ANNUAL REPORT 2016

Market Trends

World crude steel production in 2016 contracted by 1.1%, primarily as a result of lower demand in the first quarter. In China, state measures introduced to support the construction industry began to take effect and boosted demand for steel. In 2017 global production volumes should recover further in response to growing steel consumption in a number of countries.

Overcapacity prevailed for most of 2015, remaining the key factor behind low prices in the steel industry. Meanwhile there have been some signs of improvement in global supply/demand fundamentals. In early 2016, China announced plans to cut its steel production capacity by 100–150 million tonnes over the next five years to reduce the size of its steel industry and resolve a long-term capacity excess. China’s policy to steer towards a more consumption and services-led economy has supported this move, and is expected to drive the economy back to fast growth and development, which in turn will stimulate steel-consuming industries such as automotive and construction. Capacity cuts in China and pollution control initiatives also improved the outlook for the steel supply-demand balance.

Spot hard coking coal prices unexpectedly surged at the end of Q3 of 2016. Growth continued throughout October 2016 and prices reached levels of above $300/t in November, having almost tripled since the beginning of the year. Major drivers of this dramatic increase were the reduction of working days for coal mines in China (276 day policy) and supply disruptions in China and Australia. Then HCC prices started to decline in response to returning Chinese supply with the relaxation of its 276 days policy. This trend is expected to continue in 2017, whilst remaining sensitive to changing Chinese policy.

Hard coking coal, FOB Australia, $/tn

During Q4, iron ore prices surged more than 20% because of increasing demand, relatively high steel production and speculative futures trading.

Iron ore, Fe 62% CFR China, USD/tn

Steel prices recovered to some extent during 2016 driven by growth in raw material prices and increased buying activity amidst restocking by commodity traders. Meanwhile economic conditions remain uncertain and any deterioration could result in adverse effects on steel prices.

The largely unexpected outcome of the U. S. presidential election has led to increased political and economic uncertainty, with expectations that new economic policy could be less conducive to US economic growth. Likely restrictions on US international trade and reduced freedom of movement of workers and capital could have a negative impact on global growth. In China, which is a key influencer of global commodity prices, in particular iron ore, coking coal and steel, a possible deterioration of trade relations with the USA could have a real negative impact on economic growth. Meanwhile, some argue that a possible significant easing of US sanctions against Russia could stimulate economic growth, with foreign capital inflow driving a recovery of the Russian rouble. However the dynamics of Russian rouble will remain uncertain due to instability of global oil prices.

In 2016 GDP contracted by 0.2% which was lower than 0.2% GDP reduction in 2015, according to Rosstat. Net capital outflows amounted to US$57.5 billion in 2015 and US$15.4 billion in 2016, according to the Central Bank of Russia (CBR). Inflation reached 12.9% in 2015 and declined to 5.4% in 2016.

In December 2016, the CBR forecasted that with an average price of US$40 per barrel of Urals oil in 2017, Russia’s GDP will increase by 0.5-1% and net capital outflow in Russia will amount to US$13 billion in 2016 as compared to US$15.4 billion in 2016.

Whilst there can be no certainty that this trend will continue, the CBR reduced its key interest rate gradually to 11% over the first half of 2015 and further to 10.5% in June 2016 and to 10.0% in September 2016.

Inflation and CBR rates decline

The Global steel industry will be influenced by the following global developments in the forthcoming months:

  • Closure of capacity in China;
  • Migration of excessive capacity to downstream steel products;
  • Worldwide protectionism.

A number of Severstal’s export products (including exports to the EU, the Group’s principal export market) are subject to trade barriers.

In 2016, the European Commission introduced five-year anti-dumping duties against Russian cold-rolled steel products ranging from 18.7% to 36.1%, with a 34% duty imposed on the Group’s products.

There is currently an ongoing investigation by the European Commission concerning imports of certain hot-rolled flat products of iron, non-alloy or other alloy steel originating in Brazil, Iran, Russia, Serbia and Ukraine which could result in the introduction of antidumping duties on such products leading to the loss of their competitiveness in the EU markets. A provisional determination of these proceedings is currently scheduled for May 2017.

Currently, the following US anti-dumping measures apply to Russian hot-rolled products: a 53.8% anti-dumping duty for the Group’s hotrolled plates and a 73.6% anti-dumping duty on the Group’s hot-rolled coils and sheets.

Although the Company believes that the sale of its hot-rolled coils and sheets was conducted at fair prices and should not have triggered the imposition of any anti-dumping measures, the US Department of Commerce found that Severstal has failed to cooperate with the review and assigned a preliminary anti-dumping rate of 184.56% to the Group’s products which was originally calculated 17 years ago on the basis of trade relations and conditions prevailing at that time when the US Department of Commerce treated Russia as a non-market economy.

In addition, other countries have introduced or are considering introducing anti-dumping measures against the Group’s products:

  • Mexico applies anti-dumping duties ranging from 15 to 36.8% on hot-rolled and cold-rolled steel products from Russia;
  • Thailand has imposed anti-dumping duties ranging from 24.2% to 35.17% and safeguard measures ranging from 21.13% to 41.64% on hot-rolled steel products;
  • India has imposed safeguard measures of 18% on hot-rolled coils and is currently conducting anti-dumping and safeguard investigations on hot-rolled coils and sheets;
  • Brazil is currently conducting anti-dumping investigations against hot-rolled flat steel products from Russia.