ANNUAL REPORT 2017

Chairman’s Review

Dear Shareholders,
In 2017, Severstal reinforced its leading position despite challenging macroeconomic conditions. Our clear and focused strategy and vertically-integrated business model once again enabled us to perform resiliently in an uncertain economic environment.

Strength throughout the cycle

This year was marked by industry-wide challenges, as raw materials prices fluctuated and overcapacity continued to weigh on steel prices. China’s commitment to closing inefficient steel and mining facilities supported growth in global steel demand in 2017. I am pleased to report that against this backdrop we made progress against each of our strategic priorities during 2017, delivering robust cash generation while driving efficiency, maintaining a strong balance sheet and making progress on our initiatives to enhance customer care and product quality. Amid changing market conditions, the strategic location of Severstal’s assets allows the Company to take advantage of more attractive pricing at different stages of the industry cycle, by shifting additional sales volumes between domestic and export markets. In 2017, our flexible sales model and integrated business enabled Severstal to capitalise on a recovery in the domestic demand, driven by Russian GDP growth. Severstal remains one of the most profitable steel companies in the world.

Consistent strategy powered by innovation

Severstal’s ongoing focus on cost discipline and efficiency enhancements once again delivered excellent results in 2017. However, in an increasingly competitive industry we are constantly looking for ways to differentiate ourselves from our peers and stand out as leaders in the sector. Technology and innovation are a key focus for Severstal. This is increasingly the most significant driver in enhancing our overall performance and customer service. As presented at our 2017 annual Capital Markets Day, the Board has identified a digital innovation strategy that will support Severstal’s committed long-term strategy of maintaining its position as a leader in value creation for all stakeholders.

An innovation culture will help us to speed up product development and further improve our processes. However, we remain firmly committed as well to the already time-tested optimisation initiatives to maintain our competitive low cost position.

Returns to shareholders

In 2017, maintaining a low level of debt and delivering strong margins, Severstal was able to pay strong dividends despite market pressures. In line with our progressive dividend policy, the Company distributed almost all of its free cash flow to shareholders, with total cash outflow for dividends in 2017 amounting to approximately $1.5 billion, which represents a yield of around 11.5% on current market capitalisation. The Board believes that Total Shareholder Return (TSR) is the most effective metric against which to measure the Company’s performance in value creation against its peers. In 2017 Severstal was focused on establishing our TSR targets as part of the long term strategies driving our activities across the Group.

Health and Safety

Whilst delivering shareholder value is our primary financial objective, safety is the number one priority at all of Severstal’s operations. Since the tragic accident at our Severnaya mine in February 2016, everyone has been focused on learning the lessons and implementing better practice. We are striving to be an accident-free organisation and management is constantly focused on reducing our lost injury time frequency rate (LTIFR). Our management teams work around the clock to foster a strong safety culture among all of our employees.

Environmental, social and governance

Through ongoing 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 committed to operating in a cleaner environment and to improving the sustainability of its working practices. This is an area the Company takes very seriously and our assets have been transformed in recent years in line with our environmental priorities. Our investors are becoming increasingly focused on environmental, social and governance (ESG) as a metric by which they evaluate responsible investment. The Company is committed to operate responsibly and sustainably, in the long-term. Accordingly, we aim to enhance our ESG reporting to demonstrate our commitment and continued progress in this area.

Governance and the Board

I believe strongly that good leadership makes a huge difference to an organisation and accordingly I’m passionate about ensuring that Severstal has the highest standards of governance and leadership supported by a consistent culture, values and behaviours throughout Severstal. In my role as Chairman, I am responsible for ensuring the smooth operation of the Board and also overseeing the Company’s strategy, corporate culture, recruitment and the development of our senior executives.

People

At Severstal, we recognise that our people are the heart of our business. It is a testament to the hard work of all of our employees that the Company continues to deliver strong results and industry leading performance despite market headwinds. In recognition of this, and to support their ongoing progress, we are committed to the professional development of every employee, providing them access to our world class in-house and external training programmes. In 2017, we launched a new programme, “Career Restart”, aiming to identify and develop those employees at Severstal with standout potential. We also launched Severstal’s youth leadership programme which will enrich our talent pool for Severstal’s 100 top managers in the coming years.

Outlook

In 2017, we saw growth in global steel production largely driven by China. Meanwhile, capacity cuts in China drove utilisation up to 85% at the end of the year, supporting growth in steel margins. In Russia, economic recovery supported a 5% improvement in steel demand over 2017. In October 2017, the EU Commission imposed definitive antidumping duties against steel exporters, however, Severstal received the lowest duty rate of all of its peers, enabling us to continue serving our European customers and remain competitively positioned in those markets. We continue to believe that efficient, innovative and vertically integrated operators such as Severstal will continue to deliver value to stakeholders. On behalf of my fellow directors I would like to thank our hard-working employees and our shareholders for their ongoing support.

Sincerely yours,

Alexey Mordashov
Chairman of the Board of Directors