

Columbus HRC conversion costs from total cash costs, $/t