Divisional Review

Severstal Resources Division

Severstal Resources comprises Severstal’s mining assets, are a fundamental part of the Severstal’s vertically integrated business model. The division supplies almost all of the iron ore and approximately 60% of the hard coking coal consumed by Severstal’s Russian Steel division, while also selling iron ore pellets to third parties. Severstal Resources mines all of its iron ore and coking coal in Russia.

Key assets

1. Karelsky Okatysh

Located in Karelia, north-western Russia, Karelsky Okatysh is one of the country’s leading and most modern iron ore mining complexes. It mines magnetite quartzite ores and produces high-quality iron ore pellets with an iron concentration of 64% to 66%. The two major deposits, Kostomuksha and Korpanga, have an estimated life of 30 years.

2. Olcon

Located in the Murmansk region, Olcon is Russia’s most northerly iron ore complex. Olcon mines magnetite-hematite quartzite ores from five open pits, and produces high-quality iron ore concentrate, crushed stones and ferrite strontium powder. Olcon’s deposits have an estimated life to 2026.

In 2017, the Karelsky Okatysh and Olcon management teams were merged to improve governance of the assets. With both of the assets focused on iron ore, this collaboration creates synergies ensuring that both benefit from best practices in mining and concentrate production.

3. Vorkutaugol

Located in the Komi Republic (near Vorkuta), north-east European Russia. Vorkutaugol mines coking and steam coal, and is one of Russia’s largest producers of hard coking coal. Coking coal produces coke which is used for steel production. Steam coal is used in the energy and chemical industries. The two deposits operated, the Vorkutinskoye and Vorgashorskoye coal deposits, have an estimated life of 25 and 17 years, respectively. The business consists of five underground mines, one open-pit mine and three washing plants.

4. Yakovlevskiy Mine

Located 40 km north of the city of Belgorod, the total resource base of the Yakovlevsky deposit exceeds 9.6 bn tonnes with a high Fe content (61.4%). No beneficiation of the ore is required due to its high Fe content. Production capacity is 1.0–1.2 mtpa with the potential to increase to 4.5 mtpa in the medium-term. The mine has a diversified customer base – selling iron ore to all major Russian steel producers. Severstal has historically been the key customer, purchasing c. 30–40% of overall production volumes. The asset will increase Severstal’s existing total vertical integration in iron ore (concentrate + pellets) from c.110% to c.115%

Performance overview

The market environment for steel-related commodities in 2017 remained challenging, both for coking coal and iron ore products. In 2017, the average headcount at Severstal Resources was 12,444, compared with 12,914 in the prior year.


Coking coal concentrate (Vorkutaugol)

  • Average selling price increased 66% year-on-year driven by growth of the global benchmark
  • The 35% increase in cash cost per tonne year-on-year reflects the financial impact of the Severnaya mine incident in February 2016 as well as repositionings at Vorkutaugol mines during 2017


Iron ore concentrate (Olcon)

  • Average selling price increased $20/tonn as a result of global iron ore prices uptick year-on-year
  • Severstal managed to maintain a low cash cost despite moderate cost inflation in 2017
  • Sales volumes are expected to stay flat in 2018

Karelsky Okatysh

Iron ore pellets (Karelsky Okatysh)

  • Average selling prices for iron ore pellets increased $30/tonn following global trends
  • Сost dynamics reflects the operational efficiency programme and cost-saving initiatives despite cost inflation year-on-year.

Dynamics of revenue by products

Although the majority of the Company’s sales are internal, Severstal is a well-established commodity supplier both in Russia and abroad. Pellets and coking coal concentrate are the main products sold to third parties. Severstal also has a number of third party customers for its mining products in Russia, including major domestic steelmakers. Sales and cost of sales fi gures in the charts below are presented in US dollars as a percentage of the total sales or cost of sales of the Severstal Resources division.

Geographical diversification of sales

At Severstal Resources, labour costs are one of the main contributors to the total cost of production. In 2017, labour costs accounted for 29% of the total cost base whilst materials and energy costs respectively accounted for 33% and 26%. Cost reduction and efficiency improvements, in conjunction with high safety standards, are key priorities for Severstal’s mining business. Global market dynamics enabled the Company to offset the drop in coking coal sales volumes, with EBITDA growing 105% year-on-year.

Cost of sales structure

Key developments in 2017:

In 2017, Severstal Resources continued to improve safety across its assets alongside capacity development and ongoing maintenance.


The Company purchased new large dump trucks at an overall cost of more than $6.5 million. This will improve performance, reliability of equipment and reduce environmental impact.

A new crushing and sorting unit was installed at the asset. The unit produces high quality gravel for internal usage and supplies to third parties.

Karelsky Okatysh

Investment at Karelsry Okatysh totaled $145 million in 2017, and was focused on enhancing quality, decreasing costs and renewing machinery and equipment.

New excavators, dump trucks and large dumpcarts were obtained to improve operating performance.

Dry and wet magnetic separation units were upgraded to increase the volume of processed ore and reduce energy consumption.


Capital works at the Vorgashorskaya mine’s belt slope were completed. The project will enable the Company to access and start developing an additional 23 mln tonnes of coking coal in 2019, increasing the mine life to 2030.

Strategic priorities for 2018

In 2018, Severstal will continue to invest in production improvements, maintenance and safety.


At the central processing plant the Company will launch a project to reduce energy transmission losses (total cost of $4 mln).

Over $20 mln will be invested in machinery at drifting and long faces to support the sustainability of the production level.

Over $20 mln will be invested in mining equipment to access new coal blocks.

Over $17 mln will be invested in building two new up-casts and relocating the coalmine methane thermoelectric plant to Vorkutinskaya mine.

A multifunction alerting and positioning system will be installed at the mines. This monitors air quality continuously in the mines.

Karelsky Okatysh

Work on the second line of the tailings thickening complex continues, with completion scheduled for 2019. This will use a closed water cycle to feed the asset with technical water without taking in water from tailings.

A number of projects will be implemented to upgrade the fleet, such as re-equipping dump trucks with lightweight bodies and acquiring new drilling rigs. The Company also plans to upgrade conveyor belts and feeders.

One of the goals for 2018 will be to reduce the cost of crushed ore.

Severstal Russian Steel Division

Severstal Russian Steel is a leading Russian steel producer, with a broad product mix, self-sufficiency in raw materials and an extensive distribution network. The division focuses on high value-added flat steel products and the production of long products for construction and downstream sales.

Severstal’s downstream assets include producers of large diameter pipes and metalware for machinery, as well as service centres and stamping facilities for exposed automotive parts. The division has the highest share of high value-added products among its domestic peers, while Severstal’s flagship Cherepovets Steel Mill is one of the lowest-cost steel mills in the world.

Located in north-west Russia, the division’s steel operations enjoy convenient rail access to the Company’s mining operations and low-cost direct river access to the Baltic ports. It is also well positioned to serve the industrial hubs around St.Petersburg and Moscow.

In 2017, the average headcount at Severstal Russian Steel was 37,018, compared with 37,115 in the prior year.

Key assets

1. Cherepovets Steel Mill

One of the world’s largest stand-alone integrated steelworks by capacity as well as an excellently located, low-cost steel producer. It produces a wide range of flat and long-rolled products, including hot and cold-rolled flat products, galvanized and colour-coated products and long-steel applications. Rolling Mill 5000, located in Kolpino, near Saint-Petersburg, produces thick plate for large diameter pipes, ship and bridge building and other industries.

2. Izhora Pipe Mill

The mill in Kolpino specialises in manufacturing large diameter pipes from plate, which are produced at the nearby Kolpino Mill-5000. It has a production capacity of 600,000 tonnes of pipes per year, most of which is used in oil and gas pipeline projects.

3. Mini-Mill Balakovo

A mini-mill focused on the production of long products for the construction industry. Annual design production is one million tonnes of rolled products.

4. Severstal-Metiz

Manufacturer of more than 55,000 product types, including cold-drawn steel, steel shapes, railway fasteners, low carbon and high carbon wire, nails, steel fiber, steel wire ropes, wire strands, steel meshes and fasteners. Severstal-Metiz comprises several subsidiaries: the Cherepovets site in north-west Russia, the Orel site in central Russia, the Volgograd site in the Povolzhie region. In 2017, the Group sold to a third party 100% of the shares in Redaelli Tecna S. p.A., аn Italian steel company, included in the Severstal Russian Steel reporting segment. Also in October 2017, the Group sold its 98.7% stake in PJSC Dneprometiz to a third party.

5. Downstream production assets

  • Severstal-Gonvarri-Kaluga Steel Centre is a Russian-Spanish joint venture of two global leaders in steel manufacture and processing. It has a design capacity of 170,000 tonnes of rolled metal products per year, produced for the automotive and electrical industries.
  • Gestamp-Severstal-Kaluga Stamping Facility is a joint venture between Severstal and Gestamp. It is equipped with a number of press lines and produces the full range of rolled steel products, from coils to car components for international car manufacturers. It has an annual output of 13 million stamped parts and has the potential to expand production.
  • Severstal-SMC-Vsevolozhsk service centre is a joint venture with Japanese company Mitsui. This centre prepares high-quality CRC and galvanized steel (‘blanks’), which will be further stamped at our joint venture with Gestamp in Vsevolozhsk, and Gestamp Kaluga. Tier 1 supplier for: Nissan, Toyota, Tier-2 Supplier for: VW, Ford, Hyundai. The production facility includes unique for Russia machine called TWB which produce tailor welded blanks, this technology used purely for automotive. The service centre’s capacity is 150,000 tonnes.
  • Gestamp-Severstal-Vsevolozhsk is a joint venture of Severstal and Gestamp group. It is equipped with a press line and welding assembly equipment and produces car components for international car manufacturers. Annual output is 600k parts – press and assembly – and the potential to increase up to 2,000k parts.
  • Ruetgers Severtar, a joint project with Ruetgers (RAIN), based at the Cherepovets Steel Mill plant, produces vacuum pitch, technical oils and naphthalene.
  • TPZ-Sheksna was launched in 2010, and is designed to produce up to 250,000 tonnes of electric-welded pipes of various diameters, thicknesses and lengths for the construction industry, as well as square and rectangular sections with different cross-sections. The plant uses semi-finished steel products made at the Cherepovets Steel Mill.

6. Trading companies

Severstal Russian Steel sells its products domestically to regional and national distributors, directly to end-users, and through AO Severstal Distribution. AO Severstal Distribution has a wide network of metal centres throughout the country. Severstal Russian Steel conducts export sales principally through the subsidiary Severstal Export GmbH, as well as through SIA Severstal Distribution, Severstal Distribution LLC and ZAO Severstal Distribution.

Production volumes (million tonnes)

Against a backdrop of capacity cuts in China and growth in Russian steel consumption y/y in 2017, the Russian Steel division was able maintain relatively high sales volumes in 2017, at 11 million tonnes, despite market headwinds. Due to the location of its main producing asset, the division was able to promptly reallocate sales volumes between domestic and export markets.

Ongoing global steel overcapacity cuts and improved consumption supported steel prices in 2017. Reflecting this, Severstal’s average steel prices raised 38% for hot-rolled strip and plate, 26% for cold-rolled flat products and 26% for long products.

Average selling price (US$/t)

Severstal’s key domestic customers include construction companies and pipe mills, machinery and automotive clients. The Company’s product portfolio therefore includes a wide range of products of various specifications. Severstal Russian Steel benefits from its proximity to export routes. The share of exports in the division’s sales portfolio varies depending on the health of the Russian market and the attractiveness of international sales options as an alternative. In 2017, export volumes comprised 40% of the division’s total sales. Sales and cost of sales figures in the charts below are presented in USD as a percentage of the total sales or cost of sales of the Severstal Russian Steel division.

Sales by regions 2017

Sales by regions 2016

Sales by industries 2017

Sales by industries 2016

Severstal works consistently to maintain its leading cost position through labour and energy productivity and operational enhancements. In 2017, raw materials accounted for 72% of total costs. Labour and energy costs ranked second and third with a share of 11% and 9%, respectively.

Cost of sales structure 2017

Cost of sales structure 2016

Key developments in 2017

  • 120,000 tonnes of iron was produced by CherMK ‘Severyanka’, one of the largest blast furnaces in the world.
  • A second ladle furnace was installed to improve cost and quality.
  • A new HDG & coating line was completed to increase capacity of HDG by 400,000 tonnes and coating steel by 200,000 tonnes.

Strategic priorities for 2018 and beyond

  • Coking Battery #4 is scheduled for reconstruction to improve capacity. This is due for completion in 2017–2018. Estimated CAPEX is US$100 million.
  • More than US$17 million will be invested in a technical upgrade of metal finishing shop #2 at CherMK.
  • New cooling towers #2 and #4 will be constructed to improve water cooling process.