ANNUAL REPORT 2016

Severstal Chairman’s Review

Dear Shareholders,
In 2016 we celebrated the 10th year anniversary of our GDR listing on the London Stock Exchange. To celebrate this important landmark, the Company was invited to open trading on the Exchange on 1 November, which was a great honor for all those who have contributed to our development. Throughout this period safety has remained management’s top priority with significant investment to ensure safer working environments and the health and well-being of our people. We have focused on delivering industry leading margins and strong free cash flow generation, with our aim to be a leader in value creation. Since our listing in London, the Company has paid approximately $6.2 billion of dividends. As a result, over the last ten years Severstal’s total shareholder return has outperformed our global peers by more than 140%. The Board has also been committed to ensuring the highest levels of corporate governance, sustainability and shareholder engagement.

Performance in 2016

Despite challenging trading conditions, in 2016 we continued to benefit from the fundamental strengths of our vertically integrated, low-cost business model. Rise in global steel prices towards the end of the year supported EBITDA performance and, with our highly competitive cost position, Severstal has been able to continue generating strong free cash flow. We expect further stabilisation of the global steel and steel-related commodity markets in 2017.

Our flexible sales structure and the advantageous location of our assets enabled Severstal to respond to an approximately 4%* year on year decrease in Russian steel consumption by increasing steel product exports, which represented 39% of sales volume in 2016. As a result, we were operating at close to full utilisation of our key steel assets over the year.

We also focused on further efficiency improvements in order to continue to reinforce our ability to withstand market headwinds. This was supported by prudent capital expenditure in line with our strategy and further enhancements to our customer care initiatives.

Despite still relatively depressed demand globally, our sales volumes were quite resilient and annual average selling prices increased for raw materials and some steel products reflecting our flexibility in allocation of volumes between domestic and export markets, as well as an upward trend in global commodity and steel pricing in the 2nd half of 2016. Our product mix is increasingly well diversified with HVA representing approximately 42% of the portfolio. Our focus on efficiency allowed Severstal to maintain firm annual EBITDA level at $1.9 billion, with margins remaining one of the highest amongst global steel producers at 32.3%.

Severstal’s financial position remains strong with its Net debt/ EBITDA ratio at 0.4x at the end of 2016. The Company will continue to strike the right balance between maintaining a low indebtedness level and returning value to its shareholders.

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 operating 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 in line with our environmental priorities.

In recent years Severstal has been focused on environmental projects which 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.

Severnaya

Since the tragedy of the Severnaya mine accident in February 2016, the entire Company still remembers with great sadness the deaths of our 31 colleagues and the five rescue workers. Severstal is totally committed to the investigation into the causes of the accident. The Company is cooperating with the authorities and provides all necessary information.

The Severnaya mine will be sealed off to avoid the risk of airflow causing further underground fire and explosions in the mine. The decision was made in September 2016 by the Technical Commission comprising representatives of Vorkutaugol and Russian authorities. A study undertaken by several leading mining research institutes has concluded that underground fire in the mine remains a risk.

An inflow of oxygen could risk unpredictable fires and blasts. Experts are now considering a safe method for sealing off the mine for the foreseeable future as well as the extraction of its resources through the adjacent Komsomolskaya mine, which is preliminary expected to start in 2020.

People

The strength of Severstal’s performance this year against a challenging market background is a testament to the quality and commitment of all colleagues across the business. I would like to thank them all personally for their hard work over the course of the year. We value each and everyone of our employees and aim to provide equal opportunities to all, from when they first begin their careers at Severstal, through to the ongoing development of their professional skills. We aim to create a dynamic work environment that enables all of our employees to realise their full potential. Our training programmes focus on developing future talent and we continue to work actively with young people helping them to develop their careers. Our professional training focus is embedded in the Company’s values.

Board

In 2016 we maintained a balance on the Board with half of its members being independent non-executive directors. In my role as Chairman, I am responsible for ensuring the smooth operation of the Board and that Severstal adheres to the highest standards 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 Alexander Shevelev, who knows the Company extremely well having worked previously at Severstal for many years, as CEO in November 2016 will reinforce our focus on operational excellence across the business.

Outlook

In 2016 global overcapacity continued to weigh on steel and steel-related commodity markets. However, we believe that the encouraging trends experienced at the end of 2016 will gather momentum in 2017. The Russian economy is returning to growth with domestic steel demand expected to increase by approximately 1.5% in 2017. These positive dynamics are being reinforced by growing import substitution and market share wins. 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 our position of being one of the world’s most efficient low-cost producers, whilst increasing our value added sales by further enhancing quality and customer care. Continuing progress across these key areas should be a solid basis of our future outperformance.

Alexey Mordashov
Chairman of the Board of Directors

* Metall-Expert data and Company estimates.