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

Severstal Chairman’s Review

Dear Shareholders,
While 2015 marked the 60th anniversary of Severstal’s key steel unit in Cherepovets, 2016 marks the 10-year anniversary of our listing of GDRs on the London Stock Exchange. Over the years Severstal has transformed itself into a world-class business and one of the most efficient steel companies globally. We have dedicated personnel, a strong corporate culture, a portfolio of well-invested assets and vertically-integrated business model. All this helps us to address market downturns, to deliver solid returns to our shareholders and to help in the development of our local communities.

 

Resilience through operational excellence

In 2015 we continued to benefit from the fundamental strengths of our vertically-integrated low cost business model. Our flexible sales structure and the location of the assets enabled Severstal to respond successfully to a 12% year on year decrease in Russian steel consumption and as a result we were running with close to 100% utilisation at our key steel units in 2015.

Our focus in 2015 was on further efficiency improvements in order to withstand market headwinds, and this was supported by prudent capital expenditure and further enhancements to our customer care initiatives.

Despite depressed demand in both domestic and export markets, Severstal has delivered another resilient performance, including EBITDA margins up from 26.7% to 32.8% and a 26% increase in free cash flow versus 2014.

After the year end, in February 2016, the entire company was extremely saddened as a result of the tragic deaths of 31 Severstal employees and five rescue workers in an accident at the Severnaya mine, Vorkuta. Severstal is committed to receiving an objective and transparent investigation of the causes of the accident – the preliminary assumption is that it was due to geological reasons. We are cooperating fully with the relevant state authorities. Once the state prosecutors complete their investigation, the results will be made public.

On behalf of all of the management team and the Board of Directors of Severstal, I would like to express our deepest condolences to the families of the miners and rescue workers who died. Health and safety is an absolute priority in our business. We aim to eliminate all fatal accidents and will continue to prioritise investment in this area to do our best to ensure that incidents like this do not occur in the future.

Strategy

Our goal remains to be a leader in value-creation through innovation and excellence across all areas of our operations. We have a clear growth strategy and transparent KPIs that the Board and executive management team are focused on delivering against. The essence of our strategy is to preserve the position of a very low cost producer, while being able to sell products with a premium through our leading quality and customer care.

Our People and the Board

The strength of Severstal’s performance this year against a challenging market background is testament to the quality and commitment of all colleagues across the business. I would like to thank them all for their hard work over the course of the year.

In 2015 we maintained the important balance on the Board with a half of its members being independent non executive directors. In my new role as Chairman I am responsible for ensuring the smooth operation of the Board and that Severstal adheres to the highest levels of governance across the business. I also oversee the Company’s strategy, corporate culture, recruitment and development of our top level executives. The appointment of Vadim Larin, who has been with the Company since 2003, as CEO has re-inforced our focus on operational excellence across the business.

Sustainability

Through ongoing technological innovation steel is becoming cleaner, lighter and more efficient than ever before. On an industrial scale, steel is the most recyclable material on earth that remains affordable to customers. Severstal is fully committed to working in a cleaner environment and implementing ever more sustainable working practices. This is an area that the Company takes very seriously and we have delivered a significant transformation of our assets in recent years.

Since 2012 we have invested almost 6.6 billion roubles in environmental improvement projects. These include the installation of new BOF filters at Cherepovets to reduce air emissions as well as successful initiatives to reduce sulphur dioxide emissions at Karelsky Okatysh.

Shareholder returns

In 2015 we continued to pay dividends in line with our policy announced in October 2014. We are committed to paying no less than 50% of net profit as dividends for the reporting period provided that Net debt/EBITDA is below 1.0x. As a business we are committed to delivering shareholder value and returns, and over the course of 2015 we were delighted to recommend total dividend payments for the year of 58.88 roubles per share (including the FY2015 dividend, which is subject to approval at the AGM in June 2016).

Outlook

In 2015 low commodities prices linked to global economic slowdown and continuing overcapacity drove steel production down by 2.8%. In December 2015 global steelmaking capacity utilisation hit lows of 64.6%. In 2016 global overcapacity continues to weigh on steel and steel-related commodity markets, and the World Steel Association forecasts a further decline in steel demand from China, which increased its export volumes by 20% in 2015, compared with the previous year.

In Russia, the outlook for 2016 is also uncertain. A sustained period of low oil prices will constrain economic recovery and visibility on demand remains low. Many producers will also need to address the challenges presented by global protectionism. For our business, the anticipated impact of these duties does not currently seem to be that significant, as our export strategy is flexible enough to target more attractive markets.

Whilst many international peers are unable to mitigate the impact of lower steel prices, Russian producers are able to benefit from lower operational costs that are denominated in roubles, which supports margins.

Severstal will continue to focus on our key strategic objectives of maintaining industry leading margins through efficiency and customer care. Severstal has proven itself resilient and I am confident that our flexible approach to the evolving market environment will remain a competitive advantage in the future.

Alexey Mordashov
Chairman of the Board of Directors

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