Annual Report & Accounts 2013
Severstal Annual Report 2013 Home > Performance > COO statement
 

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. All these three priorities are being implemented at all our three business divisions with the ultimate goal of generating strong positive free cash flow.

Dear Shareholders,

I was pleased and honoured to become Severstal’s Chief Operating Officer in 2013, ten years after I joined the company.

The last few years have been marked by a severe decline in the price of both steel and mining products across the globe. This has driven up to 60 per cent of the world’s steel companies into negative free cash flow (FCF), according to analyst estimates.

Severstal’s response has been to strengthen its position as a low-cost producer. As much as possible we are moving our assets with solid fundamentals to the left of the cost curve and divesting other units, as we did with our three US assets in 2011-2012. For the remaining assets 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. All these three priorities are being implemented at all our three business divisions with the ultimate goal of generating strong positive free cash flow.

Upstream operations

The relentless cost management initiatives of recent years have turned Vorkutaugol into one of the most profitable coking coal producers in Russia. This is a status that it reconfirmed again in Q3 and Q4 2013. The company has been keeping the cash cost of production almost flat for the last five years despite inflation. Output rise, Vorkutaugol increased its sales of coking coal concentrate by 7 per cent in 2013. So far, this achievement does not reflect the incremental gain we hope to see when we complete the expansion of the Pechorskaya Washing Plant by 2 million tonnes at the end of 2013 and launch inclined shafts at three of the mines at Vorkutaugol in 2014.

Karelsky Okatysh reached two pivotal points in its mine plan in 2013. The first was record production of 10.6 million tonnes of pellets a year. The second was that it passed the peak of its stripping ratio in 2013. This is now set for gradual and continued decline until the end of the mine’s life in many years’ time. We have been wisely investing in stripping recently, especially during the “fat years for mining” in 2010 to 2011, when our EBITDA margin was sometimes above 50 per cent. Our focus now is increasing the pellets quality. Separate processing of raw product should drive the iron content of fluxed pellets from the current 63.7 per cent to some 66 per cent in 2014. The key beneficiary will be our Cherepovets Steel Mill.
 
Iron ore concentrate producer Olcon has been pursuing similar goals to Karelsky in recent years. These are to keep the production volumes stable; pass the peak of the stripping ratio; and to manage costs. The only concern for Olcon is the short life of the mine, which has now been fixed. Following the completion of an independent JORC audit in 2013, Olcon confirmed 16 more years of the mine life at current production volumes. Major infrastructure projects at Olcon include the construction of a high-angle conveyor and a new dryer to replace an obsolete one – both will be launched in 2014 and will further reduce costs.

We hope that PBS Coals, a small coking coal producer in the USA, will reopen its idled mines in 2014 if the market rebounds, as most analysts expect.

In this challenging market, the strength of our balance sheet is the key priority, so we have slowed the pace of development of our mining greenfield portfolio. With some possible exceptions, our investment in those projects will be very limited in the coming years.

Downstream operations

As long as the Russian steel market is maturing, we believe we should continue to consistently differentiate ourselves from the competition by delivering a higher level of services and quality to the most demanding steel customers. Some progress has already been made. Our share of sales to international automotive companies in Russia increased from 33 per cent to 44 per cent between 2012 and 2013.

Our second priority in steel is to use the logistics advantage we have in Russia. The Cherepovets Steel Mill is close to centres of high steel consumption and is also one of the closest mills to major export routes.

Our main production priorities are continued cost cutting, and increase of the “first-time through” (FTT) ratio at each stage of production. This means producing fewer defective products and stabilising the quality of the products we manufacture. We will continue the selective upgrade and development of Severstal Russian Steel, including a revamp of the cold-rolling mill, further roll out of chain-of-service centres, and the expansion of the Steel Solutions project. Cost control measures at Severstal Russian Steel in 2013 included the increased use of hot iron in the blast furnace as opposed to scrap; the use of on-site metallic slags; the commissioning of the Coke Battery # 7; higher on-site energy generation; and personnel optimisation.

Our key steel project in 2014 is the launch of our 1 million tonnes Balakovo Mini-Mill in Russia. We believe that this has strong fundamentals, thanks to its good location, the surplus of scrap and energy in the region, and the underlying demand for steel.

In the USA we are seeing strong local steel demand and believe that we are well-positioned to capture this growth. Our key priorities at Severstal North America are to make further operational enhancements, to improve scrap and pig iron purchases, and to grow our share of high value added products. In 2013 both of our US assets – Dearborn and Columbus – decreased their costs of production year-on-year.

Smart CAPEX

We have set a target for our CAPEX not to exceed US$1 billion in the mid-term. Our confidence in this figure comes from the fact that several major projects in mining will be completed in 2014 and we do not have a similar scale pipeline to come. In addition to this we are optimising our maintenance CAPEX while maintaining our reliability or safety requirements and our mining greenfields will be developed selectively and slowly.

After achieving an EBITDA margin of 17 per cent and 18 per cent in Q3 and Q4 of 2013 respectively, we are looking with more confidence into the future.

Vadim Larin
Chief Operating Officer 

Share |
Select language: Русский