Annual Report & Accounts 2013
Severstal Annual Report 2013 Home > Company overview > CEO statement
 

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. We are building a healthy and high-quality business to generate above-industry-average earnings in all market conditions by increasing efficiency at our existing operations, controlling costs, and developing attractive market positions.

Dear Shareholders, Colleagues, Partners,

Severstal delivered another resilient performance in 2013 despite continued challenging conditions in the global steel and
steel-related commodities markets. We were able to consistently improve our earnings performance throughout the year driven by our ongoing focus on enhancing efficiency, reducing costs and improving customer satisfaction as well as the fundamental strengths of our business model.

We made good progress during the year in lowering costs including significant reductions to G&A expenses (down 14.7%) and distribution costs (down 10.3%). Despite slightly lower revenue in 2013 as a result of a weaker pricing environment, our focus on reducing costs enabled the Group to deliver an improved EBITDA margin of 15.5%. Group EBITDA was $2,063 million, 4.4% lower than 2012: a solid performance supported by increased earnings and profitability at both of our steel divisions, Severstal Russian Steel and Severstal International.

The Group made further reductions to debt, lowering gross debt by almost $1 billion during the year. Our net debt to EBITDA ratio at the year end was 1.8 times which was achieved whilst continuing to invest prudently in improvements to our operational efficiency, health and safety performance and product mix and customer care. With our ongoing focus on delivering operational improvements and reducing costs, I am confident that we remain on track to deliver our internal target ratio of 1.5 times.

Health and safety continues to be a primary focus for Severstal’s management as we strive to eliminate all fatal accident at our operations and reduce our lost-time injury frequency rate (“LTIFR”). LTIFR in 2013 was 1.45, broadly in line with 1.41 in 2012. We also made good progress in reducing the environmental impact of our operations.

Our performance in 2013 was made possible by the hard work, commitment and skill of our people across the Group and I thank them for their continued efforts.

Strategy

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. We are building a healthy and high-quality business to generate above-industry-average earnings in all market conditions by increasing efficiency at our existing operations, controlling costs, and developing attractive market positions. The Company’s focus remains exclusively on the steel and steel-related mining markets and leveraging our strengths as a vertically integrated producer, with self-sufficiency in iron ore and coking coal.

Efficiency and investment

One of our key focuses in 2013 was on further enhancing our operational efficiency and developing our low cost production. This was aided by our Business System initiatives which are now thoroughly embedded across the Group delivering a competitive advantage through cultural and operational improvements.

We continued to invest prudently in our operations in 2013 with capital expenditure of $1.2 billion, 18.6% lower than in the prior year. We will continue to adopt a prudent and flexible approach to investment in 2014 with a maintained focus on operational efficiency, health and safety improvements as well as further enhancing our product mix and customer service. Our 2014 capital expenditure target of $976 million is approximately 17% lower than 2013 and will include maintenance investment of approximately $570 million. Selected major development projects ongoing in 2014 across the Group include the launch of the Balakovo Mini-Mill; the revamp of our cold rolling mill at Cherepovets; the completion of a specialised steel service center near St. Petersburg, and; the operational consolidation of Vorkutaugol’s Zapolyarnaya and Vorkutinskaya coal mines through the construction of an inclined shaft.

Severstal Russian Steel

Severstal Russian Steel is a world-class, low cost and highly efficient steel producer. Despite somewhat weaker demand and average selling prices 10.1% lower than 2012, the division was able to increase steel shipments by 3.4% year on year to 10.6 mt and partly mitigate the impact on revenue by further increasing sales of specialis ed and high value-added (“HVA”) products as well as our relentless focus on service and meeting customers’ evolving needs. The share of HVA products in the sales portfolio increased to 48% (2012: 46%) and revenue was $8,033 million (2012: $8,617 million).

Despite lower revenue, the division delivered a 5.3% increase in EBITDA to $1,008 million (2012: $957 million) driven by lower input prices in conjunction with management’s focus on reducing both production and G&A costs. The division’s EBITDA margin also increased, by 1.4 ppts to 12.5%.

Major investment projects during the year included the completion of the Balakovo Mini-Mill, the development of a specialised steel service centres and the modernisation of the Izhora Pipe Mill.

Severstal Resources

The division’s focus in 2013 was on further reducing costs, which we achieved across all our mining units with the exception of PBS Coals. However, the pricing environment for steel-related commodities in 2013 was challenging, with coking coal realized prices down circa 20 per cent and iron prices down between two and five per cent year on year. This, along with lower overall volumes, resulted in Severstal Resources reporting revenues 11.3% lower year on year at $2,665 million and the division’s EBITDA was $813 million (2012: $985 million).

Investment projects during the year included capacity expansion at Vorkutaugol and the construction of a steeply inclined conveyor at Olcon.

Severstal International

Severstal International delivered an improved performance in 2013, reporting its highest EBITDA for three years at $244 million (2012: $185 million) despite falling steel prices, reflecting the efficiency of our modern and invested assets as well as management’s operational and sales improvements. The division's utilization rate is approximately 83 per cent, which was higher than the local industry average of 76%.

Outlook

Whilst market conditions in 2014 will remain challenging, we will strive to deliver further improvements to earnings through the execution of our stated strategy focused on efficiency and low-cost production, optimising capital investment and delivering value through enhanced customer satisfaction, service and product mix.

We anticipate continued growth in global steel demand in 2014 driven by an anticipated bottoming out of European demand and further improvements in the US economy, which together might result in higher utilization rates for the global steel industry. However, continuing supply growth in both iron ore and coking coal may results in slightly lower prices year on year. In Russia, we expect steel consumption to grow by 3% in 2014 driven primarily by the construction and the oil and gas sectors, which will also drive increased demand for large diameter pipes for new projects.

Overall, I am confident that our focused strategy, business model, well-invested assets and the continued commitment and skill of our people position Severstal well to continuing outperformance against the industry.

Alexey Mordashov
Chief Executive Officer

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