Severstal Annual Report 2015 Home > Business Overview > Severstal Russian Steel Division

Severstal Russian Steel Division

Severstal Russian Steel is a leading Russian steel producer, with a broad product mix, self-sufficiency in raw materials and an extensive distribution network. We focus on high value-added flat steel products and the production of long products for construction and downstream sales.

Our downstream assets include the production of large diameter pipes and metalware for machinery, as well as service centres and stamping facilities for exposed automotive parts. The division has the highest share of high value-added products among its domestic peers, while our flagship Cherepovets Steel Mill is one of the lowest-cost steel mills in the world.

Located in north-west Russia, the division’s steel operations enjoy convenient rail access to the Company’s mining operations and low-cost direct river access to the Baltic ports, as well as being well positioned to serve the industrial hubs around Saint-Petersburg and Moscow.

In 2015 Severstal Russian Steel’s average headcount totaled 37,543 persons (including the corporate center).

Key assets

1. Cherepovets Steel Mill

One of the world’s largest stand-alone integrated steelworks by capacity as well as an excellently located low-cost steel producer. It produces a wide range of flat and long-rolled products, including hot and cold-rolled flat products, galvanized and colour-coated products and long-steel applications. Rolling Mill 5000, located in Kolpino, near Saint-Petersburg, produces thick plate for large diameter pipes, ship and bridge building and other industries.

2. Izhora Pipe Mill

The mill in Kolpino specialises in manufacturing large diameter pipes from plate, which are produced at the nearby Kolpino Mill-5000. It has a production capacity of up to 600,000 tonnes of pipes per year, which is mainly used in oil and gas pipeline projects.

3. Mini-Mill Balakovo

A new generation mini-mill focused on the production of long products for the construction industry. Annual production capacity is one million tonnes of rolled products.

4. Severstal-Metiz

Manufacturer of more than 50,000 product types, including low-carbon and high-carbon wire rods, nails, cold-drawn steel, steel ropes, netting and fastenings. Severstal-Metiz comprises several subsidiaries: the Cherepovets site in north-west Russia, the Orel site in central Russia, the Volgograd site in the Povolzhie region, as well as subsidiaries in Italy (Redaelli) and Ukraine (Dneprometiz).

Downstream production assets

  • Severstal-SMС-Kolpino applies the primer to shipbuilding plates, produces semi-finished products for machinery and large fabricated sections for the construction industry. SMС-Kolpino has an automated steel product preservation line, distinguished by its shot blasting and protective prime coating, which are sheet metal processing methods designed to prevent corrosion. It also has an automated beam welding line, which produces welded structures such as T-bars and I-bars and automated plasma-beam cutting lines which carry out sheet metal cutting, including those used for manufacturing welded structures.
  • Severstal-Gonvarri-Kaluga Steel Centre is designed to produce 170,000 tonnes of rolled metal products per year for the automotive and electrical industries.
  • Gestamp-Severstal-Kaluga Stamping Facility is equipped with a number of press lines and produces all rolled steel products from coils to car components for international car manufacturers. It has an annual output of 13 million stamped parts and has the potential to expand production.
  • Severstal-SMC-Vsevolozhsk service centre is a joint venture with the Japanese company Mitsui. This centre prepares high-quality CRC and galvanized steel, which will be further stamped at our joint venture with Gestamp in Vsevolozhsk. The service centre’s capacity is 150,000 tonnes.
  • Severtar, a joint venture with Rutgers, based at the Cherepovets Steel Mill plant, will produce vacuum pitch, technical oils and naphthalene.
  • TPZ-Sheksna was launched in 2010, and is designed to produce up to 250,000 tonnes of electric-welded pipes of various diameters, thicknesses and lengths for the construction industry, as well as square and rectangular sections with different cross-sections. The plant uses semi-finished steel products made at Cherepovets Steel Mill.

Trading companies

  • Severstal Russian Steel’s domestic sales are made to regional and other distributors, directly to end-users, or through AO Severstal Distribution. AO Severstal Distribution has a wide network of metal centers throughout the country. We conduct export sales principally through the subsidiary Severstal Export GmbH, as well as through SIA Severstal Distribution, Severstal Distribution LLC and ZAO Severstal Distribution.

Performance overview

Ongoing operational efficiency improvements accompanied by our well-planned maintenance and development investment program enabled the Russian Steel division to further increase both hot metal and crude steel output. Specifically, increased usage of higher Fe content pellets (produced by Karelsky Okatysh), our upgraded coke battery and increased spread between pig iron and scrap improved coke hot strength back to historical levels (above 50%), which resulted in higher production and reduced coke consumption at BF#5.

Notwithstanding a 12% year-on-year decrease in Russian steel consumption, the Russian Steel division was able to respond to market headwinds and increase steel products sales volumes 3% versus the previous year to 10.9 million tonnes. The favourable location of the main producing asset supported the division’s sales strategy allowing prompt relocation of sales volumes between domestic and export markets.

Existing steel overcapacity issues and stagnating steel consumption globally put pressure on steel prices with Russian HRC export price declining by 38% from US$436/t in January 2015 to US$271/t as at the end of 2015.

Production volumes (million tonnes)

Sales volumes (million tonnes)

Russian Steel division average selling price (US$/t)

Revenue breakdown by
destinations

Sales volumes breakdown by
destinations

Reflecting the abovementioned factors divisional revenue (US$ million) was down 23% versus the previous year.

Dynamics of revenue by products

Our key domestic customers include construction companies and pipe mills, machinery and automotive clients. Therefore our product mix covers a wide range of products of various specifications.

Severstal Russian Steel benefits from its proximity to export routes. Our share of export varies depending on the health of the Russian market and the alternative attractiveness of international sales options. In 2015 our export sales volumes comprise 37% of total sales. Having well-established sales chains and the required product certification, we can quickly and flexibly redistribute our sales between domestic and export markets.

Sales and cost of sales figures in the charts below are presented in USD as a per cent of the total sales or cost of sales of the Severstal Russian Steel division.

Sales by industries

Export sales structure by regions

We consistently work to maintain our leading cost position through labour and energy productivity and operational enhancements. In 2015 raw materials account for 65% of total costs. Labour and energy costs are ranked second and third with a share of 13% and 10%, respectively.

Cost of sales structure

EBITDA drivers in 2015 (US$ million)

Key developments in 2015:

In order to capture new markets Severstal is actively pursuing certification of its products in full compliance with global standards. Specifically, in January 2015, Severstal received the SFS1268 certificate permitting it to make shipments of rebar to Finland and other Baltic countries. Moreover, in April 2015, Severstal has been approved by the German Certification Authorities to deliver 10-16 mm steel reinforcing bar products in compliance with DIN 488 requirements. The Izhora Pipe Mill has successfully completed the recertification audit of its corporate environmental management system and safety system for compliance with ISO 14001:2004 and OHSAS 18001:2007 requirements. With these products now certified, Severstal is able to expand its target markets and further enhance distribution efficiency.

Russian Steel made a number of advancements in 2015 to increase our share across product markets and target more prospective product niches, that have competitive conditions and an attractive supply-demand balance:

  • Severstal Metiz launched a new cold rolling mill to launch production of high-precision profiles at Cherepovets.
  • The Company started an upgrade of the four-stand continuous tandem cold rolling mill 1700, which is scheduled to launch in 2016. This project, with a total cost of 3.2 billion roubles, will increase production of cold-rolled flat products by 200,000 tonnes per year and potentially increase sales to the automotive industry.

Strategic priorities for 2016 and beyond

Fully in accordance with both our prudent approach to investments and the “defensive growth” development model Russian Steel division will continue further enhancing its product mix as well as implementing efficiency improvement large-scale projects. Planned investment across the Severstal Russian Steel division in 2016 is approximately 26 billion roubles.

  • In 2016-2018 the № 4 coke oven battery will be refurbished, and auxiliary facilities will be modernised to ensure fixed assets are maintained. This will help to reduce the purchase cost of coke. The estimated cost of the project is more than 5 billion roubles.
  • The company also plans to construct a ladle furnace complex for steel production at CherMK. The new furnace will have capacity of 4.8 million tonnes. The aim of the project is to increase converter steel production to 10.3 million tonnes per year. Record annual converter steel production currently stands at 9.5 million tonnes. Increasing production capacity by building a second ladle furnace will ensure that 100% of the smelting furnace treatment takes place within one unit. This will significantly reduce costs and improve product quality. The total investment will be more than 2.5 million roubles.
  • In long steel production, construction of a second unit producing grinding balls for raw material companies is planned. The new unit will increase grinding ball production by 30,000 tonnes a year. Total investment in the project is approximately 0.3 billion roubles.
  • In 2017 Severstal plans to launch a new hot dip galvanizing unit with an annual capacity of 400,000 tonnes and a metal polymer coating unit with an annual capacity of 200,000 tonnes. This will be the mill’s third metal polymer coating unit. The total estimated cost of the project is 7.6 billion roubles.

For more detailed information on Severstal Russian Steel division please refer to page Appendix.

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