Severstal Annual Report 2015 Home > Strategic Review > Severstal CEO’s Review

Severstal CEO’s Review

Dear Shareholders,
Severstal is focused on innovation and excellence in integrated steel production to drive value creation for our shareholders and customers. Underpinned by our strong asset portfolio, we remain well-positioned for continued outperformance in the uncertain global economic environment.

I am delighted to report that in 2015, during my first year as CEO, Severstal achieved further significant operational enhancements. This included progress against our objective of becoming a global leader in efficiency and returns. In a trading environment with significant challenges, Severstal delivered one of the highest margins in the industry.

Before moving on to other subjects, I must reiterate the comments of our Chairman regarding the tragic incident which took place at the Severnaya mine in February 2016. The whole Company was deeply saddened by the tragic loss of life and we are providing full support to the families of those affected. At the time of writing, we are working with the authorities to identify the cause of this fatal accident. One of the Company’s key objectives is to eliminate all fatalities across the business with health and safety remaining a key priority and focus of investment, as we strive to ensure tragedies such as this will not be repeated.

Progress in the area of health and safety is supervised directly by the Board of Directors’ HSE Committee which continues to ensure that we benchmark our performance against global peers. We have implemented a single set of health and safety policies across all our assets to reduce lost time injury frequency rate (LTIFR) and with the objective of avoiding all fatalities. We remain committed to continuously improving our health and safety procedures and equipment. We are determined to make a full evaluation of the causes of the incident at the Severnaya mine.

Continued strategic progress

Severstal’s objective is to be a leader in value creation, both for our customers and shareholders. The strategic location of our assets gives us the flexibility to shift sales volumes between domestic and export markets. Moreover, rouble depreciation supports margins by reducing operational costs, which are predominantly denominated in roubles compared with dollar denominated export sales.

Strong free cash flow remains a priority and we continue to deliver on this objective whilst remaining committed to our quarterly dividend.

Efficiency and investment

Underpinned by our vertically integrated model, we continue to create value from efficiencies at every stage of the production chain and offset the negative impact of external pricing pressures on steel products and raw materials.

We are constantly reviewing our operations across the entire production chain to identify new efficiencies, to further enhance margins and profitability. As a result, Severstal has one of the best cost positions in the global industry with an integrated hot–rolled coil cash cost of less than US$200/t.

This position on the cost curve is supported by a prudent capital investment programme. Capital expenditure in 2015 was US$440 million, 44% lower than in the prior year (FY2014: US$779 million). Severstal plans to invest approximately 43 billion roubles across the business in 2016.

Customer focus

We remain committed to our aim of delivering leading levels of customer service. We believe that an intense focus on customer care and quality has a direct impact on our ability to expand our market share and we consistently strive to improve our delivery times via our well located distribution network, and supply our customers with high value-added (HVA) products that meet their evolving requirements.

Proactive engagement with customers involves gaining feedback on their needs to guide our product development approach. In September 2015 we launched a new brand - Steel Cashmere, which is flexible and highly resistant to environmental and mechanical impacts, in response to requirements of customers in housing construction.

Sustainability

We continued to make good progress in reducing the environmental impact of our operations, and investment is also focused on ensuring that our assets meet the required environmental standards. In June, Izhora Pipe Mill 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.

Outlook

Severstal continues to demonstrate resilience thanks to a focus on cost efficiencies, HVA products, improving customer care, and the location of our assets, which enables us to shift sales flexibly between domestic and export markets. Trading in the year to date has been in line with management’s expectations.

We remain confident that, underpinned by the Company’s vertically integrated business model, our position on the cost curve, and a sizable share of high value-added products in the portfolio, Severstal remains well positioned for success.

Vadim Larin
Chief Executive Officer

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