Annual Report & Accounts 2013
Severstal Annual Report 2013 Home > Company overview > Severstal’s Business Model
 

Severstal’s Business Model

Our primary strategic objective is to build a sustainable and high-quality business to generate higher than industry average earnings throughout the industry cycle. Severstal’s fundamental strengths to help achieve this include:

A resilient business model combining low-cost steel production and self-sufficiency in raw materials

Russia is one of the world’s lowest cost regions for steel production. Severstal also enjoys a unique position in the steel industry thanks to almost full self-sufficiency in iron ore and more than self-sufficiency in coking coal. Our mining assets are located close to the Company’s steel operations, and through producing a surplus of iron ore pellets and coking coal, Severstal is able to sell large volumes of mining products to customers in Russia and internationally.

Strong presence in the Russian markets with the flexibility for export sales

The domestic market in Russia remains Severstal’s priority, with a special focus on the North-Western and Central regions of the country. In these regions we benefit from the highest levels of steel consumption in the country as well as enjoying a logistical advantage not available to our competitors thanks to the location and quality of our assets. Our focused approach to our target markets has enabled Severstal to increase its market share in Russia in 2013.

Severstal’s operations enjoy a more favourable geographic position for serving export markets than the majority of its Russian competitors. This makes export sales more attractive and viable for Severstal as the difference between the cost of selling domestically and internationally is reduced. This provides Severstal with a more flexible sales structure and therefore allows the Company to generate higher than industry average earnings.

With two steel units in the USA (Severstal North America), Severstal has a diversified end-market customer base with strong and established positions in the automotive, construction and pipe and tube industry segments. 2014 marks the ten year anniversary of Severstal’s presence in the US market.

Growing our share in high margin segments

We have a clear value-over-volume strategy. Severstal has a leading position amongst its Russian steelmaking peers in terms of share of high value-added (HVA), higher margin products in its sales portfolio, at around 50 per cent. Driving further growth in the high-margin segment requires continuous improvement to our product quality and the development of a wide range of premium services. Consequently, we have a constant dialogue with our customers in order to develop our offering to meet their evolving requirements. For example, at the beginning of 2014 in partnership with Mitsui, Severstal launched a steel service centre in Vsevolozhsk to supply local automotive producers, making us more flexible and able to meet their needs and enabling us to build on the position we have developed in recent years as an established and reliable supplier to the automotive industry. We also continue to innovate and develop new products to improve our customer offer, such as our range of products under the Steel Silk brand (used in roofing for buildings) which helps us to further differentiate ourselves from our competitors.

Unlocking the value of self-help initiatives

Severstal’s Business System is a company-wide set of projects aimed at delivering operational improvements. The Business System projects deliver operational, organisational and cultural changes. In 2013, these initiatives further enhanced our efficiency and reduced our costs, including through the optimisation of the Group’s management structure. Our attention to detail and philosophy of “leaving no stone unturned” to drive efficiency enabled us to generate the highest EBITDA margin in the Russian steel sector in Q3 2013 at 17 per cent. Whilst we have made impressive progress to date, we have further progress to make and plans in place to maintain our position as an efficiency leader.

CEO statement

Our strategic goal remains the same: we aim to be a leader in value creation. In the current volatile and challenging market environment, this means the ability to generate solid positive free cash flow throughout the market cycle.

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Chairman statement

Since listing we have been committed to the highest standards of corporate Governance and aim for full compliance with the UK Corporate Governance Code.

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COO statement

We have three simple operational priorities: to have low-cost production across all of our operations at all times; to increase our share of high-margin products; and to ensure that all our assets have low CAPEX requirements.

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CFO statement

Reflecting the confidence in the outlook and the financial strength of the company, the Board of Directors has recommended a dividend payment of 3.83 roubles per share and per GDR (approximately US$0.11) for the 12 months ended 31 December 2013.

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