Russian Steel benefits from a good geographical location, which gives us favourable access to the raw materials we need, and to our transportation networks and markets.

We produce a wide range of products throughout this part of our business, including hot-rolled sheets, large-diameter pipes, profiles, and cold-rolled coated sheets – encompassing special-grade sheets for the automotive industry, hot-rolled plates and long products. We sell our steel products mainly in our domestic market, serving the needs of the Russian automotive, construction, oil and gas, shipbuilding, engineering and other industries.

We produced 9.5 million tonnes of crude steel in 2009, compared with 11.1 million in 2008. Revenue was US$6.18 billion, a decrease of 48.8% compared with 2008. EBITDA was US$1.32 billion, down 64.1% on the previous year.

Russian Steel comprises

Steel production

The Cherepovets Steel Mill, located in Cherepovets, is an integrated mill specialising in steel production (with a total steelmaking capacity of 11.1 million tonnes a year). Its capacity has decreased since an open-hearth furnace closed on 1 November 2008. The mill also produces a wide assortment 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, produces hot-rolled plates and strips.

Pipes production

The Izhora Pipe Mill produces pipes with a diameter of 610–1,420 mm, and a thickness of 14–40 mm. These are covered with a three-layer polymer coating on the outside, and a smooth or anti-corrosion coating on the inside.

The mill is capable of producing pipes of up to 18.3 metres in length, which are unique by Russian standards (the standard length is 12 metres). The mill is located in Kolpino, the industrial zone of St. Petersburg. Slabs are manufactured at Severstal’s Cherepovets Steel Mill and then rolled into plate at Rolling Mill 5000. The plate is then delivered to the Pipe Mill (located on the same site), to be made into large-diameter pipes.

Metalware production

Our companies have an annual production capacity of 1.5 million tonnes of wire and wire products. This includes over 55,000 different product types, manufactured in Russia, Ukraine, Italy and the UK.

Our diverse portfolio of suppliers includes almost all the large manufacturers of raw materials in the CIS and Europe – such as Cherepovets Steel Mill, OEMK, MMK, MMZ, ArcelorMittal, Lucchini and OVAKO.

Around 40% of the volume of materials we use in our metalware production comes from the Cherepovets Steel Mill.

Scrap collection and processing

Our ferrous scrap metal recycling business supplies scrap metal to the Cherepovets Steel Mill and other companies. It includes companies in several Russian regions.

Trading and service companies

This segment includes trading companies in the Russian Federation and abroad. Their main purpose is to provide equipment repair services to maintain the production processes of the Cherepovets Steel Mill.

Key performance indicators

In 2009, Russian Steel’s revenue decreased by US$5.88 billion. This was a decrease of 48.8%, due to a 39.7% drop in sales prices compared with the previous year: the average price for steel products fell by US$397 per tonne. Sales volumes of steel products decreased by 19.2% (or 2.23 million tonnes) in comparison with 2008. Due to a decrease in demand, especially in the first half of 2009, our production volume was only 75.5% of the normal level. Production costs fell significantly in 2009, mainly due to the decrease in production volume. As a result, our 2009 operating margin decreased to 16.8%. Our 2009 EBITDA dropped by 64.1%, and EBITDA per tonne fell by 56.7% to US$146.9.

Our EBITDA margin decreased from 30.5% to 21.4%.

	2009	2008	Change year-on-year %
Revenue (US$ million)	6,179.1	12,063.8	(48.8)
Gross profit (US$ million)	2,097.7	4,675.7	(55.1)
Profit from operations (US$ million)	1,035.7	3,178.1	(67.4)
Operating margin (%)	16.8	26.3	n/a
EBITDA (US$ million)	1,319.4	3,675.2	(64.1)
EBITDA per tonne (US$/tonne)*	146.9	339.5	(56.7)
EBITDA margin (%)	21.4	30.5	n/a
Average steel product price (US$/tonne)*	604	1,001	(39.7)
Hot-rolled strip and plate (US$/tonne)	474	908	(47.8)
Large-diameter pipes (US$/tonne)	1,995	2,789	(28.5)
Cold-rolled flat products (US$/tonne)	538	880	(38.9)
Galvanized and other metallic coated sheet (US$/tonne)	757	1,153	(34.3)
Colour-coated sheet (US$/tonne)	1,053	1,472	(28.5)
Metalware products (US$/tonne)	918	1,342	(31.6)
Long products (US$/tonne)	456	866	(47.3)
Semifinished products (US$/tonne)	342	681	(49.8)
Other tubes and pipes, formed shapes (US$/tonne)	586	1,049	(44.1)
Average scrap price (US$/tonne)	202	385	(47.5)

* Excludes scrap.

The average number of Russian Steel employees in 2009 was 50,848 (full-time equivalent), a decrease of 16.9% compared with 2008.

The Cherepovets Steel Mill reduced its workforce by 17.5% due to a deliberate downsizing policy. The majority of entities in the Russian Steel Division were affected by a reduction in the number of employees.

The main actions were:

• Matching the number of employees to our production capacity.
• Closing technologically not advanced shops (such as the open-hearth furnace).
• Transferring sport, health, cultural and other social units to local town administrations.
• Restructuring our repair service, with some employees transferring to service subsidiaries.

Production results

In 2009, Russian Steel produced 7.2 million tonnes of hot metal (11.1% less than in 2008), and 9.5 million tonnes of crude steel (14.0% less than in 2008).

The main reason for the significant decrease in demand was the recession, especially in the first half of 2009.

Production volumes, thousand tonnes	2009	2008	Change year-on-year %
Total output
Hot metal	7,223	8,125	(11.1)
Crude steel
Basic oxygen furnaces	8,002	8,141	(1.7)
Electric arc furnaces	1,546	1,895	(18.4)
Open-hearth furnaces	–	1,061	(100.0)
Total crude steel	9,548	11,097	(14.0)

Average production volumes of crude steel for the first half of 2009 were 27.6% less than in the second half of 2009.

Sales and marketing

In 2009, total revenues declined considerably, by 48.8% compared with 2008, whereas revenue from the sale of steel products decreased by 19.2%. This decrease is due to the overall weak economic conditions, which resulted in the widespread decline of steel consumption in all industries. Also, all steel producers pursued a price reduction policy to stimulate maximum capacity utilisation. In the case of Russian Steel, price reductions were 38.2% on average.

Russian Steel’s sales by product

In 2009, sales of hot-rolled strip and plate accounted for 42.1% of overall sales volume (30.3% of revenue), cold-rolled flat products accounted for 13.5% of volume (11.0% of revenue), semi-finished products accounted for 8.9% of volume (4.6% of revenue), long products accounted for 8.4% of volume (5.8% of revenue), metalware products accounted for 7.3% of volume (10.1% of revenue), and galvanised and other metallic coated sheet accounted for 5.4% of volume (6.2% of revenue). Other steel products (tubes, pipes, colour-coated sheet and scrap) accounted for 14.4% of volume and 21.7% of revenue. Other revenues and shipping accounted for 10.3% of total revenues.

Sales by products

	2009		2008		Change year-on-year %
	Thousand tones	US$ million	Thousand  tonnes	US$ million	Thousand  tonnes	US$ million
Hot-rolled strip and plate	3,948	1,872.2	4,350	3,949.1	(9.2)	(52.6)
Large diameter pipes	390	778.0	294	819.9	32.7	(5.1)
Cold-rolled flat products	1,265	680.8	1,419	1,249.1	(10.9)	(45.5)
Metalware products	683	626.7	899	1,206.6	(24.0)	(48.1)
Galvanized and other metallic-coated sheet	508	384.3	695	801.3	(26.9)	(52.0)
Long products	788	359.0	1,466	1,269.8	(46.2)	(71.7)
Semi-finished products	839	287.2	942	641.0	(10.9)	(55.2)
Other tubes and pipes, formed shapes	436	255.4	463	485.6	(5.8)	(47.4)
Colour-coated sheet	234	246.4	244	359.1	(4.1)	(31.4)
Scrap	289	58.3	834	321.3	(65.3)	(81.9)
Total steel products	9,380	5,548.3	11,606	11,102.8	(19.2)	(50.0)
Other and shipping	–	630.8	–	961.0	–	(34.4)
Total sales by products	9,380	6,179.1	11,606	12,063.8	(19.2)	(48.8)
Inter-segment transactions	49	44.6	87	39.5	(43.7)	12.9

Principal markets

As a whole, the domestic market dropped much more sharply in 2009 than the export market. Therefore exports supplemented Russian sales in hot-rolled strip and plate and in cold-rolled and galvanised products. In scrap, there was the opposite trend: domestic sales compensated for lower exports, due to higher demand from Russian steelmakers (mostly from section mini-mills). Sales of large-diameter pipes grew in both Russian and export markets.

Russian market

Sales by product – domestic market

	2009		2008		Change year-on-year %
	Thousand tonnes	US$ million	Thousand tonnes	US$ million	Thousand tonnes	US$ million
Hot-rolled strip and plate	1,420	781.1	2,681	2,539.3	(47.0)	(69.2)
Large-diameter pipes	297	626.8	292	815.6	1.7	(23.1)
Cold-rolled flat products	609	345.1	930	854.3	(34.5)	(59.6)
Metalware products	425	351.4	577	776.4	(26.3)	(54.7)
Galvanized and other metallic-coated sheet	336	273.6	563	670.9	(40.3)	(59.2)
Long products	649	298.4	1,309	1,142.8	(50.4)	(73.9)
Semi-finished products	4	2.5	37	24.8	(89.2)	(89.9)
Others tubes and pipes, formed shapes	350	201.8	354	372.2	(1.1)	(45.8)
Colour-coated sheet	214	225.2	216	317.9	(0.9)	(29.2)
Scrap	95	19.4	70	26.0	35.7	(25.4)
Total steel products	4,399	3,125.3	7,029	7,540.2	(37.4)	(58.6)
Other and shipping	–	312.2	–	644.0	–	(51.5)
Total sales by products	4,399	3,437.5	7,029	8,184.2	(37.4)	(58.0)
Inter-segment transactions	21	33.8	4	27.3	425.0	23.8

The Russian market is the most important for Russian Steel. Our main domestic customers include pipe mills, the automotive and machinery industries, construction and shipbuilding companies. Our share of the Russian market in revenue terms changed significantly (55.6% in 2009 compared with 67.8% in 2008). In addition to low logistics costs, the Russian market has considerable potential, and allows for long-term relationships with customers based on cultural and other grounds.

In 2009, sales to the Russian market went down by 37.4% in volume terms, while revenues decreased by 58.0%, as a result of the 33.8% reduction in prices. Hot-rolled strip and plate accounted for 32.3% of sales volume, long products accounted for 14.8%, cold-rolled flat products accounted for 13.8%, and galvanized and other metallic-coated sheet accounted for 7.6% of sales volume.

Russian Steel sold 47.0% less hot-rolled strip and plate by volume and 69.2% less by revenue in 2009 than in 2008. For long products, there was a 50.4% decrease in sales by volume and a 73.9% decrease in revenue. Revenues from galvanized and other metallic-coated sheet decreased by 40.3% in tonnes and by 59.2% in US dollars. For cold-rolled flat products, the decrease was 34.5% in tonnes and 59.6% in US dollars.

As a whole, the difficult market conditions, particularly in the first half of 2009, resulted in lower sales volumes and reduced average prices during 2009 compared with 2008.

Export markets

Sales by product – export markets

	2009		2008		Change year-on-year %
	Thousand tonnes	US$ million	Thousand tonnes	US$ million	Thousand tonnes	US$ million
Hot-rolled strip and plate	2,528	1,091.1	1,669	1,409.8	51.5	(22.6)
Large diameter pipes	93	151.2	2	4.3	n/a	n/a
Cold-rolled flat products	656	335.7	489	394.8	34.2	(15.0)
Metalware products	258	275.3	322	430.2	(19.9)	(36.0)
Galvanized and other metallic coated sheet	172	110.7	132	130.4	30.3	(15.1)
Long products	139	60.6	157	127.0	(11.5)	(52.3)
Semi-finished products	835	284.7	905	616.2	(7.7)	(53.8)
Others tubes and pipes, formed shapes	86	53.6	109	113.4	(21.1)	(52.7)
Colour-coated sheet	20	21.2	28	41.2	(28.6)	(48.5)
Scrap	194	38.9	764	295.3	(74.6)	(86.8)
Total steel products	4,981	2,423.0	4,577	3,562.6	8.8	(32.0)
Other and shipping	–	318.6	–	317.0	–	0.5
Total sales by products	4,981	2,741.6	4,577	3,879.6	8.8	(29.3)
Inter-segment transactions	28	10.8	83	12.2	(66.3)	(11.5)

In 2009, compared to 2008, export sales volumes increased by 8.8% while revenues from steel products decreased significantly (by 32.0%) due to the major reduction in prices (by 37.5%). The main contributors to export revenues in volume terms were hot-rolled strip and plate (50.8%), semifinished products (16.8%) and cold-rolled flat products (13.2%).

In 2009, export market prices decreased for every product, ranging from 20.1% (metalware products) to 49.9% (semi-finished products).

In volume terms, sales of hot-rolled products increased by 51.5%, cold-rolled flat products by 34.2%, and galvanized and other metallic coated products by 30.3%. Sales of large-diameter pipes in 2009 (92,000 tonnes) were 47 times higher than in 2008.

Sales by region

Strategically, Russian Steel is building long-term relationships with customers in the CIS and the EU. Deliveries to other regions are carried out primarily on a spot basis, with the exception of sales to tube and pipe makers and automotive producers. Sales to customers in Russia are strategically important for future sales of Russian Steel.

In 2009, the main export regions were Europe (41.0% of export revenue), Asia (34.3% of export revenue) and the Middle East (14.5% of export revenue). Sales to other regions amounted to 10.2% of export. The main trend is the growth of sales to Asian customers, mainly to China in Q1 2009. In the second half of the year, China's share of export sales decreased as we were selling more to Europe and the Middle East.

Sales by industry

In the domestic market, Russian Steel focuses on selling its products to the construction industries and steel service centres, pipe production, oil and gas, automotive producers and machinery builders, amongst others. In export markets, sales are primarily to processing and construction industries, including re-rollers of slabs, hot-rolled and cold-rolled coils. In 2009, construction and processing sales, in revenue terms, accounted for 50.4% of all sales worldwide, while sales to the oil and gas sector accounted for 11.8%, machinery building accounted for 13.8%, and pipe production accounted for 10.1%.

The structure of sales in 2009 did not change significantly from 2008.

Costs

	2009		2008
Cost of sales structure	US$ million	% of total	US$ million	% of total	Change year-on-year %
Materials
Scrap metal	561.0	13.7	1,397.0	18.9	(59.8)
Coal	502.6	12.3	976.6	13.2	(48.5)
Iron ore	323.0	7.9	626.2	8.5	(48.4)
Ferroalloys and nonferrous metals	269.7	6.6	616.9	8.4	(56.3)
Pellets	206.6	5.1	538.5	7.3	(61.6)
Coke	46.3	1.1	106.8	1.4	(56.6)
Other materials	687.3	16.8	1,009.9	13.7	(31.9)
Total materials	2,596.5	63.6	5,271.9	71.4	(50.7)
Energy
Electric power	142.4	3.5	213.0	2.9	(33.1)
Gas	141.3	3.5	192.2	2.6	(26.5)
Other energy resources	78.5	1.9	120.7	1.6	(35.0)
Total energy	362.2	8.9	525.9	7.1	(31.1)
Staff costs	485.6	11.9	737.7	10.0	(34.2)
Depreciation and amortisation	257.2	6.3	441.9	6.0	(41.8)
Services	140.0	3.4	298.7	4.0	(53.1)
Other	239.9	5.9	111.9	1.5	114.4
Total	4,081.4	100.0	7,388.0	100.0	(44.8)

The cost of sales decreased by US$3,306.6 million in 2009 compared with 2008. The main factor contributing to this decrease was the fall in sales volume from 11.6 million tonnes to 9.4 million tonnes, resulting in a US$1,354 million reduction in the cost of sales.

Other factors contributing to the decrease in the cost of sales included:

• Changes in the structure of used raw materials and production, which caused the cost of sales to decrease by US$130 million.
• Changes in labour costs, excluding foreign exchange rate movements, which resulted in a cost of sales decrease of US$118 million.
• The decrease in depreciation and amortisation of assets, excluding foreign exchange rate movements, which caused the cost of sales to fall by US$114 million.
• Losses from exchange rate movements, which resulted in a cost of sales decrease of US$1,043 million.
• Falling raw materials consumption rates, which reduced the cost of sales by US$119 million.
• The decrease in the price of materials and energy, which caused the cost of sales to drop by US$139 million.
• The reduction of services such as repairs and insurance, which caused the cost of sales to fall by US$120 million.

The decrease in labour costs was due mainly to the 16.9% fall in the average number of Russian Steel employees, in 2009 compared with 2008.

Capital investment

We invested US$368.7 million in our steel business in 2009. Of this, we spent US$94.1 million on new projects and US$259.6 million on repairing and modernising projects.

Main ongoing projects

Hot metal cranes №8 and №10 at steel-making operations

We invested US$11.5 million in this project in 2009, out of a total planned investment of US$26.2 million. The project’s purpose is to maintain fixed assets: to replace two hot metal cranes at a blast oxygen furnace shop. We started this in the first quarter of 2007 and finished in the fourth quarter of 2009.

Replacement of stove №3 with BF №5 at blast furnace operations

We invested US$8.2 million in this project in 2009, out of a total planned investment of US$18.7 million. The aim of the project is to maintain fixed assets: to replace a stove with a new one of Kalugin design. We started this in the first quarter of 2009.

Revamp of turbo-generator №6 at thermal power plant – thermal blower station (TPP-TBS)

We invested US$5.9 million in this project in 2009, out of a total planned investment of US$5.9 million. The project’s aim is to increase power generation and reduce costs. We implemented this project during 2009.

Revamp of main step-down substation №1 at electric power supply shop

We invested US$4.2 million in this project in 2009, out of a total planned investment of US$26.8 million. The purpose of the project is to maintain fixed assets. We started this in the fourth quarter of 2007.

Hot dip galvanizing line

We invested US$15.9 million in this project in 2009, out of a total planned investment of US$80.6 million. At the end of the project, we expect to increase production of colour-coated products to 400,000 tonnes per year. We started this in the first quarter of 2007.

Revamp of joint gas cleaning system of shaft furnace №2 and ladle furnace №2

We invested US$1.8 million in this project in 2009, out of a total planned investment of US$4.0 million. The project is focused on de-dusting the point source and reducing emissions from shaft furnace №2 and ladle furnace №2. We started this in the first quarter of 2008 and finished in the fourth quarter of 2009.

Pipe welding mill at TPZ Sheksna

We invested US$72.9 million in this project in 2009, out of a total planned investment of US$116.2 million. The rolling mill is expected to produce up to 250,000 tonnes of pipes per year. It will primarily produce electric-welded pipes of various diameters, thickness and length, as well as square and rectangular sections with different cross-sections.

ZAO Severstal Long Product Mill Balakovo (mini-mill in the Saratov region)

We invested US$17.3 million in this project in 2009, out of a total planned investment of US$785.5 million. The mill will produce long products for the construction industry and will have the capacity to make up to 1 million tonnes of rolled products per year.

Metalware production

We invested US$25.7 million in this segment in 2009, out of a total planned investment of US$36.3 million. The purpose of this investment is to optimise drawing capacity, reduce costs, improve product quality and develop new product types, including large-diameter cable ropes.

We have taken decisive action to cut our capital expenditure programme for 2009, and focused mostly on repairing and modernising projects, as well as on projects in the final stages of completion.

Our decisive management action includes:

• Using modern technological materials and solutions.
• Improving industrial efficiency through energy and materials.
• Optimising purchasing costs.
• Decreasing functional and operating budgets.
• Optimising the number of employees and staff expenses.
• Decreasing capital expenditure by focusing only on repairing and modernising projects.
• Implementing a strong policy to reduce net working capital.