· PDF fileSTRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS...
Transcript of · PDF fileSTRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS...
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
3Severstal
Annual Report 2017
Table of contents
Strategic report 4
Severstal at a Glance 6
Chairman’s Review 10
Strategy and Business Review 12
CFO’s Review 18
Market Trends 20
Risk management 22
Divisional review 26
Responsibility 32
Our commitment to sustainable development 34
Health and Safety 35
Environmental Protection 36
Social investment 37
Talent development 39
Corporate Governance 42
Board of Directors composition 44
Corporate Governance Statement 50
Board committees and reports from their chairs 56
Financial Statements 62
Auditor’s Report 64
Consolidated income statements 68
Consolidated statements of comprehensive income 69
Consolidated statements of fi nancial position 70
Consolidated statements of cash fl ows 71
Consolidated statements of changes in equity 72
Notes to the consolidated fi nancial statements 73
Additional information 132
Additional information 134
Appendix 136
Appendix 138
Contacts 143
1.
2.
3.
4.
5.
6.
17,848 (33%) 2016: 5,916Revenue
2,162 (43%) 2016: 1,517Profit from operations
2,577 (35%) 2016: 1,911EBITDA
1,393 (36%) 2016: 1,021Free Cash Flow
1,914 (30%) 2016: 1,477Net cash from operating activities
US$ million
STRATEGIC REPORT
Strategic report 4Severstal at a Glance 6Chairman’s Review 10Strategy and Business Review 12CFO’s Review 18Market Trends 20Risk management 22Divisional Review 26
We use certain alternative performance measures
(“APMs”) in this Annual Report that are used by
management to assess the underlying performance
of the business and as information in recommending
dividends. EBITDA, which is widely used in the industry,
represents profi t from operations plus depreciation and
amortisation of productive assets (including the Group’s
share in depreciation and amortisation of associates
and joint ventures) adjusted for gain/(loss) on disposals
of PPE and intangible assets and for share in associates’
and joint ventures’ non-operating income/(expenses).
A reconciliation of Operating Profi t to EBITDA is set
out in the Appendix. Free Cash Flow is used by the
Board of Directors, in conjunction with Net Debt (being
Total Debt Finance less Cash and Cash Equivalents)
as a guide in recommending dividend payments.
Free Cash Flow is determined as the aggregate amount
of the following items: Net cash from operating
activities from continuing operations, CAPEX, proceeds
from disposal of PPE, interest received and dividends
received. A reconciliation of Free Cash Flow to Net cash
from operating activities is set out in the Appendix.
STRATEGIC REPORT
STRATEGIC REPORT
6Severstal
Annual Report 2017
Severstal at a Glance
PAO Severstal (“Severstal”, “the Company”, or “the Group”) is a vertically integrated
steel and steel-related mining company with its major assets located in Russia
and investments in other regions. The Company was founded in 1955 at the
Cherepovets Steel Mill in Russia. Severstal’s strategy is to maximise shareholder value
by building a healthy and high-quality business that generates higher than market
average earnings throughout the economic cycle. The Company comprises two major
operational divisions: Severstal Resources and Severstal Russian Steel.
Severstal ResourcesSeverstal’s mining assets are a fundamental part of the
Company’s vertically integrated business model. Severstal
Resources supplies almost all of the iron ore and approximately
60% of the hard coking coal consumed by Severstal’s steel
business, while also selling signifi cant volumes to external
customers both in Russia and abroad.
Severstal Russian SteelThe Company’s core asset is the Cherepovets Steel mill, one
of the lowest cost steel mills in the world, strategically located
near to the Company’s mining operations, the Baltic ports and
Russia’s industrial heartland. Severstal Russian Steel is a leading
Russian steel producer. The division has a broad product portfolio,
comprising a majority of high value-added fl at steel products
and increasing volumes of long products for construction and
downstream sales.
Vorkuta
Olenegorsk
Yakovlevskiy Mine
Kostomuksha
St. Petersburg
Vsevolozhsk MoscowKaluga
Orel
CherepovetsSheksna
Balakovo
Volgograd
Kolpino
Severstal’s share capital structure
A.Mordashov – 77.03%
Free float – 20.15%
Treasury shares – 2.82%
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
7Severstal
Annual Report 2017
Listing and tickers
Moscow Exchange (MICEX) – CHMF GDRs on the London Stock Exchange (LSE) – SVST
Indexes
Index Weight*
RTS 1.38 %
MICEX 1.38 %
MSCI Russia 1.78 %
FTSE Russia IOB 2.10 %
Russian Depositary Index 1.54 %
Bloomberg World Iron/Steel Index 2.64 %
* as at 11 December 2017
Credit ratings
Standard&Poor’s Moody’s Fitch Ratings
PAO Severstal Credit Rating/Outlook BBB-/Stable Baa3/Positive BBB-/Stable
Date of Rating** 20 September 2016 29 January 2018 20 October 2016
** “Date of Rating” does not refl ect subsequent confi rmations
Our key performance indicators remain the same, we will add Total Shareholder Return
(TSR) during 2018
Target Current progress Track record
Safety Eliminate all fatalities LTIFR for 20170.96
Customer careLead in Russia in level of service and
qualityA comprehensive system in place
Customer
satisfaction* with
Q4 2015
Q3 2017
Cost positionMiddle-to-the-left position for all our
assets on the cost curveOn integrated basis: Achieved
HR
C c
ost
, $/t
*
* World Steel Dynamics, 2016
cost position
EBITDA margin>20%
through the cycle32.8% for 2017
32.8%
Smart CAPEX Below $1 bln/year $591 mln of cash CAPEX for 2017
$591m$439m $525m
Free cash fl ow Always positive through the cycle $1,393 mln for 2017
$1,021m$1,552m
$1,393m
Dividend payoutUp to 100% FCF if
Net debt/EBITDA is below 1.0x**$1.5bn paid*** in 2017
$1.6b
$0.7b $1.0b $0.9b$1.4b$1.5b
Low debt Net debt/EBITDA <1.5x 0.4x at the end of 2017
* Severstal analysis, quarterly and annual reports. ** Dividend policy: Not less than 50% of the net profi t for the reporting period provided that Net debt/EBITDA is below 1.0x. Should the ratio increase to higher
than 1.0x, Severstal would return to its previous dividend payout of 25% of net profi t. *** The majority of cash out for: Q4 16, Q1 17, Q2 17, Q3 17 dividends paid in 2017, subject to FX.
STRATEGIC REPORT
8Severstal
Annual Report 2017
More of 2017 in Figures & Charts
Operational performance, million tonnes 2017 2016 Change, %
Steel products (Consolidated) 10.9 10.7 2%
Coking coal concentrate 3.3 4.1 (20%)
Iron ore pellets 11.1 10.8 3%
Iron ore concentrate 4.3 4.1 5%
Financial performance
Profi tability highlights, million US$
EBITDA EBITDA margin Revenue
20172016 20172016 201720162015 2015 2015
6,3965,916
7,848
2,096 2,577
32.8% 32.8%
1,911
32.3%
Working capital dynamic and smart CAPEX*, million US$
NWC as at the end of the periodCAPEX*
20172016 201720162015 2015
439 525591
491
830
578
* Consisting of cash outlays for purchases of property, plant and equipment and intangible assets
Working capital turnover, days NWC/Revenue, %
57
Q1 16
51
37
Q1 15 Q2 15
32
Q3 15
60
Q4 15
40
Q2 16
44
Q3 16
32
15.7%
14.0%
10.1%8.8%
16.5%
11.0%12.0%
8.8%
12.9%11.8%
10.8%9.5%
Q4 16 Q1 17
47 43
Q2 17
39
Q3 17
35
Q4 17
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
9Severstal
Annual Report 2017
Sustainable Free Cash Flow generation, million US$
Other adj.
to FCF
(439)
1,867
124 1,552
Other adj.
to FCF
Other adj.
to FCF
(525)
1,477
OCF
2016
69 1,021
FCF
2016
Capex*
2016
OCF
2015
FCF
2015
Other adj.
to FCF
(591)
1,914
OCF
2017
70 1,393
FCF
2017
Capex*
2017
Capex*
2015
* consisting of cash outlays for purchases of property, plant and equipment and intangible assets
Clear dividend policy and sustainable returns, RUB
50.00
40.00
30.00
20.00
10.00
00.00
60.00
1.89
FY
2012
0.43
Q1
2013
2.03
Q2
2013
2.01
Q3
2013
3.83
FY
2013
2.43
Q1
2014
2.14
Q2
2014
54.46
Q3
2014*
14.65
FY
2014
12.81
Q1
2015
12.63
Q2
2015
13.17
Q3
2015
20.27
FY
2015
8.25
Q1
2016
19.66
Q2
2016
24.96
Q3
2016
27.73 27.72
FY
2016
24.44
Q1
2017
22.28
Q2
2017
35.61
Q3
2017
FY
2017**
* Q3 2014 dividends include special dividends
** to be approved at AGM
Debt maturity schedule*, million US$
880
2022+
563
11
701
2018 2019 2020 2021
* Debt represents the principal amount of debt. Figures exclude accrued interest and unamortised
balance of transaction costs.
Net debt, Net debt/EBITDA, million US$
2,727
1Q 17
788
2,722
2Q 17
827
2,693
3Q 17
703
4Q 17
1,062
2,013
4Q 16
859
Total debt, $m Net debt, $m Net debt/ EBITDA, x
0.3x
0.4x0.4x 0.4x 0.4x2,093
STRATEGIC REPORT
10Severstal
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.
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
11Severstal
Annual Report 2017
Strength throughout the cycleThis year was marked by industry-wide challenges, as raw
materials prices fl uctuated and overcapacity continued to weigh
on steel prices. China’s commitment to closing ineffi cient 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 effi ciency,
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 fl exible 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
profi table steel companies in the world.
Consistent strategy powered by innovationSeverstal’s ongoing focus on cost discipline and effi ciency
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 signifi cant
driver in enhancing our overall performance and customer service.
As presented at our 2017 annual Capital Markets Day, the Board
has identifi ed 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 fi rmly committed as well to the already time-tested
optimisation initiatives to maintain our competitive low cost
position.
Returns to shareholdersIn 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
fl ow to shareholders, with total cash outfl ow 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 SafetyWhilst delivering shareholder value is our primary fi nancial
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 governanceThrough ongoing innovation, steel is becoming cleaner, lighter
and more effi cient 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 BoardI 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.
PeopleAt 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.
OutlookIn 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
defi nitive 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 effi cient, 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 MordashovChairman of the Board of Directors
STRATEGIC REPORT
12Severstal
Annual Report 2017
Strategy and Business Review
Dear Shareholders,
I am pleased to report that in 2017 Severstal has
once again maintained its position as a global
leader in value creation. Severstal’s high quality assets
and vertically integrated business model continue to
underpin our performance, as our industry leading
margins are driven by a strategic focus on maximising
effi ciencies across our business.
As a company, we are constantly striving to do more,
better, and in June 2017 we were pleased that Severstal
was recognised by World Steel Dynamics as one of
the world’s most competitive steel companies, having
climbed four places since the previous year.
Our strategy is fully focused on driving total shareholder
returns (TSR) and once again this year we have
continued to deliver highly competitive returns through
the generation of strong free cash fl ow and earnings.
Severstal remains committed to paying high dividends
through the cycle. Operating responsibly to create value
for all of our stakeholders is our priority, and so alongside
our fi nancial performance we work to ever improve our
results in ESG (environment, social and governance),
including sustainability and our impact on the
communities in the regions where we operate.
Critical to our ongoing success is an unfaltering focus
on ideas and innovation. In a highly competitive industry
with many challenges, steel producers need to adapt
and innovate. Severstal aims to be a leader in this area
and for 2017 our CAPEX included 1.7 billion roubles in IT
and digital projects. These projects will drive increasing
effi ciencies across the business, enhance our customer
service and deliver new products to continue to support
our margins across the industry cycle. Severstal has
developed a strong digital team dedicated to trialing
and introducing the latest international technologies as
well as developing advanced digital solutions in-house.
Thank you for your continued trust!Sincerely yours,
Alexander ShevelevChief Executive Offi cer
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
13Severstal
Annual Report 2017
Severstal’s business modelSeverstal is a vertically integrated steel and steel-related mining company with its major assets located in Russia.
The Company is self-suffi cient in raw materials which are supplied by its Resources assets (coking coal and iron ore mines) located in close
proximity to Severstal’s steel production plants. Today, the Company has c. 60–65% self-suffi ciency in coal and more than 100% in iron
ore, selling high value-added pellets to the market. This model means that the Company has a hedge against volatile raw materials prices
throughout the year, to support our industry-leading margins.
Maintaining high margins through the cycle
0
50
100
150
200
250
300
350
400
Q4
15
Q3
15
Q2
15
Q1
15
Q4
14
Q3
14
Q3
16
Q2
16
Q1
16
Q4
16
Q2
17
Q1
17
Q3
17
Q4
17
Contribution of Severstal Resources division to the integrated costs
Cash cost of slab on an integrated basis
EDITDA, margin, %
share of HVA, %
280
47
203
52
169
45
212
47
176
30
164
39
153
24
179
42
180
33
194
56
240
83
237
97
241
61
243
78
53% 52%
46% 47% 47% 47%42% 43% 42% 40% 44% 44%
49%
28%
32% 38% 33%
32% 29%25%
33%37%
32% 33% 33% 31%
47%
35%
Whilst the Company is predominantly focused on supplying
steel products to the domestic market, Severstal also exports to
c. 70 countries. The Company’s steel assets are competitively
positioned near to the key steel consuming regions of Russia as well
as to Severstal’s export markets. This also provides the Company
with fl exibility to be able to shift sales volumes between domestic
and export markets depending on market dynamics and to benefi t
from pricing premiums resulting from currency fl uctuation.
The Company produces a broad portfolio of steel products and is
focused on expanding this further to deliver high value products that
meet the changing needs of its customers. Severstal builds long-term
customer partnerships and is therefore committed to constantly
improving product quality, supply discipline and service quality.
Severstal has a highly-disciplined approach to capital expenditure.
Company investment projects are planned over long-term periods and
each must meet the strict internal rate of return of 20%, or deliver
a predetermined level of quality or environmental enhancement.
Severstal’s robust business model enables the management team
to focus on maximising free cash fl ow and generating higher than
market average earnings throughout the economic cycle, which
is demonstrated in graphic form above. This in turn supports
the regular distribution of competitive dividends, in line with the
Company’s dividend policy.
STRATEGIC REPORT
14Severstal
Annual Report 2017
Severstal’s Business Model
Inputs Strategy and success factors Business Segments Value Creation
• Stakeholders (investors,
business partners, workforce,
society)
• High standards of
corporate culture and
Severstal’s values
• Unique production assets
and geographical location
• Vertical integration (60% in
coking coal, 115% in iron ore
and 80% in electricity)
• Effective and innovative
business processes
Severstal aims to maximise its value for all stakeholders by:
• Safe operations
• Providing sustainable
growth of the business and
dividend payout.
• Maintaining low cost
position (left bottom side
of the cost curve) and high
share of HVA in product
portfolio (46%)
• Smart CAPEX allocation
• Keeping the balance sheet
strong (low debt and
effective working capital
management)
• Commitment to best ESG
(environment, social and
governance) practices
Severstal Russian Steel (Crude Steel Production 11.7 mt => Steel Product sales 11.0 mt). refer to divisional performance (page 29)
• Cherepovets Steel Mill
• Izhora Pipe Mill
• Mini-Mill Balakovo
• Severstal-Metiz
• Downstream production
assets
• Trading companies
Severstal Resources (Coking Coal Concentrate sales 3.3 mt, Iron Ore Concentrate sales 4.3 mt, Iron Ore Pellets sales 11.1 mt) refer to divisional performance (page 26)
• Vorkutaugol
• Karelsky Okatysh
• Olkon
• Yakovlevskiy Mine
• Financial capital (refer to
Financial Highlights Section
and KPI) (page 8)
• Natural, Social and
Human capital (refer to
Sustainability Section)
(page 34)
• Business capital (refer
to CEO strategy update)
(page 12)
• Shareholder capital
(page 134)
Severstal’s strategy – focus on innovation and effi ciency leadership, prudent investments and customer careSeverstal’s strategy is focused on maximising shareholders’ value
by ensuring that the Company remains one of the most profi table
producers in the industry, generating sustainable higher than
average earnings throughout the economic cycle. The Company’s
ability to generate strong free cash fl ow allows it to return
attractive dividends to shareholders. In addition, Severstal is
committed to best in class governance, health and safety and
sustainability, including reducing our impact on the environment.
In 2017 the Company launched a major innovation programme
focused on delivering growth without signifi cantly increasing
production scale (the Company operates at consistently close to
100% capacity utilisation). The programme includes three key areas:
– Product innovation;
– Process innovation;
– Business model innovation.
We believe this will create an even better platform for future
business development and sustainable growth. For 2018,
Severstal plans to deliver up to an additional US$350 million
to its EBITDA as a result of its enhanced sales and marketing
strategy, selective production growth and operational effi ciency
programmes which include innovation, digital and smart
procurement initiatives.
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
15Severstal
Annual Report 2017
All initiatives, including innovations, potentially may deliver up to an additional
US$350 million to Severstal’s 2018 EBITDA
+ $8m
+ $1m
+ $30m
STEEL
STEEL
STEEL
IRON ORE &
PELLETS & COAL
PELLETS
PELLETS
COAL
IRON ORE
+ up to $63 mln
2) Volumesgrowth
+ up to $125 mln
+$37m + potential
$88m
3) Operationalefficiency
+ up to $162 mln
+$123m + potential
$39m
1) Sales &marketing
+ up to $33m
Market structure. Domestic demand
improvement. Keep market share
+ up to $7m
Product structure. HVA mix improvement
(excl. HDG & CC)
+ up to $79m
Price efficiency
+ up to $4m
Share of HVA pellets up
from 52% to 55% in total sales
Yakovlevksy Mine to increase its iron ore
concentrate output (current ~1mtpa)
+370KT of coking coal concentrate volumes
+40KT to the total pellet output
+75KT of crude steel due to new ladle furnace
+200KT New colour-coating line
+400KT New HDG line
Metalware product sales growth
– New ladle furnace: lower consumption
of raw materials
– Upgraded sinter machines reduce costs
– Self-sufficiency in energy increased to 78%
Smart procurement + Digital +
Process Innovations
Efficiency gains + CAPEX gains
+ $13m
+ $7m
+ $10m
+ up to $13m
Premium clients
programme
+ up to $20m
Back to EU HRC market
+ up to $20m
LDP, stripe and other tubes
marketing
+ up to $10m
Product innovations
+ up to $16m
Export & domestic
markets diversification
Effect being estimated
+ up to $36m
+ up to $4m
+ up to $2m
+ up to $11m
+ up to $10m
+ up to $14m
+ potential $88m
+ up to $23m
Adding up to$350* mln
to 2018 EBITDAUpside potential
* All fi gures are preliminary Сompany estimates. Actual results may vary signifi cantly.
Supported by our focus on digital and innovation, the Company
constantly works to progress fi ve key pillars of its strategy:
customer care, cost effi ciency leadership, smart capex, health and
safety and people and sustainability.
1. Health and Safety and People
Severstal is committed to eliminating 100% of fatalities across
the business and constantly improving the health and safety
standards at all of our assets. The Company’s health and safety
strategy is overseen by the Board of Directors’ Health and Safety
Committee who ensure the Company’s practices progress in line
with the highest global standards.
Loss Time Injury Frequency Rate (LTIFR) is a key metric against
which the management’s performance is measured and we invest
heavily every year in improving health and safety procedures and
upgrading equipment. Increasingly, we are automating operating
machinery to reduce the human factor and risks that are inevitably
associated with heavy industry.
The real key to Severstal’s success, at every level, is the corporate
culture that unites a talented and ambitious workforce. Our
business is founded on our people, whose commitment, skill
and new ideas constantly drive the Company to achieve more,
together. For this reason, we ensure that each individual is offered
the best professional training to take their careers at Severstal
to the highest level.
Key achievements in 2017 – Health and Safety and PeopleSince the tragic accident at the Severnaya mine in February 2016,
work on testing and optimising the safety processes at all of our
assets has been ongoing to ensure that all of our systems are
secure and such an incident is highly unlikely to occur again.
We did not have any fatalities in 2017 amongst Severstal
employees. Sadly three individuals working for Severstal’s
contractors lost their lives. We are helping to investigate these cases.
Severstal’s Young Resources programme continued to go from
strength to strength. The programme works with university and
high school students to develop future talent for the steel industry.
Read more about Severstal’s health and safety initiatives and
talent development on page 35.
2. Customer care
Severstal’s customer care initiatives fall into three key areas of
focus:
• Product quality;
• Supply discipline;
• Service quality.
Supply
Customer
care
QualityService
STRATEGIC REPORT
16Severstal
Annual Report 2017
Key achievements in 2017 – Customer
CareIn January, we announced the upgrade of Severstal’s online shop
targeting online sales of 3.5 million tonnes by 2018. Customers
can now order steel from storage facilities in 44 regions and
choose from a selection of delivery locations. A key benefi t of
the portal is that it has enabled us to considerably enhance our
customer outreach and feedback capabilities. As a result, we are
more alert to potential issues, can better anticipate changing
market demand and effi ciently deliver product innovations that
meet our clients’ changing requirements.
Severstal has continued to make signifi cant progress in its
customer quality satisfaction indicator since the end of 2015,
which is a measure of product and service quality, as well as
reliability.
47%
Quality
88%
46%
32%
79%
55%
Reliability Service
Q4 2015* Q3 2017**
* First available data
** Latest available data
For Severstal’s commodity products, which have a diversifi ed
customer base and numerous purchases every month, Severstal
employs simple forecasts in planning its production cycle
to improve lead-times without building up inventories. For clients in
the automotive segment, who demand considerably lower volumes
of specifi c higher value-added steel products, the Company’s
production planning method is more complex.
Severstal’s online shopping platform helps to support proactive
and regular engagement with customers, which is key to
ensuring Severstal continues to meet their evolving needs by
better understanding the balance between price and non-price
factors affecting customer decisions. Another aim is to make
communications between Severstal and its customers ever
easier and more transparent from product order to delivery and
aftersales service. Ongoing client feedback enables Severstal
to enhance and adapt its customer service tools to satisfy our
customers’ requirements.
3. Cost and effi ciency leadership
Severstal’s strategy is focused on enhancing product quality
rather than increasing scale of production, enabling us to
generate higher earnings per tonne of product. We are focused on
creating incremental value through ongoing effi ciency and cost
control improvements to offset industry risks and maintain our
competitive position in the market.
Key achievements in 2017 – cost and effi ciency leadershipInitiatives within Severstal’s Business System continued to drive
operational and organisational excellence along the business’
entire value chain, including improving customer satisfaction
and promoting a safety-conscious culture. The Business System
has primarily focused on a culture change within the Group’s
production departments in order to achieve cost reductions,
improve working conditions and industrial safety, and enhance
product quality.
The Company believes that the Business System has established a
working environment within Severstal that is both ambitious and
collegiate, and more receptive to change and the adoption of new
best-in-class business-processes.
By creating incremental value through further effi ciency
improvements and cost control projects, Severstal maintains a
leading competitive position against peers and offsets market
risks. Severstal has already achieved a position on the left of the
cost curve and aims to keep this favourable position by delivering
continuous improvement.
Severstal’s Business System ensures that the Company is
constantly innovating to achieve greater effi ciency across its
operations.
Leading cost position***
$350
$400
$450
$300
$250
$200
$650
$600
$550
$500
1000 200 300 400 500 600
Severstal
Mln tonnes
HR
C c
ost
S/t
*** World Steel Dynamics, 2016
In 2017 the Company continued to make progress on its
operational effi ciency programmes:
Iron ore – Tailings thickening at Karelsky Okatysh.
– Modernisation of mining transport and equipment.
– A new steeply inclined conveyor.
– Ideal shift programme (no idle time, no product losses).
– Improved quality of iron ore concentrate to 67.5% without
reducing volumes.
– Ongoing centralisation of managerial functions, with Karelsky
Okatysh bringing synergies, savings, growing the share of HVA
pellets in our sales portfolio.
– Energy cost control.
Coking coal – Stabilisation of mining volumes at Vorkutaugol. Severstal
will increase its vertical integration in iron ore from the current
level of 60% to 65% in 2018, refl ecting volume growth in
2018 and the completion of repositionings in 2017.
– Volumes to increase by 370 kt and stabilise in 2018.
– Vorkutaugol: new ventilation & degassing methods. Increase
output by ~50 kt/month (mines operating at Seam #4).
– Vorkutaugol: debottlenecking of the raw coal lifting
mechanism.
Steel – Launched second ladle furnace in 2017. Cost savings of
~700 million RUB/year.
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
17Severstal
Annual Report 2017
– Renovation of coke battery #4 at Cherepovets (2016–2018).
Effect: higher coke quality, more environmentally friendly
operations.
– Refurbishment of blast furnace #5 at Cherepovets (2017–
2020). Effect: less consumption of coke and sinter, higher
quality of pig iron, more environmentally friendly operations.
Severstal continued to develop its Expert Network programme
across all of the Company’s assets – 12 communities of
professionals (800 experts) are participating in operational
effi ciency and production process optimisation. In 2017,
2,500 initiatives were put forward by the Expert Network.
We believe that investing in machine learning and predictive
analytics today will deliver signifi cant and ongoing effi ciency
enhancements in the future. In 2017, Severstal was particularly
proud to announce the creation of the biggest data lake in
Russian industry, using technology supplied by Microsoft and
Lenovo. With two petabytes of capacity, the facility enables us
to collect, store and analyse operational statistics. The stored
data will support predictive analytics projects in areas including
predictive equipment maintenance and product quality
optimisation as well as other areas where artifi cial intelligence
can improve effi ciency.
In June 2017, we worked with Sberbank to develop blockchain
technology enabling Severstal to securely transfer international
letters of credit to suppliers and clients. The service is the fi rst of its
kind developed in Eastern Europe and signifi cantly reduces the
timeframe of each transaction, whilst improving transparency.
4. Smart capital expenditure
Our strategy is supported by a prudent approach to investments
which is fl exible to market conditions.
In 2018, Severstal will be more focused on hot-end projects
to improve product quality and support further operational
effi ciencies.
In 2017, Severstal successfully completed construction of the
Second ladle furnace and colour-coated and galvanized lines, and
launched the coking Battery #4 modernisation project.
Project Description/Effect Period Status CAPEX estimate, US$ mln
New HDG & coating line Capacity increase: HDG – 400,000 tonnes, coating – 200,000 tonnes 2016–2017 Finished 120
Second ladle furnace Cost & quality improvements 2017 Finished 50
Coking Battery #4 Scheduled reconstruction 2016–2018 In progress 100
BF#3 Construction 2021 In progress 500
New Coking Battery #11Replace batteries #8 & #9 before their scheduled reconstruction,
improve coke quality/cost2019–2022 Evaluation 500
5. Sustainability
As part of Severstal’s focus on operating sustainably and
maximising shareholders’ value, the Company is committed to
reducing its environmental footprint, conserving energy and
using natural resources in a responsible manner. In addition,
Severstal continues to support a positive social climate in the
regions where it operates and annually invests in the development
of infrastructure, education, culture and sport. To support
progress in its sustainability objectives, Severstal intends to
further enchance its reporting on ESG (environment, social and
governance).
Key achievements in 2017 – sustainabilityWe were pleased to note that in 2017 Severstal was named
the Russian industry leader for environmental transparency
by Interfax-ERA, the ecological and energy agency.
A number of further energy generator upgrades enabled the
Company to increase its energy generation self-suffi ciency to
c. 80%.
Severstal continued its work to actively rehabilitate the
environment and improve water recycling, fast-track soil
recultivation and plant new trees in the regions where it operates.
You can read more about our approach and what we have
delivered on page 34.
OutlookGlobal steel demand growth was approximately 2.8% for
2017 according to World Steel. Russian steel consumption exceeds
our expectations – we expect growth of 5–6% to about 40 million
tonnes which will be the fi rst year of growth after several years of
decline the domestic market. We hope that 2018 pricing will be
supported by global demand growth and further capacity cuts in
China, but we expect some softening of steel prices in 2018. Steel
demand in Russia will continue to grow 3–4% in 2018.
Prices remain extremely volatile however we are confi dent that
our integrated business model and high share of HVA will continue
to support our margins through the cycle, building on our track
record.
We are also confi dent that Severstal’s transformation programme,
including our enhanced sales and marketing strategy, selective
production growth, innovative operational effi ciency programmes,
digital and smart procurement initiatives will create a platform for
continued business growth in the future.
STRATEGIC REPORT
18Severstal
Annual Report 2017
CFO’s Review
Dear Shareholders,
In 2017 Severstal once again delivered a strong fi nancial
performance amid challenging industry conditions.
Severstal is a fully vertically integrated producer with
strict fi nancial discipline. We are focused on delivering
long-term shareholder value and industry-leading total
shareholder returns (TSR), and our success is driven by a
strategy committed to enhancing effi ciency, customer
care and long-term sustainability. In turn, progress in
these areas is underpinned by our commitment
to innovation and new technology and Severstal’s
fundamentally strong business model.
We are focused on achieving:
• Industry leading EBITDA margins through
effi ciency improvement and cost management;
• Positive free cash fl ow;
• Controlled, prudent and disciplined CAPEX;
• A strong balance sheet with low debt levels;
• Returning value to shareholders in the form of
dividends.
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
19Severstal
Annual Report 2017
Industry leading EBITDA marginsIn 2017, the Group achieved revenues of $7,848 mln,
benefi tting from the strengths of our growing product portfolio
and well positioned, high quality production assets. This
represented an increase of 33% compared with prior year and
refl ected industrywide challenges of rising and fl uctuating steel
prices, as well as improvement in demand. Meanwhile, Severstal
achieved capacity utilisation close to 100% across its assets
throughout the year. Severstal’s vertical integration enables us
to optimise our cost base irrespective of market conditions. In
2017 we were able to mitigate the impact of fl uctuating raw
material prices over the year, and our assets remain positioned
fi rmly on the left hand side of the industry cost curve. During
the year we delivered further effi ciency improvements across our
assets to further strengthen our margins. Although a substantial
share of the Group’s production and administrative costs are
rouble-denominated, short-term rouble fl uctuations have a
broadly neutral effect on our EBITDA as usually our rouble revenue
approximately matches our rouble-denominated costs. Full year
EBITDA was $2,577 million, an improvement of 35% compared
with the previous year. The Group targets a cycle-average EBITDA
margin of c.20% and in 2017 we once again exceeded this target,
achieving an EBITDA margin of 33%, which remains one of the
highest in the global industry.
Maintaining stable positive Free Cash FlowFree cash fl ow generation is one of the Group’s strategic
priorities for delivering value to its shareholders and maintaining
a strong balance sheet. In 2017 we achieved free cash fl ow
of $1,393 million, compared with $1,021 million in 2016. The
Group works proactively to offset steel and raw materials
price volatility throughout the year through focusing on working
capital management and cost optimisation. This is supported by
our vertically integrated model and broad product portfolio, which
enables us to consistently generate strong free cash fl ow.
Smart CAPEX – mid-term target not exceeding $1.0 billion per yearThe Group has a consistently prudent approach to all investments,
with all projects required to meet an internal ROI target of
20%, and CAPEX is covered by operating cash fl ow. In 2017,
the Group’s overall CAPEX was $591 million, covering a number
of internal investment projects (including a new ladle at furnance
#2 a galvanized and colour coated lines unit and modernisation of
coke batteries).
Strong balance sheet with low debt levelsThe Group is focused on maintaining a low level of debt, which it
has signifi cantly reduced over the last few years. The Group’s
Net debt/EBITDA ratio stood at 0.4x as at the end of 2017. Our
ongoing target is a Net debt/EBITDA ratio below 1.5x. Severstal’s
gross debt reduction strategy is largely maturity driven and almost
all of the Group’s gross debt at the end of 2017 was public debt.
Cash in hand and unused committed credit lines cover several
years of debt maturities. The Group continues to proactively
manage its debt profi le, and in 2017 it placed a $250 million
Senior Unsecured Convertible Bonds due in 2022 with a coupon
rate of nil% and $500 million Eurobonds due in 2021 with a
coupon rate of 3.85%. We were particularly pleased to have
been able to achieve such low interest rates refl ecting high
demand from investors and positive image of Severstal as a
trusted investment. Severstal continues its work with credit rating
agencies to enhance our position in the capital markets.
M&A activitySeverstal takes a prudent approach to M&A activity and evaluates
potentially value-enhancing opportunities on a case by case basis.
In 2017 the Group sold Redaelli Tecna S.p.A., a non-core asset, for
37 million euro ($40 million). The sale will allow Severstal-Metiz to
focus on its Russian assets and enhance its effi ciency.
In 2017, Severstal acquired rights to claim debt obligations of
Metal-Group LLC, worth 19.9 billion roubles (including principal,
interest and penalties). Severstal paid 6 billion roubles as part
of the transaction. The Yakovlevskiy mine produces very high
grade iron ore (Fe content is up to 61%) which will increase the
quality of the Company’s overall iron ore concentrate production
and strengthen its position in the domestic iron ore market.
DividendIn line with our commitment to delivering value to our
shareholders, Severstal targets dividend payments of 100%
of quarterly free cash fl ow, provided that net debt/EBITDA is
below 1.0x. For 2017 the total accumulated dividend returned
to shareholders was $1.5 bn (for 2016: $0.9 bn) refl ecting a
favourable pricing environment in 2017 and management’s
commitment to maximising shareholder value.
Sincerely yours,
Alexey KulichenkoChief Financial Offi cer
STRATEGIC REPORT
20Severstal
Annual Report 2017
2017 saw growth in global steel and raw materials markets driven by several fundamental improvements: synchronized global economic
growth, the devaluation of the USD, increasing steel demand both in China and globally, continuing steel capacity cuts in China and the
slow reaction of supply to higher prices due to production limitations.
In 2018, with global economic growth forecast to continue and support increasing steel demand, steel margins are expected to gradually
decline to more sustainable levels. Chinese steel consumption will be stable y-o-y, while China will maintain its environmental restrictions
on steel production. Analysts forecast an increase in supplies of raw materials.
The Russian economy is set to trend in line with 2017: gradual economic and steel demand recovery, low infl ation, decreasing interest
rates and marginal rouble depreciation. Meanwhile, developed economies will face bubble risks. Monetary tightening in the USA and a
stronger USD could present a challenge to the stability of developing countries.
Steel analysts believe that China’s programme to cut electric arc furnace and basic oxygen furnace capacity is progressing in line with
government targets, and all induction furnace capacity has now been shut down. China’s total carbon crude steelmaking capacity fell to
around 1,020 Mt.
China’s campaign to tackle air pollution by addressing overcapacity in the steel industry has benefi tted steel producers. It has boosted
margins, restoring hope that the era of cheap steel is drawing to a close. Further transformation of China’s steel industry, including further
capacity cuts over the winter, is likely to offset slowing demand. Reduced capacity will lead to higher levels of utilisation, this will increase
marginal costs and steel prices. Sberbank CIB, Sep 2017.
Hard coking coal, FOB Australia, $/tn• Coking coal prices currently exceed marginal costs for producers
• Steady demand for coal is being driven by high levels of steel production in China and a stronger steel margin
$50
$100
$150
$200
$250
$300
$350
Jan
16
Fe
b 1
6
Ma
r 1
6
Ap
r 1
6
Ma
y 1
6
Jun
e 1
6
July
16
Au
g 1
6
Se
p 1
6
Oct
16
No
v 1
6
De
c 1
6
Jan
17
Fe
b 1
7
Ma
r 1
7
Ap
r 1
7
Ma
y 1
7
Jun
e 1
7
July
17
Au
g 1
7
Se
p 1
7
Oct
17
No
v 1
7
De
c 1
7Chinese government announced reduction of working days for mines from 330 to 276 per year
Harsh weather conditions and accidents on mines in China and Australia resulted in a sharp coal deficit
China weakens policy of 276 working days for all mines
Australian Cyclone Debbie
Contract prices for 2Q were first determined on the basis of spot prices
Reconstruction of damaged railways after cyclone Steel prices growth and
short-term reductions of coal supply
Increased demand for high grade coking coal by Chinese steel mills ahead of heating season and support from port delays at Dalrymple Bay (Australia)
Source: Bloomberg
• HCC spot prices are expected to decline in 2018 refl ecting Chinese production cuts in Q4 2017 and Q1 2018 to curb emissions, as
well as signifi cant supply disruptions in 2017 (storm Debbie) and high prices in Q1 2017 (reaction to the Chinese 276 days policy). In
addition, stalled growth in Chinese steel demand in 2018, new capacity expansions (Mozambique, Australia) and seaborne marginal
costs at $110/tn will put pressure on prices.
• Meanwhile, prices will be supported by: growth in global steel production, increasing costs for Chinese coal producers, the restructuring
of the Chinese coal industry, voluntary supply restrictions and higher demand for coal following the closure of illegal induction
furnances in China.
Market Trends
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
21Severstal
Annual Report 2017
Iron ore, Fe 62% CFR China, USD/tn• Iron ore prices are supported by high levels of steel production in China
$40
$50
$60
$70
$80
$90
$100
Jan
16
Fe
b 1
6
Ma
r 1
6
Ap
r 1
6
Ma
y 1
6
Jun
e 1
6
July
16
Au
g 1
6
Se
p 1
6
Oct
16
No
v 1
6
De
c 1
6
Jan
17
Fe
b 1
7
Ma
r 1
7
Ap
r 1
7
Ma
y 1
7
Jun
e 1
7
July
17
Au
g 1
7
Se
p 1
7
Oct
17
No
v 1
7
De
c 1
7
Source: Bloomberg
The price of iron ore is expected to decline from an estimated $74/tn in 2017 to $57/tn in 2018 due to:
• Steel production restrictions in Q4 2017 and Q1 2018 in China for environmental reasons
• Increasing supply from Big-4 (Vale’s S11D, Australia) and other producers, with seaborne marginal costs estimated at $55/tn
• Possible tightening of credit conditions in China following the 19th CPC summit
• No growth in Chinese steel demand in 2018
• High iron ore inventories in China
Factors supporting prices are:
• Global steel production growth in 2017–2018
• Higher demand for iron ore following the closure of illegal induction furnaces in China
• Demand for high quality iron ore in China to satisfy environmental standards
Russian steel prices are expected to decline from an estimated $520/tn in 2017. Fundamental factors such as anticipated iron ore and
HCC price reductions, possible tightening of credit conditions in China following the 19th CPC summit and a forecast of no growth in
Chinese steel demand in 2018 will likely result in a decline in steel prices.
At the same time, several factors will provide some support to steel prices: production restrictions in Q4 2017 and Q1 2018 in China
to reduce environmental emissions, global steel demand growth, capacity cuts in China and lower supply following the closure
of illegal induction furnances in China.
Infl ation and CBR rates declineMonetary Policy Rate | in%
5%
7%
9%
11%
13%
15%
17%
19%
Jan
16
Fe
b 1
6
Ma
r 1
6
Ap
r 1
6
Ma
y 1
6
Jun
e 1
6
July
16
Au
g 1
6
Se
p 1
6
Oct
16
No
v 1
6
De
c 1
6
Jan
17
Fe
b 1
7
Ma
r 1
7
Ap
r 1
7
Ma
y 1
7
Jun
e 1
7
July
17
Au
g 1
7
Se
p 1
7
Oct
17
No
v 1
7
De
c 1
7
Jan
14
Fe
b 1
4
Ma
r 1
4
Ap
r 1
4
Ma
y 1
4
Jun
e 1
4
July
14
Au
g 1
4
Se
p 1
4
Oct
14
No
v 1
4
De
c 1
4
Se
p 1
3
Oct
13
No
v 1
3
De
c 1
3
Jan
15
Fe
b 1
5
Ma
r 1
5
Ap
r 1
5
Ma
y 1
5
Jun
e 1
5
July
15
Au
g 1
5
Se
p 1
5
Oct
15
No
v 1
5
De
c 1
5
Note: 1-Week Repo Rate in %
Source: Central Bank of the Russian Federation
Russia’s Central Bank (CBR) (the “Bank”) resumed its easing cycle on 18 December, cutting the key rate from 8.25% to 7.75%. The move
followed a pause in July, meeting the expectations of market analysts. The Bank’s decision was driven by favourable price dynamics
as infl ation had fallen notably in recent months, creating space to ease rates. However, volatility in food prices, fl uctuations in global
commodities prices and shifting infl ation expectations limited the size of the cut, and the Bank emphasised in its accompanying
statement that a moderately tight monetary policy is still required. Looking forward, the Bank signalled that it would likely cut the rate
again, stating that “it deems it possible to cut the key rate further”.
Economists see the Central Bank lowering the monetary policy rate further in 2018, with a Consensus of 7.03%. Focus Economics,
Consensus Forecast, CIS Countries, Oct 2017.
Infl ation in 2018 is expected to be broadly in line with 2017, refl ecting CBR’s infl ation target of 4%, weak consumer demand due to lower
household real incomes, restricted government spending and marginal rouble depreciation.
STRATEGIC REPORT
22Severstal
Annual Report 2017
Severstal’s operations are subject to certain risks. Effective risk
management is an essential element of our operations and
strategy. The accurate and timely identifi cation, assessment
and management of risks supports our decision making at all
management levels and ensures that we achieve our strategic
goals and meet our KPIs.
Risk Management FrameworkSeverstal’s risk management framework is designed to identify,
manage and mitigate the risk of any failure to achieve business
objectives. Executive management, managers and employees
at all levels participate in the process of managing risk on a
continuing basis, and perform duties assigned to them within
the risk management process. The Board of Directors and all
employees of Severstal are obliged to adhere to the company’s risk
policies and standards at all times during their work.
There is a formalised management structure in place, with
clear delineation of roles, responsibilities and accountabilities
for the Board, Audit Committee, Executive Committee and risk
management function.
The Board of Directors is ultimately responsible for maintaining
a sound risk management and internal control system. The
Risk management
Board discusses the risks facing the business on a regular basis.
The Audit Committee closely monitors the effectiveness of
the risk management system, obtains regular risk reports from
management and agrees with internal audit the areas on which it
requires assurance.
The risk management structure includes a Risk Management
Committee that is responsible for implementing the risk
management policy and monitoring the effectiveness of controls
that support Severstal’s business objectives. This committee
meets several times a year and can meet more frequently if
required. The committee comprises key management, the CEOs
of our production facilities and the head of the risk management
function. Risk reports are compiled and submitted at each Risk
Management Committee meeting, after which material risks are
reported for discussion at the Board.
The Risk Management function is responsible for coordinating
risk identifi cation and assessment processes, implementing risk
management best practice, internal and external reporting, and
organises and coordinates Severstal’s insurance programme
reporting directly to the Board.
Board Assures shareholders that the company has identifi ed key risks and is successfully managing them
Audit CommitteeMonitors the overall effectiveness of the risk management system and directs the activity
and obtains assurance from the internal audit function
Risk Management Committee
Monitors the performance of the risk management system and key risks;
Promotes communication between managers and between management and the Board;
Preliminarily approves risk management policies and procedures;
Reviews and approves external and internal risk reports
Risk Management functionCoordinates risk identifi cation, assessment and mitigation measures;
Accumulates and processes risk assessment data;
Generates consolidated risk reports
Risk owners Identify specifi c risks and initiate risk management measures
Risk identifi cation and assessmentSeverstal’s risk landscape covers all risks that could affect the
business, customers, supply chain and communities. There is a
formal risk identifi cation and management process to ensure that
risks from day-to-day operations and from the general economy
and the sector, are continually identifi ed, evaluated and where
possible mitigated throughout Severstal’s operations.
Risk appetiteOverall, Severstal has a balanced approach to risk taking, although
the Board seeks to minimise safety, health and reputational risks.
The Board recognises that it is not possible or necessarily desirable
to eliminate some of the risks inherent in Severstal’s activities.
Also, some of the risks facing the business are not capable of being
readily controlled, particularly as far as market risk is concerned.
Assessment of principal risksThe risk management system of the Group works effectively
and has supported a robust assessment by the Directors of the
principal risks facing the Group. The principal risks are reviewed
throughout the year and these are discussed formally at the Board
at least twice a year.
Principal risksSeverstal’s principal risk categories have been defi ned as: health,
safety and environmental; strategic; market; and legislative and
regulatory. The table below lists the principal risks as determined
by the Board that may affect the Group, an assessment of the
current status of the risk and how the Group mitigates the risk. The
contents of the table, however, is not intended to be an exhaustive
list of all the risks and uncertainties that may arise.
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
23Severstal
Annual Report 2017
Key
Relative severity Change during the yearSpeed at which the risk could impact
Included in longer-term Viability Statement
High
Medium
Low
Increasing risk
Decreasing risk
Stable
Within three months
Within a year
Over a yearVS
Principal risks Nature of the risk Mitigating activitiesOverall change during the year
Health, safety and
environmental risks – safety
Severstal operates in hazardous industries and the
potential danger of fi re, explosions, as well as risks
specifi c to individual operations such as high levels
of methane or rock falls in mines; and potential foot
traffi c accidents and higher risk of accidents during
maintenance in steel operations.
Rigorously enforced,
comprehensive health and safety
policies;
Regular polygraphic screening
of all employees for attitude to
health and safety risk;
Continuous training,
communication and behavioural
learning;
Enhanced control over contractors
No change
Constant management
focus on improving safety is
being refl ected in improved
behaviour, LTIFR and other
safety metrics.
Market risk – changes
in demand for steel
VS
Domestic demand depends on the state of the
national economy. Investments in fi xed capital,
construction and industrial production in Russia are
still exposed to the risks of contraction due to low oil
prices and a high degree of uncertainty. A potential
reduction in domestic demand would require Severstal
to increase its export sales, which are less profi table.
Demand in international markets is affected by China,
which is exposed to the risk of reduction in domestic
demand.
Focus on customer orientation;
Optimisation of sales geography;
Search for new sales markets;
Focus on the more stable,
higher value segments
Decreased risk
The Russian economy is
expected to grow in 2018,
but global steel demand
remains weak.
Market risk – fl uctuations
in price of steel
VS
Export prices and profi tability are at a risk of going
down due to existing overcapacity issues, introduction
of new protectionism measures and deterioration of
the global economic outlook.
Domestic prices are driven by the premium over export
prices, which may reduce if domestic demand shrinks.
Customer orientation;
Use of long-term contracts;
Engagement with anti-dumping
and tariff authorities
Increased risk
The risk of protectionism
has signifi cantly increased
because of issues in the
EU, and in the USA, which
may affect other countries’
attitudes to tariffs, although
during 2017 Severstal
received the lowest level of
anti-dumping duty on hot
rolled coil imports to the EU.
STRATEGIC REPORT
24Severstal
Annual Report 2017
Strategic risk – potential
government action
The level of uncertainty in the global political scene
could result in a signifi cant disruption in “normal”
economic activity.
There is also a risk of further sanctions against Russian
business, which could lead to reduced ability to deal
with a wide range of counterparties.
Business interruption and business
continuity plans;
Compliance procedures
Increased risk
Although largely outside
Severstal’s control,
procedures are in place to
ensure that Severstal is in
compliance with all sanction
requirements.
Market risk – competition
risks
VS
Low capacity utilisation across the world creates a
highly competitive environment.
The global market could also be positively affected
by a planned reduction in steelmaking capacity
by the Chinese Government, primarily driven by
environmental considerations.
Cost management and product
quality improvement initiatives
No change
The recent rise in steel prices
might encourage capacity
that was planning to exit the
market to carry on producing,
but there are indications that
the planned reductions in
capacity in China are actually
taking place.
However, global steel
capacity utilisation is still at
a relatively low level.
Market risk – fl uctuations in
the prices of raw materials,
energy and services
Global raw material prices typically fl uctuate in
line with stock replenishment cycles in China, but
are intensifi ed by seasonal peaks and troughs in
the construction industry. Severstal is not fully
self-suffi cient in coking coal and prices increased
signifi cantly during 2016, but stabilised at a higher
level during 2017.
Infl ation in Russia depends on the foreign exchange
rate and may grow if oil prices go down and the rouble
loses value. The rates for utilities are likely to show
steady increases as they are regulated by the state.
Streamlined planning and
purchasing of raw materials,
including scrap;
More effi cient use of raw
materials;
The consolidation of the
Yakovlevsky mine will
make Severstal more self-
suffi cient in iron ore in 2018
No change
Severstal has managed
the volatility in prices during
the year, however, the
pricing of and supply of raw
materials remains volatile.
Health, safety and
environmental risks –
environmental
Severstal operates industrial facilities that hold
heavy metals or hazardous substances which could
present signifi cant risks to the health or safety of local
communities and the environment.
The competent authorities have imposed, are imposing
and may in the future impose specifi c requirements for
Severstal to reduce our environmental footprint.
Severstal has a unifi ed Health,
Safety and Environment Policy.
Severstal’s environmental
commitments are integrated in
the Corporate Environmental
Protection Policy of Severstal;
Severstal has implemented several
mechanisms to try and ensure this
type of risk is below the average
level for the industry
No change
The amount of legislation
and the expectations
of society in Russia and
beyond in relation to this
type of risk have remained
relatively stable during the
year.
Legislative and regulatory
risks – tax
Legal risks associated with
changes in tax legislation
Despite an almost complete codifi cation, the
provisions of Russian tax laws constantly change. A
whole range of new tax provisions and amendments to
previous regulations is enacted every year. Some of the
changes are favourable to the taxpayer, while some
are unfavourable.
Severstal works in full compliance
with applicable tax, customs,
foreign currency and other
regulations, responding in a
timely manner to all changes and
trying to maintain a productive
discussion with regulatory
authorities on matters of
the interpretation of law
Decreased risk
During the year Severstal
clarifi ed a number
of issues with the Russian tax
authorities.
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
25Severstal
Annual Report 2017
Assessment of the Group’s prospectsSeverstal operates an annual planning process which includes
short term (one year) fi nancial forecasts and longer term (fi ve
year) fi nancial forecasts, based on inputs from each of the
businesses. These plans and risks to their achievement are
reviewed by the Board as part of its strategy review and budget
approval processes. The processes for identifying and managing
the Principal Risks are described above.
Going ConcernThe going concern assessment considers whether it is appropriate
to prepare the fi nancial statements on a going concern basis.
The Directors have reviewed the Group’s budgeted cash fl ows
and related assumptions including appropriate stress testing of
risks (being primarily steel demand and prices) and taken into
account undrawn credit facilities and debt maturities. As a result,
the Directors have a reasonable expectation that the Group
has adequate resources to continue its operational existence
for the foreseeable future. For this reason, they continue to
adopt the going concern basis in preparing the consolidated
fi nancial statements (in accordance with the ‘Guidance on Risk
Management, Internal Control and Related Financial and Business
Reporting’ issued by the UK Financial Reporting Council).
Viability statementThe viability assessment considers solvency and the liquidity
over a longer period than for the purposes of the going concern
assessment above. Inevitably the degree of certainty reduces over
this longer period.
The Board has assessed the viability of the Group over a three-
year period. This period is within the Group’s established business
planning and forecasting processes and is a cycle which is subject
to review and approval each year by the Board. It also considers
the capital expenditure planning cycle.
In making the assessment, severe, but plausible scenarios have
been considered that estimate the potential impact of each of
the principal risks that could arise in the assessment period, for
example, a prolonged downturn in the price and demand for steel;
a signifi cant rise in protectionism such that Severstal fi nds it more
diffi cult to export steel profi tably; and a period of instability in the
Russian economy, which results in a reduced demand for steel.
The principal risks with a direct link to the viability statement have
been indicated in the table of Principal Risks above. The scenarios
assume an appropriate management response. The impacts
of these scenarios were overlain on the longer term fi nancial
forecasts to assess how the Group’s liquidity and solvency would
be affected. The assessment took account of the Group’s current
funding, forecast requirements and existing committed borrowing
facilities.
Based on the above, the Board confi rms that it has a reasonable
expectation that the Group will be able to continue in operation
and meet its liabilities as they fall due in the period to 31 December
2020.
In making this statement the Directors have made the following
assumptions:
• the Group currently has access to global debt markets and
expects to be able to fi nance facilities as necessary. The Group’s
fi ve-year forecasts are not designed to allow for a prolonged
period of limited access to global debt markets or a sustained
period of adverse conditions in these markets.
• that in the event of multiple risks occurring and having a
particularly severe effect on the Group, all actions such as
constraining capital expenditure and reducing or suspending
payments to shareholders would be taken on a timely basis.
The business believes it has the processes to identify the need
for such actions, as necessary.
• that implausible scenarios, such as multiple risks occurring at
the same time, or the impact of individual risks occurring that
cannot be mitigated by management actions to the degree
assumed do not occur, for example, Severstal being barred from
all export markets.
STRATEGIC REPORT
26Severstal
Annual Report 2017
Severstal Resources divisionSeverstal 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.
Vorkuta
Olenegorsk
Yakovlevskiy Mine
Kostomuksha
Key assets
1. Karelsky OkatyshLocated 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. OlconLocated in the Murmansk region, Olcon is Russia’s most
northerly iron ore complex. Olcon mines magnetite-hematite
quartzite ores from fi ve 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 benefi t from best practices in mining and
concentrate production.
3. VorkutaugolLocated 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,
Divisional review
have an estimated life of 25 and 17 years, respectively. The
business consists of fi ve underground mines, one open-pit mine
and three washing plants.
4. Yakovlevskiy MineLocated 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 benefi ciation 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 diversifi ed 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.
Vorkutaugol
Coking coal concentrate (Vorkutaugol)
20172016
3.2
0.9
3.2
0.1 Third party sales (million tonnes)
Internal consumption (million tonnes)
2017
81
2016
Cost per tonne (US$/t)
Average selling price (US$/t)60
79
131
• Average selling price increased 66% year-on-year driven by
growth of the global benchmark
• The 35% increase in cash cost per tonne year-on-year refl ects
the fi nancial impact of the Severnaya mine incident in February
2016 as well as repositionings at Vorkutaugol mines during
2017
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
27Severstal
Annual Report 2017
Olcon
Iron ore concentrate (Olcon)
20172016
4.1
0.1 Third party sales (million tonnes)
Internal consumption (million tonnes)
0.1
4.0
2017
31
2016
31
51
Cost per tonne (US$/t)
Average selling price (US$/t)24
• Average selling price increased $20/tonn as a result of global
iron ore prices uptick year-on-year
• Severstal managed to maintain a low cash cost despite
moderate cost infl ation in 2017
• Sales volumes are expected to stay fl at in 2018
Karelsky Okatysh
Iron ore pellets (Karelsky Okatysh)
20172016
6.0 6.5
4.6
Third party sales (million tonnes)
Internal consumption (million tonnes)
4.9
2017
27
2016
49
79
Cost per tonne (US$/t)
Average selling price (US$/t)22
• Average selling prices for iron ore pellets increased $30/tonn
following global trends
• Сost dynamics refl ects the operational effi ciency programme
and cost-saving initiatives despite cost infl ation year-on-year.
Dynamics of revenue by products
20162015
Iron ore concentrateShipping and handling and other
2017
Coking coal concentrateSteam coal
Pellets
12%
25%
10%
51%
2%
11%
33%
12%
41%
3%
11%
28%
46%
3%
12%
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 diversifi cation of sales
Russia
Export
31%
69%
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 effi ciency 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
12%
26%
33%
29%Materials
Energy
Labour costs
Other costs
Key developments in 2017:
In 2017, Severstal Resources continued to improve safety across its
assets alongside capacity development and ongoing maintenance.
OlconThe 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 OkatyshInvestment 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.
STRATEGIC REPORT
28Severstal
Annual Report 2017
Dry and wet magnetic separation units were upgraded to increase
the volume of processed ore and reduce energy consumption.
VorkutaugolCapital 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.
VorkutaAt 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 OkatyshWork 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 fl eet,
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.
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
29Severstal
Annual Report 2017
Severstal Russian Steel
divisionSeverstal Russian Steel is a leading Russian steel producer, with
a broad product mix, self-suffi ciency in raw materials and an
extensive distribution network. The division focuses on high value-
added fl at 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 fl agship 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 MillOne 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 fl at and long-rolled products, including
hot and cold-rolled fl at 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 MillThe 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 BalakovoA 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-MetizManufacturer of more than 55,000 product types, including
cold-drawn steel, steel shapes, railway fasteners, low carbon and
high carbon wire, nails, steel fi ber, 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-fi nished steel products made at
the Cherepovets Steel Mill.
6. Trading companiesSeverstal 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.
St. Petersburg
Vsevolozhsk MoscowKaluga
Orel
CherepovetsSheksna
Balakovo
Volgograd
Kolpino
STRATEGIC REPORT
30Severstal
Annual Report 2017
Production volumes (million tonnes)
2015
11.7
9.29.2
11.5
9.3
11.6
2016 2017
Crude Steel Hot Metal
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. Refl ecting this, Severstal’s average
steel prices raised 38% for hot-rolled strip and plate, 26% for cold-
rolled fl at products and 26% for long products.
Average selling price (US$/t)
2015
517
591
431
Hot-rolled strip
and plate
Cold-rolled flat
products
2016
383
446
346
2017
374
468
343
Long products
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 specifi cations. Severstal Russian Steel benefi ts
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 fi gures 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
Other
CIS
Asia
Europe
Russia
Middle East
64%16%
7%
1%
5%7%
Sales by regions 2016
Other
CIS
Asia
Europe
Russia
Middle East
68%
17%
5%
2%5%
3%
Sales by industries 2017
Tube and Pipe
Auto
Other
Construction and
service processing
44%
36%
7%
4%
5%4%
Oil and Gas
Machinery
Sales by industries 2016
Machinery
Tube and Pipe
Auto
Other
Construction and
service processing
Oil and Gas48%
31%
7%
3%
6%5%
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
31Severstal
Annual Report 2017
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
8%
72%
Materials
Energy
Labour
Other
11%
9%
Cost of sales structure 2016
8%
69% Materials
Energy
Labour
Other
13%
10%
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 fi nishing shop #2 at CherMK.
• New cooling towers #2 and #4 will be constructed to improve
water cooling process.
2RESPONSIBILITY
Responsibility 32Our commitment to sustainable development 34Health and Safety 35Ecology 36Social investment 37Talent development 39
RESPONSIBILITY
RESPONSIBILITY
34Severstal
Annual Report 2017
Our philosophy and values
At Severstal, we are resolutely committed to developing our
operations in a sustainable way that delivers lasting benefi ts for
the communities and environments around us. We also understand
that the success of our business is absolutely reliant on our people.
Steel products are essential to the development of the modern
world. However, we recognise our responsibility as an operator in
a world where issues such as climate change, health and
sustainability present both risks and opportunities for our industry.
Severstal’s Social Responsibility Policy is consistent with our
mission, strategy and corporate values. We are committed to
being a high-performance and socially responsible company
and a leader in both economic and social value creation for all
stakeholders. This means viewing sustainability as an opportunity
to continuously improve our operations.
Leadership though innovation and Environmental,
social and governance (ESG)
Severstal is committed to working in a cleaner environment
and implementing ever more sustainable working practices. This is
Our commitment to sustainable
development
an area that the Board takes very seriously and we have delivered
a signifi cant transformation of our assets in recent years.
We are also constantly upgrading our facilities to reduce our
environmental footprint. Safety will always be a top priority for
Severstal. We aim to be an accident free company and are always
reviewing our safety processes, ensuring that they are up to date
and in line with best practiсe.
Our aim is to continually enhance our ESG reporting, setting
the bar for other companies both domestically and globally. For
example, we are currently developing our climate change policy,
recognising that whilst we are a global low-cost producer and steel
is a recyclable product that we need to ensure that we are well-
positioned for a lower carbon future. We also recognise that it is
our responsibility to manage our social and environmental impact
at every stage of the production process in the regions where we
operate. We have various initiatives in place supporting the local
community through education, culture and sport.
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
35Severstal
Annual Report 2017
1. Vision, policy, goals
Progress in Health and Safety is one of Severstal’s key
performance indicators.
The Company’s Health and Safety policy, approved by the Board
of Directors, sets the guidelines for safe operations across the
business. The policy has six fundamental principles:
• Safe working conditions
• Health and Safety management
• Systems for monitoring and reporting hazards
• Safe and responsible employee conduct
• Compliance with best practices in Health and Safety
• Health and Safety information must be clear and
straightforward
Severstal’s Health and Safety policy is set and constantly reviewed
by a designated Board Committee which sets the Company’s
Health and Safety strategy. Severstal is committed to ensuring its
operations are safe and aims to constantly reduce the number of
employee accidents and eliminate fatalities. In order to achieve
this goal, the Company continuously invests in improving safety
across its operations, in line with global best practice.
2. Results of work
In 2017, the lost time injury frequency rate (LTIFR*) was 0.96.
0.99
2010 2015 2016
1.77
2011 2012 2013 2014
1.11
1.381.271.331.35
1.21**
2017
0.96
* LTIFR stands for Lost Time Injury Frequency Rate. All fi gures exclude Severstal North America
and PBS Coals.
** Excluding the mine accident in February 2016.
3. Health and Safety initiatives
Since the launch of Severstal’s Labour Safety project in 2011
and its incorporation into the business system, the Company has
achieved a signifi cant reduction in injuries in Russian Steel (which
represents 60% of the Company’s employees). Since 2016, the
Company’s labour Safety tools have been consolidated under
the safety Framework and extended to the activities of the entire
Severstal group.
Area of focus Tools
Hazard
identifi cation
Studying and improving problem areas
Behavioural safety audit
Production operations safety audit
Investigating microtraumas and dangerous events
Health and Safety
Involvement Testing and training programmes
Live demonstrations
Safe behaviour training
Organisation of Safety Days (multistage competition)
Best practice
Safety
violations
Unifi ed approach to safety violations
Labour Safety committee
Psychiatric testing
Overall
assessment
Accident prevention system (audit)
Personal safety control
The Labour Safety tools have been developed to identify hazards
and educate workers, to ensure they operate safely and respond
effectively to dangerous situations, including security breaches.
The project is structured around three areas: providing safer
working conditions, training and engaging employees. An essential
element of the Labour Safety project is a comprehensive audit and
analysis, which allows Severstal to monitor and compare standards
and practices across the business and continuously improve the
Company’s Health and Safety performance.
Part of the safety training involves live demonstrations aimed
at improving safety awareness among employees and supporting
a culture of safety across the workforce.
One aspect of the Labour Safety project involves psychometric
testing, incorporating the use of polygraph testing. By running
psychometric tests the Company is able to identify the level of
risk posed by individual employees and anticipate any potentially
dangerous behavioural tendencies. The testing is carried out
consistently across all of the Company’s departments to address
risks at every level.
In order to assess and monitor the effectiveness of the Labour
Safety systems at our sites, Severstal runs audits for the Accident
Prevention System (APS) arranged by specialists from the
Labour Protection Service. Production managers are incentivised
to improve safety levels in line with the APS system objectives.
Every division within the Company has a system which
monitors information received from employees. This ensures
that incidents are effi ciently registered and analysed.
4. Key safety investments in 2017
The company invested about 1,651 million rubles to ensure labour
safety. Among the largest investments:
– The programme to reduce the injuries while walking by foot
(SRS – 22.8 million rubles.);
– Programme to improve the level of protection in emergencies
(SRS, Metiz – 25.1 million rubles.);
– The acquisition of safety equipment (Karelsky Okatysh –
222.4 million rubles, Olkon – 565.0 million rubles);
– Industrial safety systems in the Vorkutaugol mines –
785.2 million rubles.
RESPONSIBILITY
36Severstal
Annual Report 2017
2017 was declared the Year of Ecology in Russia and Severstal
reiterated its commitment to reducing the environmental impact
of its assets.
Karelsky OkatyshAn automated gas-monitoring system was installed to control and
reduce air pollution from sulphur dioxide. The construction of the
desulphurisation unit is in its pre-project phase.
Severstal’s environmental department continued to study the
mine’s impact on surrounding water bodies to develop initiatives
that will reduce its impact.
OlconThe installation of a natural biological treatment system at the
mine’s waste water storage plant is ongoing. Different species
of plants are cultivated to reduce the concentration of harmful
substances in the water as well and reduce dust on land. This has
already reduced the concentration of polluting substances by
15–25%.
VorkutaugolThe thermoelectric plant utilises coalmine methane from
the Vorkutinskaya mine, helping to minimise waste.
Environmental Protection
CherMKThe new blast furnace #2 uses a combined gas cleaning system
that reduces emissions to the atmosphere. The gas treatment
line is being reconstructed to improve waste water treatment. The
construction of a new waste dump is planned to start following a
period of public consultation.
PlansKarelsky OkatyshOngoing research into ways to reduce the mine’s
environmental impact on nearby water bodies.
OlconThe installation of a natural biological treatment system at the
waste water storage will be ongoing.
CherMKThe reconstruction of #4 coke battery will be completed in 2018.
The aim of the project is to improve the quality of coke and reduce
emissions of coke dust.
A number of energy projects are planned to increase the plant’s
self-suffi ciency and reduce power consumption.
Ongoing commitment to environmental improvements: top six projects
2011-2015
Installation of a fugitive emission control system in the converter plant of Cherepovets Steel MillThe largest environmental project in
the history of Cherepovets Steel Mill,
it used state-of-the-art technology
to achieve a fundamental reduction
of emissions from steelmaking. It
received a national award as the
best environmental project. 2016
Launch of Rutgers SevertarThis plant meets the latest
environmental standards. It processes
tar into high-quality raw materials
for non-ferrous metallurgy and
chemical industry, including vacuum
pitch, naphthalene and technical oils,
and will sell them to domestic and
international customers.
2016-2018
Refurbishment of coke battery #4 The mill’s #4 coke battery will be
refurbished and auxiliary facilities
modernised to ensure fi xed assets
are maintained and reduce the
purchase cost of coke.
2017
Construction of a united gas fi ltering system for ladle furnace #2 and a ladle treatment standThe new gas fi ltering system
at Cherepovets will reduce the
dust content of the exhaust air
to a concentration of less than
10 mg / m3.
2017-2020
Refurbishment of blast furnace #5 Industry leading technology will
ensure that the refurbished blast
furnace consistently performs at a
high level, conserving resources and
employing a fully automated and
environmentally friendly process for
the smelting of cast iron.
2017
New iron ore drying complex at OlconSignifi cant reduction of sulphuric acid
emissions (by c.285 tonnes less per
year). The fi lters installed inside the
drying complex allow to collect up to
99.994% of the harmful substance.
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
37Severstal
Annual Report 2017
Social investment
Severstal is committed to improving the quality of life for its
employees and supporting the local communities where it
operates. This includes supporting local infrastructure
development, environmental protection, education, culture and
sports.
In 2017, the Group invested 2.3 billion roubles in social and
charitable programmes including volunteering, child welfare and
education programmes, investment in culture and sport and
community outreach.
Investment in the local economy
Severstal participates in and develops innovative projects to
support small and medium-sized businesses, as well as social
development in the regions where it operates.
In Cherepovets, Severstal has established joint projects with local
authorities including the NP Urban Development Agency (AGR)
and ANO Cherepovets Investment Agency. These are aimed at
promoting the growth of small and medium-sized businesses
(SME) and providing comprehensive support to entrepreneurs at
every stage of their careers.
A key area of support is provided through business partnerships.
In 2017, more than 25,000 advertisements were placed as a result
of the Electronic Business Cooperation project. In September
2017, more than 6.3 billion roubles-worth of contracts were signed
between large enterprises and SMEs in the Vologda region. Since
2017, AGR has been working to improve business skills and develop
partnerships promoting small and medium-sized businesses in
Kostomuksha (the Republic of Karelia). With the Company’s
support, AGR organises training events focused on sales, effective
management, marketing, and business networking.
Through AGR, Severstal has helped establish a Social Innovation
Centre. The Centre has become a hub for social entrepreneurs in
the region and a starting point for new projects, providing over
6,000 business development consultations every year.
The agency supports industrial, food production, infrastructure,
tourism and hotel industry, medicine, sports and services projects.
The largest projects include the Cherepovets Industrial Park, the
Central City Embankment Tourist and Recreational Cluster, the
Noviy Greenhouse Complex and the cheese and dairy production
plant.
Future Investments
In 2017 Severstal assisted in the development and transformation
of the public gardens in Cherepovets and the opening of the
Quantorium children’s technopark which is part of a new
nationwide network of children’s technoparks.
One of our key successes has been the Way Home programme,
supported by a successful trilateral partnership between the
government authorities, businesses and local communities.
Partners include the Russian Ministry of Economic Development,
the Vologda Regional Government, the Foundation for Support of
Children in Hardship, the National Charity Fund, the Lukoil Charity
Fund, as well as social institutions, businesses and non-profi t
organisations from regions where the programme is available.
Way Home is a comprehensive child neglect, juvenile delinquency
and social orphanhood prevention programme launched in 2006.
It unites representatives from social groups interested in helping
to address these issues. Alexey Mordashov, Severstal’s Chairman,
launched the programme and continues to personally oversee its
progress.
In 2017, 568 children were supported and kept safe in their own
home, with their birth families, 484 minors were protected from
abusive environments, and 48 children kept in the safe care of
foster families.
Over the last three years, the programme has helped
2,314 children by reducing the risk of loss of parental support and
keeping these children and their families together. In addition,
more than 10,000 parents received parental training.
In 2017, in Cherepovets Severstal employees took part in a
number of major charity events, including the Festival of National
Culture in aid of those who suffer from substance abuse, the
family city festival From Heart to Heart, and the Lifestyle Charity
Quest.
In the Balakovo district, Severstal continues to support social
projects such as Way Home: Together with Mom; Our kind home is
a family school, and Step towards. In 2017 in Cherepovets,
Severstal continued the Children of Cherepovets: Way to success
programme, which engages a community of highly respected
teachers to support and develop talented school students.
The Way Home charity and the Trajectory fund for scientifi c,
educational and cultural initiatives were established with
the help of the education department of the Cherepovets
city administration. Lecturers from Russia’s leading
educational institutions have helped develop special natural
sciences programmes, including mathematics, chemistry, physics
and biology, for teachers and school students. Experts from the
Sirius educational centre have also contributed through the
charitable foundation Talent and Success. The centre was created
as part of the redevelopment of the Sochi Olympic village, on
the initiative of the President of the Russian Federation, Vladimir
Putin. It is a tribute to Russian masters of science, sports and
art, and was established to identify, develop and provide future
professional support to gifted children.
Support of culture and art
Severstal has partnered Russia’s leading museums and theatres
for many years. Today the Severstal brand is aligned with many
cultural organisations.
In 2017 Severstal continued its partnership with the Bolshoi
Theatre (Moscow), the Russian Museum (St. Petersburg), the
Mariinsky Theatre (St. Petersburg), the State Tretyakov Gallery
(Moscow), the Pushkin State Museum of Fine Arts (Moscow), the
State Historical Museum (Moscow), the Cherepovets Museum
Association (Cherepovets), the Kirillo-Belozersky Museum-Preserve
(Kirillov), the Museum of Dionisy Frescoes (Ferapontovo, Kirillovsky
District), the Vologda Open Air Museum of Architecture and
Ethnography (Vologda, Semenkovo), the Radishchev Arts Museum
(Saratov), the Balakovo Art Gallery (Balakovo), the Valaam
RESPONSIBILITY
38Severstal
Annual Report 2017
Monastery, Sergey Andriyaka’s Watercolor School (Moscow) and
others.
Severstal continues to support the Golden Mask, Russia’s largest
theatre festival, hosted in Moscow, Latvia and Cherepovets. In
2017, Severstal supported the inaugural visits of the Golden Mask
to Petrozavodsk and Kostomuksha.
Severstal’s Museums of the Russian North is a major cultural grant
programme dedicated to supporting the development of arts
museums in the north of Russia.
In 2017, 116 applications were received for participation in events
for museum professionals from four key regions in which Severstal
operates: the Republics of Karelia and Komi, the Vologda and
Murmansk regions. 65 representatives from different museums
received grants for trips to participate in conferences, round
table events, seminars, forums and professional internships.
56 project ideas from 11 northern regions of Russia: the Republics
of Karelia and the Komi Republic, the Nenets Autonomous
Okrug, the Arkhangelsk, Vologda, Kirov, Leningrad, Murmansk,
Novgorod, Pskov Regions and the Perm Region were submitted in
the fi rst stage of the 8th open grant competition for Museums
of the Russian North project. In October, the Project Laboratory
was held in Cherepovets, where the staff of 39 regional
museums (approximately 70 people, including experts in cultural
management, education and tourism) took part in the training,
before applying for the 8th open grant competition.
Sports and recreation support
Severstal encourages all of its employees and their families to lead
healthy and active lifestyles. The Company sponsors sports events
popular among its employees and local communities. Severstal
also invests in professional sports and the Severstal Sports Club
trains athletes to participate in both national and international
events.
Severstal is also a proud sponsor of the Dynamo Moscow
women’s volleyball club. In Cherepovets, Severstal supports the
Cherepovets professional hockey club, the Almaz junior team, and
the youth hockey school that trains over 1,000 children.
In 2017, Severstal continued its Hockey Without Borders project
for people with disabilities. Through this project the Company
organises transport and support for disabled sports fans so they
can attend hockey matches. The project became an honoree of
the Civic Initiative regional award.
In 2017, Karelsky Okatysh (Kostomuksha) invested around 66 mln
roubles in social and charitable programmes. Approximately the
same amount of funding will be allocated for this purpose in 2018.
The enterprise supports social facilities (educational institutions,
sports clubs, veteran organisations, an orphanage, a rehabilitation
centre for disabled people), in particular the Friendship cultural
and sports complex, which is visited by more than 90,000 people
every year. It also supports the Kanteletar international folklore
festival, the festival of chamber music, the Sergei Ozhigov Art Song
Festival and the international Nord Session and Rhythms of Spring
festivals.
Corporate Volunteering
Severstal encourages its employees to engage with corporate
charitable programmes, including those focused on preventing
child neglect and social orphanhood, mentoring, preservation of
regional cultural heritage, environmental protection, and support
for retirees, veterans and people with disabilities. In 2017 Severstal
organised approximately 80 corporate volunteering events.
In 2017 Severstal once again took part in the international charity
event Generous Tuesday. In addition, the Company traditionally
supports Heartful Bazar, a major Russian charity project which
takes place on New Year’s Eve.
Public initiatives
Severstal shares the principles of the Social Charter of the
Russian Union of Industrialists and Entrepreneurs (RSPP) and the
World Steel Association’s (Worldsteel) Sustainable Development
Policy, refl ecting the best practices of Russian and international
businesses in collaborating successfully with communities.
When developing operational strategies, Severstal works with
local stakeholders to ensure that due consideration is given to the
priorities of individual regions and local communities. This involves
a complex system of stakeholder communications:
1. Informing the public about the Company’s initiatives.
2. Feedback: regular interviews with employees and consumers;
research into public opinion and hot lines for employees and
consumers.
3. Interaction with business partners, regional administrations,
trade unions, public and expert organizations.
4. Exchange of case studies, studying best practices
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
39Severstal
Annual Report 2017
Talent development
Severstal’s people are key to its success and the Company
continues to invest in developing the skills and careers of all of its
teams.
Talent development is focused on a number of areas:
1. Support for students, young professionals and partnerships with
educational institutions;
2. Career orientation;
3. Universities;
4. Career in the Company
1. Supporting students and graduates, cooperating with educational institutions
The recruitment and training of promising students and
graduates is important to Severstal. Annually, around 300 colleges
and university graduates are offered roles within the Company.
Severstal partners with 20 vocational universities and six schools
to develop and train graduates in Russia. The main objective of
this cooperation is to ensure that graduates joining Severstal have
the necessary qualifi cations, and that their knowledge and skills
meet the evolving requirements of the Company and the industry
as a whole.
In August 2017 an agreement was signed between Severstal and
the government of the Vologda region to cooperate on improving
professional education and personnel support for the metallurgy
and machine building sectors. Similar agreements are in place
between AO Olkon and the State Autonomous Professional
Educational Institution of the Murmansk Region Olenegorsky
Mining College, between GBOU SPO of the RK Kostomuksha
Polytechnic College and AO Karelsky Okatysh and OOO UKC
Perspective.
In 2017 Severstal’s unique leadership programme continued
to train up graduates and young professionals with the aim
of developing Severstal’s future leaders. During the two-year
programme, participants gain work experience at Severstal’s
Centre of business system development, in production and two
functional divisions. They also work on four projects of their own.
Within fi ve to seven years the programme’s participants are
expected to enter the talent pool of Severstal’s 100 top managers.
In 2017, the progamme enrolled 22 graduates from leading
Russian and international universities. The programme received a
total of 1,600 applications.
For its second year, Severstal participated in Metal CUP, the
Metallurgy and Engineering case studies World Championship. In
October 2017 Severstal’s team presented in the fi nals hosted at
the Polytechnic University of St. Petersburg.
In October 2017, Severstal prepared students of the metallurgical
college for participation in the international welding and
electrical installation competition World Skills Russia.
2. Career orientationSeverstal has been running Company-specifi c courses in high
schools since 2008. These courses are taught by university
professors and students are given access to Severstal’s
management team and experts throughout the course. They also
have an opportunity to take a tour of the university, Severstal’s
headquarters and its core steelmaking facility, Cherepovets Steel
Mill, during the spring break.
3. UniversitiesSeverstal has run vocational classes in the cities where it operates
since 2005. Professors from vocational universities run lectures for
school students, who also have the opportunity to spend time with
Severstal managers and specialists. During the Spring holidays
they also have an opportunity to visit the university, Severstal’s
head offi ce and the Cherepovets steel mill.
At the end of 2017 Severstal signed an agreement with
Quantorium children’s technopark to improve training for school
students preparing for a career in industry. Students at the
technopark work on projects which emulate the real day-to-day
activity of Severstal employees. In 2017, the Company invested
84 mln roubles in the development and repair of the building.
In September 2017, the School of future engineers vocational
training programme was launched at the Severstal school in
Cherepovets. A number of school fi eld trips to the Company’s
divisions have taken place since October.
In addition, the Cherepovets Metallurgical Museum runs
educational activities. At the museum visitors can see the full cycle
of steel production, learn about the core professions in mining and
metallurgy, try on overalls and attempt to weld steel.
4. Careers in the CompanyCareer opportunities at Severstal are not limited to a specifi c
department or site. Severstal supports every employee in building
not only a vertical, but also an expert and cross-functional career.
In August 2017 Severstal launched its new Career. Restart
programme, which aims to identify and develop employees with
particularly high potential. 2,335 Severstal employees have
already taken part.
The majority of applications were received from operational staff
(1,169 applications). Each programme participant will be given a
detailed personal development plan.
RESPONSIBILITY
40Severstal
Annual Report 2017
1) Career orientation
2) High-level training in trade-
specifi c courses (setting
students up for metallurgical
universities)
– Specialised training
– Professional curriculum
– Youth Perspective Festival
(Vorkutaugol, Olkon, Karelsky
Okatysh)
– School Olympics
Developing college applicants
for professional training
programmes (Major programme
aimed at broad target audience)
– Specialised training in skilled
trades
– Professional Development
Centre (Severstal Russian
Steel)
– Communications events
– Trainer development
Generation of applicant fl ow
for foreman and specialist
openings (Future talent pool for
management positions)
– Specialised training
– Scholarships
– Business School (Severstal
Russian Steel)
– Communications events
– Trainer development
COLLEGES
UNIVERSITIES
SCHOOLS
OBJECTIVE PROJECTS
OBJECTIVE PROJECTS
OBJECTIVE PROJECTS
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
41Severstal
Annual Report 2017
3 CORPORATE GOVERNANCE
CORPORATE GOVERNANCE
Corporate Governance 42Board of Directors composition 44Corporate Governance Report 50Board committees and reports from their chairs 56
CORPORATE GOVERNANCE
44Severstal
Annual Report 2017
Alexey Mordashov
Board of Directors composition
Role: Chairman of the Board of Directors, Member of the Health,
Safety and Environmental Committee
Experience: Born in 1965. Alexey Mordashov has been working for
Severstal since 1988. He started his career as a Senior Economist,
becoming Chief Financial Offi cer in 1992. In December 1996, he
was appointed as Severstal’s Chief Executive Offi cer. Between
2002 and 2006 he served as CEO of Severstal Group and was
Chairman of Severstal’s Board of Directors. From December
2006 to December 2014 Alexey was CEO of Severstal. From
December 2014 until May 2015 Alexey Mordashov served as
CEO of AO Severstal Management – managing company of PAO
Severstal. Alexey was elected Chairman of the Board of Directors
of PAO Severstal in May 2015.
External appointments:
• Member of the Supervisory Board (since June 2010) of the
Non-Profi t Partnership Consortium “Russian Steel”, prior to that
President of the Consortium (from 2013 to 2015), since 2016 –
Chairman of the Supervisory Board;
• Member of the Supervisory Board of World Steel Association
headquartered in Brussels, Belgium. Prior to that Chairman
(from 2012 to 2013) and Vice-Chairman from 2016 to 2017 –
Chairman of the Supervisory Board;
• Head of the Russian Union of Industrialists and Entrepreneurs’
(RSPP) Committee on Integration, Trade and Customs Policy
and WTO;
• Serves on the Entrepreneurial Council of the Government of
Russian Federation;
• Co-Chairman of the “Trade as a Global Driver” Taskforce of the
“Business 20” (B20) of “Group of Twenty” (G20);
• Co-Chairman of the Northern Dimension Business Council;
• Vice-President of Russian-German chamber of commerce,
member of the Russian-German workgroup responsible for
strategic economic and fi nance issues;
• Member of the EU-Russia Business Cooperation Council;
• Chairman of the Board of PAO Power Machines;
• Member of the Board of Nordgold S. E.;
• Member of the Board of Directors of TUI AG.
Education: Alexey earned his undergraduate degree from the
Leningrad Institute of Engineering and Economics. He also holds
an MBA degree from Business School of Northumbria University
(Newcastle, UK). Alexey was granted an honorary doctorate
from the Saint-Petersburg State University of Engineering and
Economics in 2001 and from the University of Northumbria, UK in
2003.
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
45Severstal
Annual Report 2017
Alexey Kulichenko
Role: Chief Financial Offi cer
Experience: Born in 1974. Between 1996 and 2003 Alexey
worked for Sun Interbrew, starting his career there as a cash fl ow
economist at the Rosar plant in Omsk and ending it as Effi ciency
Planning and Managing Director of Sun Interbrew. Between
2003 and 2005 Alexey worked as CFO at Unimilk. From December
2005 to July 2009 he worked as CFO of CJSC Severstal Resource.
In July 2009 Alexey Kulichenko was appointed CFO of OAO
Severstal. From 8 November 2016 till 11 December 2016 he was
CEO of AO Severstal Management.
External appointments: none.
Education: Alexey graduated from the Omsk Institute of World
Economy with a degree in Economics.
Alexander Shevelev
Role: CEO of AO Severstal Management, Member of the Health,
Safety and Environmental Committee
Experience: Born in 1974. Alexander started his career at
Cherepovets Steel Mill as a repairman in repair-tool shop in 1997.
Later he worked as a shift foreman, lead economist and deputy
head of strategic planning department, head of production
development department in OAO “Cherepovets Steel Mill”. From
2002 to 2004 he worked as Technical Support Director of OAO
“Cherepovets Steel Mill”. In 2012 Alexander Shevelev became
executive director of OAO “Cherepovets Steel Mill” (currently
Cherepovets mill “Severstal-metiz”). From 1 July 2012 he
was appointed First Deputy Mayor of Cherepovets, in June
2013 – Deputy Governor of the Vologda region. From 2013 to
2016 he was CEO OAO “Severstal-metiz”. From April 2016 to
December 2016 he has been CEO of SVEZA Group. In December
2016 Alexander was appointed CEO of AO Severstal Management.
External appointments: none.
Education: Alexander Shevelev graduated from the Vologda
National Economic Academy with a degree in Mechanical
Engineering and from the National Technical University in St.
Petersburg where he mastered economics and management.
Alexander also holds an MBA degree from the Northumbria
Business School, Newcastle, UK.
CORPORATE GOVERNANCE
46Severstal
Annual Report 2017
Vladimir Lukin
Role: Senior Vice President, Legal Affairs and General Counsel,
Member of the Health, Safety and Environmental Committee
Experience: Born in 1978. Vladimir Lukin joined Severstal Group in
2004 as Senior Legal Advisor. In 2007 he became Senior Legal
Advisor of OAO Severstal. In January 2008 Vladimir was appointed
as Head of the International Project Department. In 2009 he was
appointed as Senior Vice President, Legal Affairs and General
Counsel. Prior to joining Severstal, Vladimir worked for law fi rm
Freshfi elds Bruckhaus Deringer. Since 25 May 2015 till 1 December
2017 Vladimir Lukin was a member of the Board of Directors of
AO Severstal Management – managing company of PAO Severstal.
External appointments:
• Member of the Board of Directors of PAO Power Machines;
• Member of the Board of Directors of OOO T2 RTK Holding;
• Member of the Board of Directors of “BANK “ROSSIYA”;
• Member of the Board of Directors of ZAO
GK Video International;
• Member of the Board of Directors of ZAO National Media
Group.
Education: Vladimir graduated in Law from the Moscow State
University.
Andrey Mityukov
Role: Senior Vice President of Human Resources and Business
System of LLC “Severgroup”
Experience: Born in 1967. Andrey Mityukov has held various
HR management positions in Henkel-Russia plant from 1997 to
2000. In 2000 he worked at Sun Interbrew as Human Resources
Director at the Povolzhye plant and from 2001 as Regional Human
Resources Director. In 2003 Andrey joined Severstal Group as
Human Resources Director of “Sveza”. From 2005 to 2015 he
held the role of Senior Vice President of Human Resources of PAO
Severstal.
External appointments: none.
Education: In 1988 Andrey Mityukov graduated from the
Leningrad PVO Military Political Academy. In 2001–2002 Andrey
studied Human Resources Management under a joint programme
run by the Higher School of Economics (Moscow) and Harvard
University. In 2012 he studied in the INSEAD Business School
under the “Strategy for HR leaders” programme.
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
47Severstal
Annual Report 2017
Mikhail Noskov(stepped down the Board of Directors on 9 June 2017)
Role: Non-Executive Director
Experience: Born in 1963. Mikhail worked at the International
Moscow Bank between 1989 and 1993. From 1994 until 1997,
he was Trade Finance Director of Credit Suisse (Moscow). He
has worked for Severstal since February 1997, fi rst as Head of
Corporate Finance and from 1998 as Finance and Economics
Director. From June 2002 until December 2013, he worked as
Deputy CEO for Finance and Economics of the Severstal Group.
From 2007 to 2008 he was Deputy CEO for Finance and Economics
of Severstal. From March 2014 until February 2016 Mikhail Noskov
was CEO of telecommunication company Tele2 (Russia).
External appointments: none.
Education: Mikhail graduated from the Moscow Institute of
Finance.
Sakari Tamminen
Role: Senior Independent Director, Chairman of the Remuneration
and Nomination Committee
Experience: Born in 1953. Sakari Tamminen has extensive relevant
experience at Board level within steel and metals companies,
including being the President and CEO of the Finnish steel and
metal construction company Rautaruukki Corporation from
2003 to 2014. Sakari is currently a member of the Board at steel
company Ovako Ab, and has been the Vice Chairman of the
Board of Sanoma Corporation since 2002 to 2013. He also holds
a directorship of Danske Bank Plc and is Chairman of the Board of
Directors of Versowood Oy and M. J. Paasikivi Oy. He has also held
roles as Executive Vice President and CFO of Metso Corporation
(1999–2003) and Rauma Corporation Plc (1991–1999).
External appointments:
• Member of the Board of Directors of Ovako Ab;
• Member of the Board of Directors of Danske Bank Plc;
• Chairman of the Board of Directors of Versowood Oy;
• Chairman of the Board of Directors of M. J. Paasikivi Oy.
Education: Sakari Tamminen studied in Tampere University. He
holds a degree of Master of Science (Economics).
CORPORATE GOVERNANCE
48Severstal
Annual Report 2017
Philip Dayer
Role: Independent Non-Executive Director, Chairman of the
Health, Safety and Environmental Committee, Member of the
Remuneration and Nomination Committee
Experience: Born in 1951. Philip Dayer has extensive experience of
advising international companies, including in the CIS. Philip sits
on the Boards of several listed companies in the energy, software
and fi nancial services sectors. Philip qualifi ed as a Chartered
Accountant and pursued a corporate fi nance career in investment
banking providing capital markets advice, including on M&A
transactions and fl otations. Over the past fi ve years he has also
held Non-Executive Directorships at Hurricane Exploration plc,
Cadogan Petroleum plc, Dana Petroleum plc, Arden Partners plc,
Navigators Underwriting Agency Limited and IP Plus plc.
External appointments:
• Non-Executive Director, member of the Audit Committee and
member of the Remuneration Committee of JSC VTB Capital
Holding;
• Senior Independent Director, member of the Audit Committee
and Chairman of the Remuneration Committee of AVEVA
Group plc;
• Non-Executive Director and Chairman of the Audit Committee
of JSC KazMunaiGas EP;
• Non-Executive Director and Chairman of the Audit Committee
of The Parkmead Group plc.
Education: Philip graduated from King’s College (London) in Law.
Alun Bowen
Role: Independent Non-Executive Director, Chairman of the
Audit Committee, member of the Remuneration and Nomination
Committee
Experience: Born in 1955. Alun Bowen spent almost 37 years
working for KPMG in London, Sydney, Cardiff, Hong Kong and
Kazakhstan. He has extensive relevant experience both at
Board level and in advisory roles. Having joined Peat, Marwick &
Mitchell & Co (subsequently KPMG) in 1976, he was appointed a
partner in 1988, and subsequently managed a number of practice
areas including being Managing Partner of KPMG Kazakhstan
from 2008 to 2013. He was a member of the audit committees
of The Institute of Chartered Accountants in England and Wales
(2004 to 2007), Business in the Community (2003 to 2005) and
The Prince’s Trust (2001 to 2007). From 2014 till 2017 Alun was a
member of the Supervisory Board of JSC Eurasian Bank.
External appointments:
• Non-Executive Director, Chairman of the Risk and Conduct
Committee and member of the Audit Committee of Julian
Hodge Bank Limited;
• Non-Executive Director, Chairman of the Risk and Conduct
Committee and member of the Audit Committee of Hodge Life
Assurance Company Limited;
• Non-Executive Director, Chairman of the Risk and Conduct
Committee and member of the Audit Committee of Hodge
Limited;
• Trustee and Director of Hodge Foundation.
Education: Alun Bowen holds a Master of Arts degree from
Trinity College, Cambridge, where he studied Metallurgy and
Materials Science, and he is a Fellow of the Institute of Chartered
Accountants in England and Wales.
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
49Severstal
Annual Report 2017
Alexander Auzan
Role: Independent Non-Executive Director, Member of the Health,
Safety and Environmental Committee
Experience: Born in 1954. Alexander Auzan is Dean of the Faculty of
Economics in Lomonosov Moscow State University, professor, founder
of the National Projects Institute, he is one of Russia’s leading
economists. In late 1980s, he has taken part in the establishment
of consumer protection associations and has been a Member of
the Executive Bureau of the Council of Consumers International
(worldwide consumers association). In 2005–2011 he was a
President of Association of Russian Economic Think Tanks (ARETT).
Mr. Auzan was also a member of the President’s Commission for
Modernization and Technological Development of Russian Economy
and President’s Council for Development of Civil Society and Human
Rights. He is currently a member of the Presidential Economic
Council. He has written numerous papers on the modernisation
of Russia, national values, and the dynamics of a social contract.
His applied work involves economic and development consulting
for national and regional governments, including participation in
development of “Strategy-2020” for Russia in 2011–2012. In
2015 he headed the working group on preparation of proposals for
structure, directions, resource’s provision and plan for the social and
economic development strategy of Russia up to 2030.
External appointments:
• Independent Director and member of the Strategic Planning
Committee of AO RVK;
• Senior Independent Director of PAO Rostelecom.
Education: Alexander Auzan graduated from Moscow State
University and holds a PhD in Economics.
Vladimir Mau
Role: Independent Non-Executive Director, Member of the Audit
Committee
Experience: Born in 1959. Vladimir Mau is an honoured Russian
economist. Since 1991 he participated in the economic reforms in
Russia, including working as Advisor to the Chairman of the
Russian Government from 1992 to 1993. From 1997 through
2002 Vladimir was the Head of the Working Center for Economic
Reforms of the Russian Government. In 2002 he became the
Rector of the Academy of National Economy of the Russian
Government (ANE), and since September 2010 the Rector of the
Russian Presidential Academy of National Economy and Public
Administration (RANEPA).
External appointments:
• Independent member of the Supervisory Board, Chairman
of the Audit Committee, member of the Nomination and
Remuneration Committee of PAO Sberbank of Russia;
• Chairman of the Trustees Board of the Fund for Bureau of
Economic Analysis;
• Member of the Trustees Board of Yegor Gaidar Foundation;
• Member of the Board of Directors of PAO Gazprom;
• Member of the Board of Directors, member of the Committee
for Corporate Governance, nominations and remunerations of
PAO TRANSCAPITALBANK.
Education: Vladimir Mau is a Doctor of Economics, Professor,
PhD (Université Pierre Mendès France), Honored Economist of the
Russian Federation. Vladimir graduated from the Moscow Institute
of National Economy in 1981.
CORPORATE GOVERNANCE
50Severstal
Annual Report 2017
Corporate Governance StatementThis section sets out how Severstal has applied the principles of
good governance during the year.
Corporate governance modelSeverstal is listed on the “First Level” on MICEX and has a
“standard listing” for its depository receipts on the London Stock
Exchange. Accordingly, Severstal follows the provisions of the:
1. Recommendations from the Corporate Governance Code (2014)
approved by the Central Bank of Russia and recommended for
application by the joint stock companies with listed securities –
available on www.cbr.ru, and
2. UK Corporate Governance Code (2016) – available on www.frc.
org.uk.
Severstal’s Corporate Governance Code has been prepared
following recommendations of the codes above and is based on
the following main principles:
• A solid commitment to full alignment with shareholders’
interests;
• A unifi ed, well-shaped business structure supported by a
focused corporate strategy;
• A disciplined merger and acquisition strategy supported by a
qualifi ed majority of Board members;
• A reliance on a stable, deep-rooted and incentivised
management team;
• Industry-leading disclosure practices and transparent corporate
reporting; and,
• A solid platform for delivering superior, long-term returns for all
our shareholders.
Along with Severstal’s Corporate Governance Code and the
Charter of the Company (both available at www.severstal.com)
the activities of Severstal’s management and supervisory bodies,
as well as internal activities, are also governed by a set of internal
corporate documents, which are also available online at
www.severstal.com.
Severstal is a member of the Russian Institute of Directors, the
leading expert and resource centre for corporate governance,
established by the largest Russian companies to develop, incorporate
and monitor standards of corporate governance in Russia.
Severstal is committed to continue developing and evolving its
corporate governance practices. For example, although the
minimum requirements for compliance for a “standard listing”
for its depository receipts on the London Stock Exchange are
relatively limited, Severstal continually monitors the requirements
for those companies that have a “premium listing” and where it
believes that these requirements will enhance transparency, they
are adopted. For example, the publication in December 2017 of
the UK’s proposed revisions to the UK corporate Governance Code
will be actively considered during 2018 and debated by the Board.
Compliance StatementThroughout the year Severstal complied with the requirements of
a listing on the “First Level” on MICEX and a ‘standard listing’ for
depository receipts on the London Stock Exchange, apart from the
fact that Severstal has not entered into a relationship agreement
with Alexey Mordashov, its majority shareholder.
The Board seeks to ensure that the interests of the minority
shareholders in the Company are properly respected by and
aligned with those of the majority shareholder. The Board has
carefully considered whether there would be any benefi t to the
minority shareholders of the Company entering into a relationship
agreement with the majority shareholder, however, the Board
has decided that the existing arrangements and regulations that
are in place, which endeavour to ensure that Severstal is capable
of conducting its business independently of the major shareholder
and his related companies, are satisfactory and that transactions
with the controlling shareholder and his related companies are
at arm’s length and on fair commercial terms. The principal
safeguards may be summarised as follows:
– Half of the Board consists of Independent Non-Executive
Directors and the Audit Committee and the Remuneration
and Nomination Committee consist of and are chaired
by Independent Non-Executive Directors.
– The majority shareholder exercises his voting rights, including
those related to amending Severstal’s Charter, in a way
which would not be prejudicial to the interests of minority
shareholders.
– The majority shareholder does not vote on any resolution to
approve a “related party transaction”. Severstal has established
a process whereby, whenever required, and at least monthly,
individual related party transactions are voted on by the other
members of the Board, who have no involvement with those
transactions, having been reviewed by the internal audit
function to ensure that they have been recorded and valued
appropriately. All related party transactions are also reviewed
by the Audit Committee and by the external auditors and
disclosed in the quarterly and annual fi nancial statements in
accordance with the requirements of IFRS.
– Shareholders have direct access to members of the Board and
executive management at Severstal’s Annual Capital Markets
Day and Annual General Meetings of Shareholders, which are
held in person. The majority shareholder, as the Chairman
of Severstal, will ensure that the interests of all shareholders
continue to be aligned.
Responsibility StatementsEach of the directors who is a director at the date of the approval
of this Annual Report confi rms that to the best of his knowledge:
1. The Group fi nancial statements are prepared in accordance
with IFRS, give a true fair view of the assets, liabilities, fi nancial
position and profi t of the Group;
2. The Strategic Report includes a fair view of the development
of the business and the position of the Group, together with a
description of the principal risks and uncertainties that it faces;
3. The Annual Report, taken as a whole is fair, balanced and
understandable and provides the information necessary for
shareholders to assess the Group’s position and performance,
business model and strategy.
The Annual Report was approved by the Board of Directors on
1 February 2018.
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
51Severstal
Annual Report 2017
Governance structure
ShareholderLevel
External Auditor
Internal AuditCommission
ManagementLevel
Board Level
General Meeting of Shareholders
Audit Committee
Remuneration andNomination Committee
Health, Safety and Environmental
Committee
Internal Audit
Company Secretary Board of Directors
Sole Executive BodyJSC «Severstal Management»
(managing company)
Auditor’s name Joint Stock Company KPMG
Legal address:16 Olimpiyskiy prospect bld. 5, fl oor 3,
premises I, room 24e, Moscow 129110
Postal address:10, Presnenskaya Naberezhnaya, Block C, fl oor
31, Moscow 123112.
State registration:
Registered by the Moscow Registration
Chamber on 25 May 1992, Registration No.
011.585.
Included in the Unifi ed State Register of
Legal Entities on 13 August 2002 by the
Moscow Inter-Regional Tax Inspectorate
No.39 of the Ministry for Taxes and Duties
of the Russian Federation, Registration No.
1027700125628, Certifi cate series 77 No.
005721432.
Membership of self-
regulating auditors’
organisation:
Member of the Self-regulated organisation
of auditors “Russian Union of auditors”
(Association).
The Principal Registration Number of the
Entry in the Register of Auditors and Audit
Organisations: No. 11603053203.
Taxpayer
Identifi cation
Number
7702019950
The Board of DirectorsSeverstal’s Board of Directors is responsible for the review
and approval of its strategy and business model, and closely
monitoring its fi nancial and business operations both by segment
and as a whole. The Board is also responsible for approval of
annual, half-year and quarterly results, the issue of any securities,
establishing dividend policy and recommendation of dividends.
It is also responsible for establishing Severstal’s risk appetite,
system of internal control, governance, monitoring executive
performance and succession planning. The Board reviews
standards of ethics and policy in relation to health, safety,
General Meeting of Shareholders and supervisory bodiesThe General Meeting of Shareholders (“GMS”) sits at the top
of Severstal’s governance structure. Full information on the
responsibilities of the GMS is available online at www.severstal.com,
together with details of when the GMS is held and how shareholders
are informed of an upcoming GMS and information on resolutions
at GMS, including those resolutions of the GMS that were taken
during 2017.
Severstal’s supervisory bodies are its Internal Audit Commission
and its External Auditor.
Severstal’s Internal Audit Commission is a full-time internal
control body that supervises the Company’s fi nancial and business
operations, to obtain adequate assurance that the Company’s
operations are in full compliance with Russian law, to make sure
the rights of the Company’s shareholders are observed, and the
Company’s reports and accounts have no material misstatements.
The Internal Audit Commission acts in the best interests of
shareholders and reports to the GMS.
Our Internal Audit Commission comprises three persons who
were re-elected by the AGM on 9 June 2017: Nikolay Lavrov
(Chief Internal Audit Executive); Roman Antonov (Deputy
Chief Internal Audit Executive); and Svetlana Guseva (Manager
of Internal Audit). They are elected for a period until the next
AGM. Members of the Internal Audit Commission cannot
be members of the Company’s Board and occupy any other
position in the Company’s management structure at the same
time.
The activity of the Company’s Internal Audit Commission is
regulated by Severstal’s Regulations for the Internal Audit
Commission. These regulations are available at www.severstal.com.
An external auditor is appointed annually by the GMS. Its fee is
subject approval by the Board.
CORPORATE GOVERNANCE
52Severstal
Annual Report 2017
environment, social and community obligations. Full information
on the responsibilities of the Board of Directors is available online
at www.severstal.com.
The Board’s activity is regulated under Russian law, the Company’s
Charter (2016) and Regulations for the Board of Directors (2014).
The BoardAccording to the Company’s Charter, Severstal’s Board comprises
ten members. Severstal believes that maintaining a balance
on the Board is a prerequisite for good decision-making and
corporate governance and ensuring equal regard for the interests
of all shareholders. Details of our Directors can be found in their
biographies.
Board composition
Executives and Non-Executives 50 %
Independent Non-Executives 50 %
Male 100 %
Female 0 %
Board diversity
Nationality
Russia (7)
UK (2)
Finland (1)
Professional experience Number of Board members
Steel 7
Mining 7
Finance 6
Oil & Gas 2
Academia 2
Governance calendar for 2017Overall calendar of General Meetings of Shareholders, in-person Board and its committees’ meetings are shown below:
Severstal governing bodies Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
AGM V
EGM V V
In-person Board V V V V
Audit Committee V V V V
Remuneration and Nomination Committee V V V
Health, Safety and Environmental Committee V V V
The Board reviews the independence of all Independent Non-
Executive Directors annually, and has determined that all
such directors are independent, in line with the UK Corporate
Governance Code and have no cross-directorships or signifi cant
links, which could materially interfere with them exercising
their independent judgment. The Company’s Independent Non-
Executive Directors play a leading role in corporate accountability
and governance through their membership and participation in
the Board’s committees.
New directors to the Board participate in an induction
programme when they take offi ce. This includes details of the
Company’s operations and procedures, as well as information
on what is required from them in their role according to the
Company’s internal corporate documents. This includes Severstal’s
Corporate Governance Code, applicable corporate governance
law, and descriptions of best practice to help ensure their early
effective contribution to the Company.
Separation of the roles of Chairman and CEOThe roles of the Company’s Chairman and CEO are separate
and their responsibilities are clearly defi ned in the Company’s
organisational documents and are regulated by law.
Alexey Mordashov is the Chairman of the Board of Directors.
The Board Chairman is elected from among its members by a
majority vote.
The Board Chairman’s role is to:
– Lead the Board and with other members of the Remuneration
and Nomination Committee lead the recruitment of new
directors;
– Ensure constructive relations between Executive
and Independent Non-Executive Directors;
– Ensure that all Board members can maximise their contribution
to the Board;
– Provide strategic insight from his wide-ranging business
experience and contacts built up over many years;
– Provide a sounding Board for the CEO on key business decisions
and challenge proposals where appropriate;
– Preside over the GMS, and,
– Meet with shareholders on governance matters and be an
alternative point of contact to the CEO for shareholders on
other matters.
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
53Severstal
Annual Report 2017
The CEO’s role is to:
– Lead the business and the rest of the management team;
– Lead the development of the Company’s strategy with input
from the rest of the Board;
– Lead the management team in company acquisitions and new
build decisions;
– Ensure organisation, status and accuracy of the company’s
accounting practices and the timely provision of appropriate
authorities with fi nancial reports;
– Bring matters of particular signifi cance or risk for discussion and
consideration by the Board, if appropriate;
– Be the principal public face of the company with shareholders,
customers, suppliers and the industry in general; and
– Cooperate with the company’s trade unions to protect
the interests of the company’s employees and communicate
with state and municipal authorities.
Sole Executive BodyThe authority of the Company’s Sole Executive Body is exercised
by the CEO of the Company.
Following the resolution of the Company’s shareholders dated
10 September 2014, the powers of Severstal’s CEO were
transferred to the managing company, Severstal Management,
with effect from 1 January 2015. This change was in line with the
Company’s stated strategic focus of optimising its management
structure and further enhancing management effi ciency and
transparency. Severstal Management achieved this by reducing
management layers, centralising certain administrative functions
and removing duplication.
The managing company has authority for managing all issues in
the Company’s current operations, except for those issues
specifi cally reserved for the Company’s GMS and the Board of
Directors.
Alexander Shevelev was appointed CEO of Severstal Management
with effect from 12 December 2016.
More details are available on www.severstal.com.
Board activity in 2017In 2017, Severstal’s Board of Directors held four (4) meetings in
person and eighteen (18) meetings in absentia.
The Board spent a considerable amount of time during
2017 discussing safety. In particular, the Board has reviewed
safety throughout the business and its continuing initiatives
to improve Severstal’s safety performance. It also discussed
regularly the changing dynamics of raw material prices and
the impact of the increasing rise in protectionism on Severstal’s
business.
In addition to the matters described above, the Board also
reviewed the following key matters:
– Health, safety and environmental issues;
– Severstal’s fi nancial plan, fi nancial performance and reporting;
– Issues relating to the strategic options facing Severstal;
– Risk and risk mitigation matters;
– Results of the external assessment for the Board and its
committees performance;
– The composition of the Board and its committees and
succession planning;
– External Auditor’s fee;
– Budget for 2018;
– Employee Code of Conduct, Anticorruption Policy, Code of
Business Conduct, Terms of reference of the Ethics Committee
of Severstal Group of Companies;
– Acquisitions and disposals;
– Transactions with related parties, etc.
The attendance of the Company’s directors at in-person meetings of the Board and its
committees during 2017
Member of the Board of Directors
Number of in-person Board meetings possible
Number of Board meetings attended
Audit Committee meetings attended (out of 4 meetings)
Remuneration and Nomination Committee meetings attended (out of 3 meetings)
Health, Safety and Environmental Committee meetings attended (out of 3 meetings)
Alexey Mordashov 4 4 – 31 –
Alexander Shevelev 2 2 – – 2
Vladimir Lukin 4 4 31 – 3
Alexey Kulichenko 4 4 41 – –
Andrey Mityukov 2 2 – 21 –
Mikhail Noskov 2 2 – – –
Alun Bowen 4 4 4 3 31
Philip Dayer 4 4 42 3 3
Sakari Tamminen 4 4 4 3 31
Alexander Auzan 4 3 11 – 1
Vladimir Mau 4 3 – – –
1 means that the specifi ed Director is not a member of the Committee, although he attended the meeting at the invitation of the Chairman of the Committee2 Philip Dayer stepped down the Audit Committee on 9 June 2017 and Sakari Tamminen was elected as a new member of the Audit Committee on the same date
CORPORATE GOVERNANCE
54Severstal
Annual Report 2017
Moreover, Independent Non-Executive Directors meet separately
as a group during the year. There were four such meetings in 2017.
Board self-evaluation results for 2017The Board carries out an annual self-evaluation of its performance
based on the individual contribution of each Board member, and
has an external evaluation once every three years in accordance
with the best corporate governance practice.
In 2017 the Board conducted its own self-evaluation. The self-
evaluation process was based on a series of confi dential and wide-
ranging questionnaires with each Board member. Questionnaires
were focused on evaluating the effi ciency and performance
of the Board and its Committees. The evaluation tested key
areas of the Board’s operations including its participation in the
formation of the Company’s strategy, succession and composition,
boardroom interaction, culture, and the way the Board supervises
business performance, risk, governance and operations in
the interests of the Company as a whole.
The results of the Board self-evaluation were collectively discussed
by the Board at its meeting in February 2018.
Firstly, the Board reviewed the progress on the implementation
of the recommendations of the independent evaluation carried
out in late 2016. The Board is satisfi ed that signifi cant progress is
being made on: learning the lessons from the Severnaya accident;
developing Severstal’s longer-term strategy for value creation; the
communication of Severstal’s values and principles throughout the
organisation; ensuring that directors have suffi cient information
to support their decision-making activities; ensuring that
the independent non-executive directors expand their programme
of site visits; and increasing engagement with shareholders.
The progress on a number of these issues is included in this
Annual Report. It also agreed that the independent directors’
involvement in the top-talent programme had increased both the
quality of debate on succession planning and also increased their
knowledge of the day-to-day issues facing Severstal’s businesses.
In its self-evaluation carried out from December 2017 to
January 2018 the Board agreed actions in relation to continuing
the evolution of the Board’s processes and discussions of the
continuing journey towards best-in-class governance.
The Board underlined some areas for improvement for 2018, those
are:
– the succession of Board members, CEO and key executives
should be considered in even greater depth than currently;
– the Board should continue considering the company’s
strategy in detail and explore a wider range of alternative
strategic options and scenarios;
– the Board should continue working on ensuring that its internal
control and risk management systems are as robust and
effective as possible.
Alexey Mordashov, Chairman of the Board of Directors has
been named the Best 2017 Chairman of the Board of Directors:
development of corporate governance at the Director of the Year
Awards.
The Director of the Year awards are presented by the Association
of Independent Directors and the Russian Union of Industrialists
and Entrepreneurs, in partnership with the Moscow Exchange, PwC
and Sberbank. The awards recognise the personal contribution
of Board Directors to ensuring that Russian companies meet the
highest standards of corporate governance. The award ceremony
was held in Moscow on 28 November.
The winners are selected by a council of experts, comprising
22 representatives from national/international regulators, leading
Russian corporations, the investment community, professional
associations, and previous award winners. At the fi rst stage, the
lists for the 50 best independent directors, 25 best chairmen of
directors and 25 best corporate secretaries are drawn up, from
which the Expert Council shortlists candidates. When evaluating
candidates for the Chairman of the Board of Directors award,
the Expert Council looks at the nominees’ role on the board of
directors, their company’s progress in corporate governance,
the effectiveness of the organisation and their company’s
transparency.
The Expert Council noted that in the role of the Chairman of the
Board of Directors, Alexei Mordashov “established an effective
working environment, ensured regular strategic discussions
and introduced a client-oriented corporate culture. The Board
of Directors is formed on the principles of independence and
professionalism, and regular and effective communication of the
Council and the company with investors.”
Alongside Alexey Mordashov, members of the Board of Directors,
Alexander Auzan, Alun Bowen, Philip Dayer and Vladimir Mau,
were also recognised. They were included in the list of Top 50
Independent Directors. Artem Bobulich, corporate secretary
of Severstal, was included in the 25 best corporate secretaries.
Senior Independent DirectorSakari Tamminen is Severstal’s Senior independent director and
Chairman of the Remuneration and Nomination Committee.
The Senior Independent Director’s role is to:
– coordinate communication of Independent Directors;
– liaise with the Chairman of the Board;
– act as an advisor for the Chairman to ensure effi cient activity of
the Board;
– ensure that appropriate succession planning procedures are in
place in relation to the Chairman’s succession;
– meet annually with independent directors to appraise the
Chairman’s performance, taking into account the views of
Executive Directors, and on other occasions as are deemed
appropriate; and,
– be available to shareholders if they have concerns which have
not or cannot be resolved through contact with the Chairman
or the Company’s executive body.
Investor relationsThe Board makes considerable efforts to establish and maintain
good relationships with shareholders and the wider investment
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
55Severstal
Annual Report 2017
community. There is regular dialogue with institutional investors
during the year, primarily though the Head of Communications
and Investor Relations and his team.
In November 2017, Sakari Tamminen led Severstal’s senior
management team in London at the Company’s seventh
annual Capital Markets Day. The meeting was also attended by
certain Independent Non-Executive Directors in order that they
could develop their own understanding of the views of institutional
shareholders.
Corporate SecretaryThe Corporate Secretary ensures Severstal’s compliance with
the requirements of applicable law, the Company’s Charter
and internal documents regulating the needs and interests of the
Company’s shareholders. The Corporate Secretary is responsible
for safeguarding the rights and interests of shareholders, as well
as establishing transparent and effective regulations to secure the
rights of shareholders. Full information on the responsibilities of
the Corporate Secretary is available online at www.severstal.com.
Artem Bobulich has been the Corporate Secretary of Severstal
since 20 January 2014. Artem Bobulich (born in 1983) has
worked in the Company’s Corporate Secretary Team of the Legal
Affairs Directorate since 2007. He graduated from the Cherepovets
State University with foreign philology specialisation and from the
Moscow State Law Academy.
Share capitalSeverstal share capital comprises ordinary shares with a
nominal value of RUB 0.01 each. The authorised share capital of
Severstal as at 31 December 2017 comprises 837,718,660 issued
and fully paid shares.
All Severstal shares carry equal voting and distribution rights.
There are no restrictions or limitations on voting rights for holders
of Severstal shares and GDRs.
Equity capital structure
as at 31 December 2017Share, % Shareholders’ equity capital
A. Mordashov* 77.03%
Free fl oat 20.15%
Treasury shares 2.82%
Total 100 %
* Through participating in Severstal’s privatisation auctions and other purchases, Alexey Mordashov
had purchased shares in Severstal such that as at 31 December 2017 he controlled indirectly
77.03% of Severstal’s share capital.
Whistleblowing proceduresSeverstal operates a whistleblowing policy for employees to
confi dentially report concerns about any unethical business
practices to senior management in strict confi dence and without
fear of recrimination through several routes. Severstal’s Ethics
Committee is the executive body which oversees the fi rm’s
whistleblowing activities and the Audit Committee receives details
of whistleblowing reports.
Anti-bribery and anti-corruption measuresSeverstal’s anti-corruption policy, which is available at
www.severstal.com and supported by the Severstal Employee Code
of Conduct and Severstal Code of Business Conduct, incorporates
appropriate provisions to meet Severstal’s obligations under
Russian legislation and the UK Bribery Act.
All individuals applying for employment with Severstal are
screened for their attitude to corruption and risk. The applications
of those employees who do not meet the expected standard
are not proceeded with. A training and communication
programme is in place for all employees to ensure that they
understand Severstal’s requirements and related reporting
procedures. Regular screening checks are also carried out for
existing employees.
Arrangements with contractors and suppliers have been and
continue to be reviewed to ensure full compliance with Severstal’s
anti-corruption policy.
Oversight of the programme is the responsibility of the Ethics
Committee, which reports regularly to the Audit Committee.
Payments to GovernmentsSeverstal’s payments to Governments disclosure in the year ended
31 December 2017 can be found in the Investor Relations section
of www.severstal.com.
CORPORATE GOVERNANCE
56Severstal
Annual Report 2017
Severstal’s Board of Directors has the following committees:
– Audit Committee;
– Remuneration and Nomination Committee;
– Health, Safety and Environmental Committee.
The Board Committees serve as consultative and advisory bodies
that deal with issues raised by the Board of Directors. Committees
may not act on behalf of the Board and are not considered to be
management bodies of the Company. They have no powers in
relation to managing the Company.
Committee meetings are held as and when necessary, but at
least three times a year (except for the Health, Safety and
Environmental Committee, which meets at least twice a year).
They are held separately from Board meetings so that extra
attention can be given to discussing issues, which require
preliminary Board consideration prior to approval by the Board of
Directors members, and determine the necessity of the Board’s
approval for a specifi c issue.
Decisions of each Committee are taken by a majority vote of all
Committee members taking part in the meeting. Each member has
one vote and the Committee Chairman has no casting vote in the
event of a tie.
The activity of Severstal’s Committees is regulated
by the Regulations for Board Committees. Please refer
to www.severstal.com for more information.
The Audit CommitteeThe Audit Committee consists of three Independent Non-Executive
Directors. Currently they are:
1. Alun Bowen (Chairman);
2. Sakari Tamminen;
3. Vladimir Mau.
Sakari Tamminen replaced Philip Dayer as a member of the Audit
Commitee during the year to ensure compliance with MICEX’s
independence rules.
Role
The Audit Committee assists the Board of Directors in monitoring
the Company’s risk management processes and control
environment, and in reviewing the Company’s annual and
quarterly fi nancial statements and overseeing its internal and
external audit arrangements.
Composition
The Board considers that each member of the Audit Committee
has appropriate knowledge and understanding of fi nancial matters
and commercial expertise, suffi cient to enable them to consider
effectively the fi nancial and accounting issues that are presented to
the Audit Committee. Sakari Tamminen has extensive experience of
the steel industry. The Board considers Alun Bowen, the Chairman
of the Audit Committee to have specifi c recent and relevant
fi nancial experience, further details are available in his biography.
Report by Alun Bowen, Chair of the Audit CommitteeI am pleased to report on the work of the Audit Committee.
A key responsibility is to ensure that the fi nancial information
presented by Severstal is fair, balanced and understandable.
To do this we focus on the quality of fi nancial information,
the independence of our external auditors and the assurance
provided by internal audit. The Audit Committee also continues
to debate and challenge the assumptions and estimates made by
management in producing the fi nancial statements.
Financial reporting
The most signifi cant issues regarding the 2017 Annual Report and
fi nancial statements and how the Audit Committee dealt with
them are set out below:
Area of focus Work undertaken Conclusion/Action taken
Tax claims and provisions: revised interpretations
of tax legislation by the Russian tax authorities
resulted in signifi cant claims being issued during
2016.
Extensive discussions took place between Severstal
management and the Russian tax authorities in
relation to the claims, and a number of matters
were clarifi ed, which resulted in a reduction in the
claims outstanding during 2017.
The Audit Committee discussed the issues with
the members of the management responsible
for taxation affairs. It also discussed with them
the status and nature of the discussions with the
taxation authorities.
The Audit Committee also discussed the issues
with KPMG’s tax specialists in relation to the
specifi c issues and also with respect to their wider
knowledge of activity in relation to taxation claims.
The Audit Committee agreed that the reduction in
the claims outstanding with the Russian tax
authorities was appropriately refl ected in the
fi nancial statements and the related disclosures
were fair and balanced.
Accounting for the Yakovlevskiy mine: the
Yakovlevsky mine transaction, although not a
particularly signifi cant transaction, as a result of
the initial arrangement to buy the debt from a
bank followed, after an interval, by taking control
of the asset and the ongoing process to secure full
legal ownership, involved the Audit Committee in
discussing the appropriate treatment of the
transaction at various times during the year.
The Audit Committee discussed the status
of the transaction with fi nancial and legal
management and also the Head of Security
to establish initially whether Severstal had
control of the asset. It was agreed that this
eventually took place in November 2017. The
Audit Committee also discussed the assumptions
made by the external valuers, commissioned
to determine the fair value of the asset, with
executive management to ensure that they were
appropriate in the circumstances.
The Audit Committee was satisfi ed that the
Yakovlevskiy consolidation has been accounted
for appropriately and that the related
disclosures in the fi nancial statements are fair
and balanced.
Board Committees and reports from
their chairs
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
57Severstal
Annual Report 2017
Non-GAAP measures: they aid understanding of
Severstal’s fi nancial performance
Severstal uses the following non-GAAP measures:
• EBITDA;
• EBITDA margin;
• Free Cash Flow;
• Net debt; and
• Net debt/EBITDA.
We discussed the use of non-GAAP measures and
reviewed their consistency with prior years.
We are satisfi ed that the non-GAAP measures,
which are widely used in our industry, can
provide better insight into Severstal’s fi nancial
performance. We reviewed the non-GAAP
measures and were satisfi ed that they did not
detract from the GAAP measures.
Annual Report: taken as a whole the Annual Report
needs to be fair, balanced and understandable so
that it is relevant to readers.
We held preparatory meetings with management
to determine the format of the Annual Report
and reviewed the allocated responsibilities and its
content, overall cohesion and understandability.
We considered judgemental matters such as the
principal risks in the Risk Management section,
estimates and the period covered by the viability
statement.
We received confi rmation that individuals’
responsibilities had been fulfi lled and confi rmed
that the overall report was consistent with the
directors’ knowledge. This allowed the Audit
Committee and the Board to be satisfi ed that the
Annual Report taken as a whole is fair, balanced
and understandable. We were satisfi ed that
the information presented in the Strategic Report
was consistent with the performance of the
business reported in the fi nancial statements. We
were satisfi ed that the viability statement should
consider a three-year time horizon refl ecting
our internal planning cycle.
External audit
The Audit Committee places great importance on the quality
and effectiveness of the external audit. In assessing quality and
effectiveness, the Audit Committee looks to the audit team’s
objectivity, professional scepticism, continuing professional
education and its relationship with management.
The Audit Committee carries out an annual evaluation of
the independence and objectivity of the external auditor and
the effectiveness of the audit process, taking into consideration
relevant professional and regulatory requirements. This
assessment is based on a specifi c discussion between the members
of the Audit Committee with the input of the Executive Directors
and other relevant senior management.
This year KPMG carried out its own client service interview
held by a senior member of the fi rm not involved in the
engagement interviewing me after discussion on their views with
the other members of the Audit Committee.
The output of the Audit Committee’s assessment and KPMG’s
client service review were discussed with the Lead Audit
Engagement Partner who developed a plan to implement the
review’s recommendations.
In addition to the annual evaluation, the Audit Committee
undertakes an ongoing assessment of external audit quality and
effectiveness in the following ways:
• The Audit Committee debates and agrees the key areas of
focus for the external audit.
• The Audit Committee negotiates and agrees the scope of the
audit prior to its commencement.
• The Audit Committee discusses the accuracy of fi nancial
reporting (materiality) with KPMG both for accounting errors
that will be brought to the Audit Committee’s attention and
amounts that would need to be adjusted so that the fi nancial
statements give a true and fair view.
• I discussed with KPMG the output of reviews carried out by
Russian and international regulators on its work. No issues
arose from these reviews.
• I meet with Larisa Kiseleva, the audit partner from KPMG who
has been the Lead Audit Engagement Partner for the IFRS
fi nancial statements since the fi rst quarter of 2015, in her offi ce
once a quarter and we communicate regularly by email and
telephone between these meetings.
• The Committee receives at every Audit Committee meeting
an update of KPMG’s work, compliance with independence
and its fi ndings. There is a detailed discussion of KPMG’s audit
fi ndings including audit differences, the work undertaken to
support their audit opinion on the fi nancial statements and the
consistency of the Annual Report with their work, prior to the
approval of the fi nancial statements and Annual Report.
• Audit differences are also discussed. No uncorrected audit
difference was qualitatively or quantitatively material to
any line item in either the income statement or the balance
sheet. Accordingly, the Audit Committee did not require any
adjustment to be made to the fi nancial statements as a result
of the audit differences reported by KPMG.
The Board has established a policy setting out what audit services
can be purchased from the fi rm appointed as external auditors.
Generally, only assurance services are purchased where it is
sensible to use the external auditor from a cost-effi ciency
or regulatory perspective. The audit fee for the year ended
31 December 2017 was $1.1 million (2016: $1.0 million) and
non-audit fees in connection with assurance on bond offerings was
$0.1 million (2016: $0.2 million).
During 2017 the Audit Committee commenced preparatory
work in relation to the audit tender which will be held in 2018. The
Audit Committee reviewed the Russian audit market and discussed
the capability and quality of the fi rms in the market. Deloitte, EY
and PwC were asked to participate in the audit tender as they were
considered to be the fi rms having the necessary scale, capability
and reputation for audit quality to act as Severstal’s external
auditors. Although KPMG has been Severstal’s auditors since 1997,
the Audit Committee decided that KPMG would also be asked to
participate in the tender process as under the audit rotation rules
recently introduced in the EU they would not be required to rotate
for a further three-year period.
CORPORATE GOVERNANCE
58Severstal
Annual Report 2017
The Audit Committee members met with prospective lead audit
engagement partners from Deloitte, EY and PwC in October to
establish whether the individuals had the necessary personal
qualities to act in that role. The Audit Committee also met the
prospective KPMG audit partner for the year ending 31 December
2020 as Larisa Kiseleva would have to rotate after the year ending
31 December 2019.
The Audit Committee has determined and agreed an appropriate
process, timetable and the critical success factors for the process.
Internal Audit
The annual Internal Audit Plan is developed from a consideration
of the principal risks facing Severstal, a cycle of audit testing and
management requests. The Audit Committee provides its input in
advance of approving the plan at an off-site meeting with Nikolay
Lavrov, the Chief Audit Executive, attended by members of the
Audit Committee. The Audit Committee meets on its own with
Nikolay Lavrov, in addition to the off-site session, at least three
times a year.
I led the Audit Committee’s formal review of the effectiveness
of internal audit this year, which involved the completion of a
detailed questionnaire by members of the Audit Committee
and Internal Audit’s principal “customers” being the heads of
Severstal’s operating businesses and Alexander Shevelev.
The major areas for discussion were:
• Ensuring management has a better understanding of
the internal audit process and has better “buy-in” to the internal
audit plan, whilst ensuring the plan is still “owned” by the Audit
Committee.
• Communicating (and clarifying if necessary) the distinction
between the roles and responsibilities of the Security
Department and that of Internal Audit.
• Developing a plan to strengthen the relationship between the
Head of Internal Audit and business heads.
Management continues to demonstrate increasing willingness
to implement internal audit’s recommendations and there
has been a reduction again this year in the number of agreed
recommendations which have not yet been implemented.
Control environment
The Audit Committee has supported management’s efforts
to improve the control environment during the year. In particular
ensuring that plans exist to close vulnerabilities in the information
technology system from both external and internal actions.
The external penetration test carried out during the year was
encouraging, but also provided a number of recommendations
for improvement.
In addition to the work carried out by Internal Audit, the Audit
Committee receives reports from the Head of Security who briefs
the Audit Committee on the Security Department’s efforts through
psychophysiological screening and other methods to ensure that the
risk culture within the organisation is the best it can be. The sharply
reducing trends in inventory theft (particularly ferro-additives),
drug and alcohol abuse, disclosure of trade secrets and the number
of criminal corruption cases are encouraging. As is the number of
employees who are compliant with anti-corruption standards and
the continuing vigilance through testing of prospective employees
for their attitude to safety, risk and corruption. The Head of Security
also briefs the Audit Committee on issues of physical and cyber
security, his plans and actions to minimise the risk in these areas
and his cooperation with Internal Audit.
Whistleblowing and ethics
The Audit Committee carried out a comprehensive review of
Severstal’s whistleblowing procedures and other communication
channels during the year, which involved changes in the terms
of reference of Severstal’s Ethics Committee, Employee Code of
Conduct, Code of Business Conduct and Anti-Corruption Policy to
ensure this activity remains in line with global best practice.
Audit Committee effectiveness
The Audit Committee reviews its terms of reference and
effectiveness annually. An external effectiveness review carried
out in December 2016 concluded that there was no signifi cant
area for concern in respect of the performance of the Audit
Committee or any of its members, accordingly no formal review
was carried out this year, although the membership of the Audit
Committee changed during the year as commented on earlier.
Looking ahead
In 2018, in addition to its regular work, the Audit Committee will
be focusing on:
• Ensuring a thorough and effective external audit tender
process;
• Overseeing continuing improvements in the Annual Report, the
Sustainability Report and Severstal’s website to ensure that
stakeholders receive the information they require in the most
effective manner;
• Ensuring that Severstal’s increasing use of “big data” is
managed appropriately and does not increase Severstal’s
exposure to risk.
The Remuneration and Nomination CommitteeThe Remuneration and Nomination Committee consists of
three Independent Non-Executive Directors. Currently they are:
1. Sakari Tamminen (Chairman);
2. Philip Dayer;
3. Alun Bowen.
Role
The Remuneration and Nomination Committee’s role is to assist
the Company engage qualifi ed professionals to manage the
Company, create the incentives necessary to ensure they are
successful within the Company and ensure there is an appropriate
talent pool and oversee succession planning within Severstal.
It also reviews the remuneration and compensation for the
Company’s senior managers and Board members.
Report by Sakari Tamminen, Chair of the Remuneration and Nomination CommitteeThe Remuneration and Nomination Committee has focused on
three principal areas this year:
• Corporate culture and employee engagement;
• Succession planning and Severstal’s talent pool;
• Executive remuneration structure and the long-term incentive
plan (LTIP).
A winning corporate culture and talent retention
Severstal pays a lot of attention to developing a unique corporate
culture of innovation and continuous improvement. We fi rmly
believe that a strong corporate culture is our unique advantage,
with a long-lasting and growing value. It is hard to replicate by
peers and helps to promote change faster.
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
59Severstal
Annual Report 2017
The cornerstone of our corporate culture is the Business System of
Severstal which is the logical development of more than ten years
of ongoing efforts to optimise production and standardise internal
processes, through many projects striving to achieve maximum
effi ciency of labour, equipment and energy, improve customer
service and ensure employee safety. Among industry players, the
system is unrivalled in the extent of its integration and EBITDA
contribution potential.
It also includes a set of projects for cultural change. We believe
this gives us a key competitive advantage, and is crucial for
success in the steel and mining industry. Ultimately, its intention is
to make Severstal a global effi ciency leader in the steel industry.
There are four main lines of development in the Business System:
• Safety;
• Customer care;
• People engagement;
• Continuous improvement of operational performance;
As a result of our Business System initiatives, we see an increased
level of engagement of our employees and higher satisfaction
levels of our clients, a trend that we are confi dent will continue.
The improvement in employee engagement has been refl ected in
the outcome of the fi fth annual independent employee
engagement survey which, using the AON Hewitt engagement
model, gave an engagement percentage of 75%, which is
nine percentage points ahead of manufacturing in Russia and
13 percentage points ahead of employees in global metallurgical
companies.
Safety has a major focus and signifi cant activity takes place to
ensure that only employees with an appropriate attitude to safety
are recruited and retained.
We do not tolerate bullying behaviour or corruption regardless of
the executive level. Severstal has an Anti-Corruption Policy focused
on ensuring our compliance with both Russian and international
anti-corruption laws. This policy sets standardised anti-corruption
requirements for all Severstal businesses and regulates activities
associated with high corruption risks, such as cooperation with
partners, acquisition of corporate securities, establishment of
joint ventures, mergers and acquisitions, confl ict of interest
evaluation procedures, sponsorships and charities, gifts and
entertainment, and so on under this programme, we developed
and adopted the Severstal Employee Code of Conduct and
Severstal Code of Business Partnership propagating our anti-
corruption requirements into our supply chain. There is also an
Ethics Committee in place and a phone/SMS hotline for our staff
to anonymously report any wrongdoing.
Continuous demonstration of corporate values is a task going
far beyond the responsibility of just the HR function; it is a
fundamental requirement for any manager of employees
across the organisation. In addition to the Business System we
have internal policies in place to observe any violation of our
corporate values.
The recruitment of high-potential students and graduates is
a priority of Severstal’s HR policy. We work hard to meet our
long-term need for young professionals, to improve the quality
of training of our future employees and to make the metals and
mining industry more attractive for job seekers. Our aim is to make
the steelmaking industry and the science behind it exciting for
younger generations. I had the pleasure this year of visiting with
other Committee member colleagues the Metallurgy Museum in
Cherepovets – a great twenty-fi rst century experience and a big
attraction for future employees of Severstal.
An ambition to become a global leader in value creation also
helps to attract and retain career-oriented professionals seeking
challenges and interesting tasks. We intend to achieve this
leadership through sustained improvements in operational facilities
and lean production, and use of best available technologies. We
have a set of ongoing schemes for employee development and
training, from induction programmes through to senior professional
development. This helps us to create a culture where employees
share similar values and work towards achieving similar goals.
Succession planning and Severstal’s talent pool
Part of our effort to create a motivating corporate culture is
a focus on growth of a talent pool, establishing remuneration
policies which motivate management for long-term performance
and are clearly aligned with the business KPIs and objectives, as
well as the interests of Severstal’s shareholders. This also includes
annual 360-degree feedback, half-year (annual) assessment of
top managers by the CEO and the Board of Directors, semi-annual
Staff Committees’ reviews and development of a succession pool.
As a result, since Severstal’s IPO all executive director positions
at the Company’s Board of Directors have been placed with
top managers from Severstal’s internal talent pool. Undesirable
executive talent outfl ow has been minimal and much below the
average industry level.
At each meeting, the Committee discusses and reviews Severstal’s
existing and emerging talent pool for senior positions and the
Company’s plans for development of the individuals and the
potential succession plans for each senior position.
As a result of members of the Remuneration and Nomination
Committee’s active involvement in Severstal’s Second Opinion
programme, where the fi rm’s talent participates in an interview
with a person not known to them and independent of executive
management, I am pleased to say that the Committee has a far
better collective knowledge of the capabilities of its senior talent
pool.
Executive remuneration structure
The executive remuneration structure seeks to strike the right
balance between engaging and retaining highly qualifi ed
managers and the interests of the shareholders. Though the
established remuneration policy has long-term variable pillars
like LTIP and KPIs, the fi xed salary element undergoes annual
revision involving benchmarking using external data to ensure
that the Company management’s compensation is fair and is in
line with the market trends. We seek to reward our executives in
the range between the 50th and 75th percentile of the market
average, as defi ned by external benchmarks. We regularly review
these external benchmarks, which are currently provided by
members of the Big 4 accounting fi rms, to ensure that they are
relevant and appropriate to our business. In 2017, we adopted
Total Shareholder Return as an additional KPI for management to
align more closely their reward with those of shareholders.
Annual Remuneration consists of the following two parts: a fi xed
salary mentioned above and a variable part known as a bonus.
The bonus’ percentage of an individual’s annual salary varies
for various executive levels. However, in general the bonus consists
of two parts – an individual element and a corporate one:
CORPORATE GOVERNANCE
60Severstal
Annual Report 2017
• The fi rst 50% is based on performance against individual
targets. The individual targets for executive Board members are
set by the Company CEO; targets for the CEO are determined
by the Remuneration and Nomination Committee and
recommended to the Board;
• The other 50% of the bonus is performance compared with
the Company’s fi nancial and operational KPIs set by the CEO
at the start of the year and approved by the Remuneration
and Nomination Committee. The set of KPIs includes fi nancial
targets such as operating cash fl ow, EBITDA and Total
Shareholder Return.
Board of Directors’ remuneration and compensation policy
By the decision of the General Meeting of Shareholders (GMS),
Board members may be paid a remuneration during the execution
of their duties, and be reimbursed for expenses incurred in
connection with their functions as Board members. The amount
of such remuneration or compensation is subject to approval by
the GMS only. Should any Board member decide to resign before
their term of his/her offi ce expires, such a Board member is paid
pro rata in proportion to the term of offi ce that expired prior to
resignation.
If incurred, Severstal reimburses its Board members’ expenses in
connection with the performance of their duties as Board
members, including transport, accommodation and mailing costs,
as well as costs relating to the translation of company documents
or materials that they are provided with.
Long-term incentive programme (LTIP)
For long-term retention of top management and alignment of
their interests with those of the shareholders, Severstal has a LTIP
programme in place.
The LTIP covers a period of three years and is based on a
“phantom” stock plan. This type of stock plan pays a cash award
to an employee that equals a set number of Severstal shares
multiplied by the current share price. Phantom stock plans
contain vesting schedules that are based on tenure. The vesting
period for the whole LTIP starts only after the end of the third year
of the executive’s participation in the programme. The number
of phantom shares attributed to an executive is determined
by a proportion of the executive’s salary in the fi rst year of the
programme.
The Committee reviews on an annual basis the awards made
under the LTIP programme and the individuals who are eligible to
receive awards.
Compensation of Senior Managers, Executive Officers and Directors
Key management’s remuneration for the year ended 31 December
2017, consisting of salaries and bonuses, totalled US$11 million
(2016: US$10 million; 2015: US$10 million). Additionally, in
2017, a provision for key management’s long-term cash-settled
share-based incentive programmes of US$1 million was accrued
(2016: US$3 million, 2015: US$2 million). This provision is subject
to further adjustments, dependent on a range of the Group’s
fi nancial indicators.
Health, Safety and Environmental CommitteeThe Health, Safety and Environmental Committee currently
consists of:
1. Philip Dayer (Chairman),
2. Alexey Mordashov,
3. Alexander Shevelev,
4. Vladimir Lukin,
5. Alexander Auzan.
Role
The Health, Safety and Environmental Committee assists the
Board in obtaining assurance that appropriate systems are in
place to deal with the management of health, safety and
environmental risks.
Report of the Chairman of the Committee Philip Dayer on Work Safety, Industrial Safety and Environmental Protection Committee and its work in 2017Health and safety is the main priority of Severstal. The Company’s
goal is to eliminate completely fatal accidents
To achieve this goal, the Company is working on a programme of
continuous improvement of safety in all aspects of its activities,
strives to follow best practices in the fi eld of work safety, as well as
to become the leading Russian company in this sphere.
We are open for cooperation. Senior management of the
Company takes part in the meetings of the RUIE Committee on
Environmental and Industrial Safety under the auspices of the
Russian Steel Consortium, the national professional association of
metallurgists. Severstal is an active participant in the World Steel
Producers Association, which regularly publishes reports in the
sphere of work and industrial safety.
The system of work and industrial safety of fi ve enterprises of the
Russian Steel Division (Cherepovets Iron and Steel Works, Izhora
Tube Rolling Plant, Severstal Distribution Company, Severstal
Project, Severstal-SMC–Vsevolozhsk), and Karelsky Okatysh and
Olkon enterprises are certifi ed for compliance OHSAS 18001:
2007 standards.
For the year ended 31 December 2017, the company showed a
47% reduction in injuries compared with 2016.
Projects involving work and industrial safety are integrated into
the Severstal Business System, which is a long-term programme
for transforming culture and increasing the Company’s effi ciency.
The main safety initiatives in 2017 were:
1. Hazard identifi cation:
• Search for hazards by interviewing and questioning workers;
development and implementation of measures aimed at
eliminating hazards;
• Investigation of micro-traumas and dangerous events
with analysis of root causes to prevent the recurrence of
similar incidents.
2. Involvement of personnel in work safety issues:
• Testing and training of production managers;
• Conducting “live” briefi ngs with workers;
• Teaching the basics of safe behaviour, including security in
everyday life;
• Identifying and disseminating best practices in work safety;
• Organisation of a multi-stage contest “Safety Formula”.
A survey of employees conducted by internal audit in 2017 showed
that the involvement of staff has grown: all employees know the
basic rules of work safety, that they must use in their work; 95%
of employees confi rm the availability of the necessary means of
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
61Severstal
Annual Report 2017
protection and the timely conduct of safety briefi ngs. However,
the review also demonstrated that although a signifi cant amount
of progress has been made, there is some way to go before the
employees and the Committee can be fully satisfi ed.
We moved from supervision to partnership. According to the
results of the Corporate survey “Severstal Pulse”, 79% of employees
believe that safety requirements are justifi ed, understandable and
feasible in their departments, and 84% of employees noted that
their immediate supervisor explains how to do the job safely.
3. Work with employees who violate safety rules:
• Establishment of common principles for dealing with violators;
• The active support of safety committees in conjunction with
labour unions;
• Identifying employees who are prone to risk, through carrying
out psychological testing and working with them.
4. Active work with contractors:
• Organisation of training, communication;
• Implementation of Severstal’s corporate instruments in
contractor organisations;
• Implementation of a system of contractors’ corporate
certifi cation of motivating contractors’ managers to ensure
labour safety.
5. Accident prevention system (APS): conducting audits at all
production sites of the company with the aim of assessing
and improving the safety system:
• Introduction of uniform approaches in the application of work
safety tools in all business units;
• Establishment of proactive targets for managers on APS.
The company invested about 1,651 million rubles to ensure labour
safety. The largest investments included:
– The programme to reduce the injuries while walking (SRS –
22.8 million rubles);
– Programme to improve the level of protection in emergencies
(SRS, Metiz – 25.1 million rubles);
– The acquisition of safety equipment (Karelsky Okatysh –
222.4 million rubles, Olkon – 565.0 million rubles);
– Industrial safety systems in the Vorkutaugol mines –
785.2 million rubles.
Investments in Vorkutaugol include the implementation of
technical solutions aimed at creating a new industrial safety
system in mines:
• Explosion-proofi ng systems – triggered barrier;
• Introduction of a multifunctional security system;
• Monitoring and control system for explosion protection in
degassing pipelines;
• The system of explosion-localisation and for monitoring and
controlling explosion protection in mines;
• Provision of an emergency alert system with automatic
(delivery control) and manual (awareness control) confi rmation
of receiving a notifi cation signal by each miner;
• Improvement of regional and local forecast systems.
In 2017 Vorkutaugol implemented a number of activities aimed
at reducing the level of injuries and involving staff in work
safety issues:
• The levels of production control and the division of
responsibility of managers for occupational safety has been
revised;
• An assessment of the effectiveness and measures of the
results of the investigation of accidents has been performed;
correcting activities have been made;
• A programme to ensure the safety of traffi c has been
implemented;
• Competitions: “Work without injuries”, competition of the
best idea for the safe installation of arch support have been
organised;
• Implementation of the “Three Steps to Security” methodology.
Severstal is also actively working on environmental protection and
promotes social programmes in the regions where we work.
Year of ecology. Lead the charge.The ecological protection activity of Severstal is based on the
belief that improving environmental performance contributes
to improving the life quality of people and increases the
competitiveness of the Company. Environmental guidelines are
taken into account in the construction and modernisation of
production. The company purposefully develops programmes to
reduce the environmental impact of man-made work, involving all
employees in this work.
The Company’s expenses for implementation of environmental
measures during 2017 amounted to 2.65 billion rubles.
The most signifi cant events were at Cherepovets:
In July 2017, ahead of schedule, the construction of the combined
gas cleaning of the second ladle and the metal fi nishing unit
was completed. The emission of dust from the metal fi nishing
units is directed to a new bag fi lter, which cleans dusty air from
the ladle furnace. By September, the dust concentration at the
discharge was less than 10 mg/m3, which corresponds to the best
world practice. The expected reduction of dust emissions is some
500 tons/year.
In the framework of accomplishing our long-term obligations
on reduction of discharge of pollutants into water sources,
during 2017 erection works on technical re-equipment of the
section for processing sludge from gas cleaning of blast furnaces
were fi nished. Start-up works are in progress. The new installation
will be brought on line in 2018.
In 2017, work began on the construction of an open waste storage
site for steelmaking and blast-furnace slurry:
– Project documentation has been completed;
– Public hearings on the environmental impact and project
documentation have been organised.
4 FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
Financial statements 62
Auditor's Report 64
Consolidated income statements 68
Consolidated statements of comprehensive income 69
Consolidated statements of fi nancial position 70
Consolidated statements of cash fl ows 71
Consolidated statements of changes in equity 72
Notes to the consolidated fi nancial statements 73
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
65Severstal
Annual Report 2017
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
67Severstal
Annual Report 2017
FINANCIAL STATEMENTS
68Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
69Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
FINANCIAL STATEMENTS
70Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
71Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
FINANCIAL STATEMENTS
72Severstal
Annual Report 2017
(Am
ount
s ex
pres
sed
in m
illio
ns o
f US
dolla
rs, e
xcep
t as
othe
rwis
e st
ated
)
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
73Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Severstal Resources
Severstal Russian Steel
Economic environment
FINANCIAL STATEMENTS
74Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Statement of compliance
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
75Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Basis of measurement
Critical accounting judgments, estimates and assumptions
Useful lives of property, plant and equipment
Impairment of assets
Taxation
Allowance for doubtful debts
FINANCIAL STATEMENTS
76Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Allowance for obsolete and slow-moving inventories
Decommissioning liabilities
Retirement benefit liabilities
Litigation
Deferred tax assets
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
77Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Consolidation
The acquisition method
Functional currency determination
Functional and presentation currency
FINANCIAL STATEMENTS
78Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Adoption of amended Standards
New accounting pronouncements
IFRS 9 Financial Instruments IAS 39 Financial instrumentsRecognition and Measurement
IFRS 15 Revenue from contracts with customers IAS 11 Construction Contracts IAS 18 Revenue IFRIC
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
79Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
IFRS 16 Leases IAS 17 Leases
Subsidiaries
Business combinations
FINANCIAL STATEMENTS
80Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Investments in associates
Joint arrangements
Goodwill
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
81Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
FINANCIAL STATEMENTS
82Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
83Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
FINANCIAL STATEMENTS
84Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Calculation of recoverable amount
Loans and receivables
AFS financial assets
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
85Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
FINANCIAL STATEMENTS
86Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Employee benefits
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
87Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Decommissioning liabilities
Ordinary shares
Repurchase of issued shares
FINANCIAL STATEMENTS
88Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Sale of goods
Rendering of services
Interest income
Interest expense
Gain/(loss) on remeasurement and disposal of financial investments
Other finance costs
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
89Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
FINANCIAL STATEMENTS
90Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
91Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
FINANCIAL STATEMENTS
92Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
93Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Severstal Resources segment
Severstal Liberia Iron Ore Ltd
2015
AO Olcon
2015
AO Vorkutaugol
2016
FINANCIAL STATEMENTS
94Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Other units
2015
2017
Severstal Russian Steel segment
Redaelli Tecna S.p.A.
2015
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
95Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
2016
Other units
2015
2016
FINANCIAL STATEMENTS
96Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
97Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
FINANCIAL STATEMENTS
98Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
99Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
FINANCIAL STATEMENTS
100Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
101Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
FINANCIAL STATEMENTS
102Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
103Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
FINANCIAL STATEMENTS
104Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
105Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
FINANCIAL STATEMENTS
106Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Bonds issued
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
107Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Bank financing security
Compliance with covenants
FINANCIAL STATEMENTS
108Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
109Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
FINANCIAL STATEMENTS
110Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Decommissioning liabilities
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
111Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Provisions
Share Capital
FINANCIAL STATEMENTS
112Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Earnings per share
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
113Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Capital management
Dividends
FINANCIAL STATEMENTS
114Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Redaelli Tecna S.p.A.
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
115Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
FINANCIAL STATEMENTS
116Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Subsidiaries:
Associates:
Joint ventures:
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
117Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Subsidiaries:
Disposal of subsidiary (other than discontinued operation)
PBS Coals Ltd
Redaelli Tecna S.p.A.
PJSC Dneprometiz
FINANCIAL STATEMENTS
118Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Acquisitions of rights
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
119Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
FINANCIAL STATEMENTS
120Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Adjustments to reconcile profit from operations to EBITDA:
Adjustments to reconcile profit from operations to EBITDA:
Adjustments to reconcile profit from operations to EBITDA:
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
121Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
FINANCIAL STATEMENTS
122Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Credit risk
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
123Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
FINANCIAL STATEMENTS
124Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Impairment losses
Concentration of credit risk
2017
2016
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
125Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
2015
Liquidity risk
FINANCIAL STATEMENTS
126Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Covenant compliance risk
Currency risk
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
127Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Sensitivity analysis
FINANCIAL STATEMENTS
128Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Commodity price risk
Interest rate risk
Fair value sensitivity analysis for fixed rate instruments
Cash flow sensitivity analysis for variable rate instruments
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
129Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
Fair value hierarchy
FINANCIAL STATEMENTS
130Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
131Severstal
Annual Report 2017
(Amounts expressed in millions of US dollars, except as otherwise stated)
5 ADDITIONAL INFORMATION
ADDITIONAL INFORMATION
Additional information 132
Additional information 134
ADDITIONAL INFORMATION
134Severstal
Annual Report 2017
Additional information
Shareholder Information
Severstal’s shares are traded on the largest Russian exchange – MICEX Stock exchange, which is a part of Moscow Exchange Group.
Moreover, Severstal’s shares are circulated in the form of depositary receipts on the London Stock Exchange and through the PORTAL
trading system in the US.
Listing and tickers
Moscow Exchange (MICEX) – CHMF GDRs on the London Stock Exchange (LSE) – SVST
Severstal’s stocks traditionally contribute to the capitalisation of key indices on the stock exchanges on which the company is listed.
Severstal makes a sizeable contribution to the MICEX and RTS indices in Russia. Additionally, Severstal is a solid constituent of MSCI
Russia and FTSE Russia IOB at LSE.
Indexes
Index Weight*
RTS 1.38 %
MICEX 1.38 %
MSCI Russia 1.78 %
FTSE Russia IOB 2.10 %
Russian Depositary Index 1.54 %
Bloomberg World Iron/Steel Index 2.64 %
* as at 11 December 2017
Credit ratings
Standard&Poor’s Moody’s Fitch Ratings
PAO Severstal Credit Rating/Outlook BBB-/Stable Baa3/Positive BBB-/Stable
Date of Rating** 20 September 2016 29 January 2018 20 October 2016
** “Date of Rating” does not refl ect subsequent confi rmations
Share price at MICEX in 2017, RUB
400
200
600
800
1000
1200
0
Apr
17
May
17
Jun
17
Jul
17
Aug
17
Sep
17
Oct
17
Nov
17
Dec
17
Mar
17
Feb
17
Jan
17
CHMF RX Equity
GDR Price at LSE in 2017, USD
10
8
6
4
2
12
14
16
18
0
Apr
17
May
17
Jun
17
Jul
17
Aug
17
Sep
17
Oct
17
Nov
17
Dec
17
Mar
17
Feb
17
Jan
17
SVST LI Equity
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
135Severstal
Annual Report 2017
During 2017 Severstal continued to be a leader in terms of
effi ciency improvement implementation which enabled the
Company to maintain a relatively high share price premium in
Russian steel sector.
In such a volatile market environment the Company’s ability
to generate substantial free cash fl ow level throughout the
cycle as well as its clear intention to realise signifi cant value for
shareholders via generous dividend payments balanced with an
aim to retain strong fi nancial position makes it the best in class
protective asset.
In 2017 Severstal hosted its annual Capital Markets Day in London
on the 2nd of November. During the event top management
highlighted TSR (Total Shareholder Return) as a key indicator of
assessing the Company’s performance. Severstal believes that
TSR will be a more comprehensive indicator allowing to assess
fi nancial and non-fi nancial performance of the Company in order
to maximise shareholder value.
Dividends
Severstal resumed paying dividends in 2010. The Severstal Board
of Directors has modifi ed the Company’s dividend policy to return
50% of the net profi t for a given reporting period to shareholders
provided that Net debt/EBITDA is below 1.0x, refl ecting Severstal’s
mission to maximise shareholder returns.
In 2017 at the Capital Markets Day the top management of
Severstal confi rmed that the target for dividend payout will be Free
Cash Flow for the period, given that Net Debt is below 1.0x. Should
Net Debt/EBITDA ratio go below 0.5x the Company may allocate
to dividends more than full free cash fl ow generated.
Dividends per share/GDR announced for the periods ended in
2017, RUB:
Q1 2017 24.44
Q2 2017 22.28
Q3 2017 35.61
Q4 2017 27.72
2018 fi nancial calendar
Q1 Operational results April 2018
Q1 IFRS fi nancial results April 2018
Shareholders’ AGM June 2018
Q2 Operational results July 2018
Q2 IFRS fi nancial results July 2018
Q3 Operational results October 2018
Q3 IFRS fi nancial results October 2018
Capital Markets Day Oct-Nov 2018
APPENDIX
138Severstal
Annual Report 2017
Appendix
ALTERNATIVE PERFORMANCE MEASURES (Amounts expressed in million of US dollars, except as otherwise stated)
Year ended 31 December
2017 2016
EBITDA1 2,577 1,911
Free Cash Flow 1,393 1,021
1. The Group defi nes EBITDA as profi t from operations plus depreciation and amortisation of productive assets (including the Group’s share in depreciation and amortisation of associates and joint ventures)
adjusted for gain/(loss) on disposals of property, plant and equipment and intangible assets and for share in associates’ and joint ventures’ non-operating income/(expenses). EBITDA has limitations as an
analytical tool, and investors should not consider it in isolation, or as a substitute for analysis of the Group’s operating results as reported under IFRS.
EBITDA Reconciliation
Year ended 31 December
2017 2016
Profi t from Operations 2,162 1,517
Add:
Depreciation and amortisation of productive assets 403 342
Loss on disposal of property, plant and equipment and intangible assets 3 52
Share in associates’ and joint-ventures’ depreciation and amortisation and non-operating (income)/expenses 9 –
EBITDA 2,577 1,911
Free Cash Flow reconciliation
Year ended 31 December
2017 2016
Net cash from operating activities 1,914 1,477
CAPEX (591) (525)
Other 70 69
Free cash fl ow 1,393 1,021
Severstal Russian Steel Division
Summary of Severstal Russian Steel’s selected fi nancial indicators
Year ended 31 December
Key performance indicators 2017 2016 Change, %
Revenue (US$ million) 7,182 5,426 32.4%
Gross profi t (US$ million) 2,230 1,939 15.0%
Profi t from operations (US$ million) 1,482 1,311 13.0%
Operating margin (%) 20.6% 24.2% n/a
EBITDA (US$ million) 1,761 1,543 14.1%
EBITDA per tonne (US$/t) 161 144 11.8%
EBITDA margin (%) 24.5% 28.4% n/a
Average steel product price (US$/t)* 593 456 30.0%
* All steel products, incl. pipes, etc.; Ex Works price terms
Dynamics of Severstal Russian Steel’s average steel price
Year ended 31 December
Product 2017 2016 Change, %
Hot-rolled strip and plate (US$/t) 517 374 38.2%
Large diameter pipes (US$/t) 1,373 1,179 16.5%
Cold-rolled fl at products (US$/t) 591 468 26.3%
Metalware products (US$/t) 893 764 16.9%
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
139Severstal
Annual Report 2017
Galvanized and other metallic coated sheet (US$/t) 718 575 24.9%
Long products (US$/t) 431 343 25.7%
Semi-fi nished products (US$/t) 422 289 46.0%
Other tubes and pipes, formed shapes (US$/t) 571 444 28.6%
Colour-coated sheet (US$/t) 876 771 13.6%
Scrap (US$/t) 257 201 27.9%
Cost of sales structure
Year ended 31 December
2017 2016
US$ million % of total US$ million % of total Change, %
Materials
Scrap metal 673.0 13.6% 467.2 13.4% 44.0%
Coal 870.6 17.6% 545.4 15.6% 59.6%
Iron ore 542.6 11.0% 336.1 9.6% 61.4%
Ferroalloys and nonferrous metals 415.7 8.4% 274.2 7.9% 51.6%
Pellets 434.3 8.8% 269.0 7.7% 61.4%
Other materials 623.5 12.5% 514.0 14.8% 21.3%
Total materials 3,559.7 71.9% 2,405.9 69.0% 48.0%
Energy
Electric power 133.0 2.7% 107.9 3.1% 23.3%
Gas 232.4 4.7% 194.2 5.6% 19.7%
Other energy resources 57.3 1.1% 44.9 1.2% 27.6%
Total energy 422.7 8.5% 347.0 9.9% 21.8%
Labour costs 535.9 10.8% 452.5 13.0% 18.4%
Depreciation and amortisation 241.8 4.9% 204.2 5.9% 18.4%
Services 125.9 2.5% 100.9 2.9% 24.8%
Change in inventories (71.9) (1.5%) (121.4) (3.5%) (40.8%)
Other 138.2 2.9% 98.4 2.8% 40.4%
Total 4,952.3 100.0% 3,487.5 100.0% 42.0%
Sales by products
Year ended 31 December
Product2017 2016 Change, %
Thousand tonnes
US$ millionThousand
tonnesUS$ million
Thousand tonnes
US$ million
Hot-rolled strip and plate 4,755 2,458.7 4,772 1,784.8 (0.4%) 37.8%
Large diameter pipes 416 570.4 389 459.2 6.9% 24.2%
Cold-rolled sheet 1,324 782.6 964 450.6 37.3% 73.7%
Metalware products 615 549.7 641 489.7 (4.1%) 12.3%
Galvanized and other metallic coated
sheet654 469.5 560 322.3 16.8% 45.7%
Long products 1,443 621.2 1,439 493.4 0.3% 25.9%
Semi-fi nished products 519 219.0 724 209.6 (28.3%) 4.5%
Other tubes and pipes, formed shapes 831 474.3 840 373.2 (1.1%) 27.1%
Colour-coated sheet 403 353.0 386 297.7 4.4% 18.6%
Scrap 24 6.2 41 8.2 (41.5%) (24.4%)
Total steel products 10,984 6,504.6 10,756 4,888.7 2.1% 33.1%
Shipping and handling and other – 677.8 – 537.3 n/a 26.1%
Total sales by products 10,984 7,182.4 10,756 5,426.0 2.1% 32.4%
Inter-segment transaction (40) (66.2) (43) (54.6) (7.0%) 21.2%
APPENDIX
140Severstal
Annual Report 2017
Domestic sales by product
Year ended 31 December
Product2017 2016 Change, %
Thousand tonnes
US$ millionThousand
tonnesUS$ million
Thousand tonnes
US$ million
Hot-rolled strip and plate 2,243 1,262.8 2,179 919.2 2.9% 37.4%
Large diameter pipes 304 430.0 380 453.5 (20.0%) (5.2%)
Cold-rolled sheet 851 503.0 784 365.8 8.5% 37.5%
Metalware products 413 385.6 401 290.5 3.0% 32.7%
Galvanized and other metallic coated
sheet365 257.0 459 265.5 (20.5%) (3.2%)
Long products 1,375 589.4 1,332 457.4 3.2% 28.9%
Semi-fi nished products 36 19.0 34 8.5 5.9% 123.5%
Other tubes and pipes, formed shapes 653 364.8 655 281.1 (0.3%) 29.8%
Colour-coated sheet 367 320.1 363 279.0 1.1% 14.7%
Scrap 24 6.2 41 8.2 (41.5%) (24.4%)
Total steel products 6,631 4,137.9 6,628 3,328.7 – 24.3%
Shipping and handling and other – 431.9 – 351.0 n/a 23.0%
Total sales by products 6,631 4,569.8 6,628 3,679.7 – 24.2%
Inter-segment transaction (40) (66.2) (43) (54.6) (7.0%) 21.2%
Export sales by product
Year ended 31 December
Product2017 2016 Change, %
Thousand tonnes
US$ millionThousand
tonnesUS$ million
Thousand tonnes
US$ million
Hot-rolled strip and plate 2,512 1,195.9 2,593 865.6 (3.1%) 38.2%
Large diameter pipes 112 140.4 9 5.7 n/a n/a
Cold-rolled sheet 473 279.6 180 84.8 162.8% 229.7%
Metalware products 202 164.1 240 199.2 (15.8%) (17.6%)
Galvanized and other metallic coated
sheet289 212.5 101 56.8 186.1% 274.1%
Long products 68 31.8 107 36.0 (36.4%) (11.7%)
Semi-fi nished products 483 200.0 690 201.1 (30.0%) (0.5%)
Other tubes and pipes, formed shapes 178 109.5 185 92.1 (3.8%) 18.9%
Colour-coated sheet 36 32.9 23 18.7 56.5% 75.9%
Total steel products 4,353 2,366.7 4,128 1,560.0 5.5% 51.7%
Shipping and handling and other – 245.9 – 186.3 n/a 32.0%
Total sales by products 4,353 2,612.6 4,128 1,746.3 5.5% 49.6%
Severstal Resources Division
Summary of Severstal Resources’ selected fi nancial indicators
Year ended 31 December
Key performance indicators (US$ million) 2017 2016 Change, %
Revenue 1,727 1,154 49.7%
COS (808) (689) 17.3%
Gross profi t 919 465 97.6%
General and administration expenses (61) (47) 29.8%
Distribution expenses (144) (114) 26.3%
EBITDA 812 397 104.5%
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
141Severstal
Annual Report 2017
Profi t from operations 677 235 188.1%
EBITDA margin 47.0% 34.4% n/a
Operating margin 39.2% 20.4% n/a
Cost of sales structure
Year ended 31 December
2017 2016
US$ million % of total US$ million % of total Change, %
Materials
Grinding balls and rods 20.3 2.5% 15.9 2.3% 27.7%
Explosives 26.6 3.3% 22.0 3.2% 20.9%
Metal – roll 18.2 2.3% 10.8 1.6% 68.5%
Other materials 74.1 9.1% 61.9 8.9% 19.7%
Raw materials 139.2 17.2% 110.6 16.0% 25.9%
Integral implements and spares 130.1 16.1% 116.1 16.9% 12.1%
Total materials 269.3 33.3% 226.7 32.9% 18.8%
Energy
Electric power 108.6 13.4% 86.7 12.6% 25.3%
Gasoline 63.8 7.9% 47.5 6.9% 34.3%
Other energy resources 38.2 4.8% 22.7 3.3% 68.3%
Total energy 210.6 26.1% 156.9 22.8% 34.2%
Labour costs 234.9 29.1% 200.3 29.1% 17.3%
Depreciation and amortisation 131.7 16.3% 113.1 16.4% 16.4%
Services 53.5 6.6% 46.2 6.7% 15.8%
Change in inventories (6.0) (0.7%) 11.1 1.6% –
Other (85.9) (10.7%) (65.2) (9.5%) 31.7%
Total 808.1 100.0% 689.1 100.0% 17.3%
Sales by products
Year ended 31 December
Product2017 2016 Change, %
Thousand tonnes
US$ million Thousand
tonnes US$ million
Thousand tonnes
US$ million
Coking coal concentrate 3,280 430.4 4,147 326.4 (20.9%) 31.9%
Steam coal 1,574 40.2 2,040 37.7 (22.8%) 6.6%
Pellets 11,133 884.6 10,842 534.5 2.7% 65.5%
Iron ore concentrate 4,251 215.6 4,103 128.7 3.6% 67.5%
Total sales by products 20,238 1,570.8 21,132 1,027.3 (4.2%) 52.9%
Shipping and handling and other – 155.9 – 126.5 n/a 23.2%
Total sales revenue 20,238 1,726.7 21,132 1,153.8 (4.2%) 49.7%
Inter-segment transactions (11,899) (995.0) (12,095) (609.2) (1.6%) 63.3%
APPENDIX
142Severstal
Annual Report 2017
Domestic sales by products
Year ended 31 December
Product2017 2016 Change, %
Thousand tonnes
US$ millionThousand
tonnes US$ million
Thousand tonnes
US$ million
Coking coal concentrate 3,280 430.4 3,928 314.8 (16.5%) 36.7%
Steam coal 1,543 39.5 1,747 35.7 (11.7%) 10.6%
Pellets 5,526 451.5 5,955 279.1 (7.2%) 61.8%
Iron ore concentrate 4,251 215.6 4,103 128.7 3.6% 67.5%
Total sales by products 14,600 1,137 15,733 758.3 (7.2%) 49.9%
Shipping and handling and other – 46.3 – 31.1 n/a 48.9%
Total domestic sales revenue 14,600 1,183.3 15,733 789.4 (7.2%) 49.9%
Inter-segment transactions (11,899) (995.0) (12,095) (609.2) (1.6%) 63.3%
Export sales by products
Year ended 31 December
Product2017 2016 Change, %
Thousand tonnes
US$ millionThousand
tonnes US$ million
Thousand tonnes
US$ million
Coking coal concentrate – – 219 11.6 (100.0%) (100.0%)
Steam coal 31 0.7 293 2.0 (89.4%) (65.0%)
Pellets 5,607 433.1 4,887 255.4 14.7% 69.6%
Total sales by products 5,638 433.8 5,399 269.0 4.4% 61.3%
Shipping and handling and other – 109.6 – 95.4 n/a 14.9%
Total export sales revenue 5,638 543.4 5,399 364.4 4.4% 49.1%
STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX
143Severstal
Annual Report 2017
PAO Severstal
Legal address:
30 Mira Street,
Cherepovets, Vologda Region, 162608, Russia
Postal address:
2 K. Tsetkin Street
Moscow, 127299, Russia
Tel: +7 (495) 926 7766
Fax: +7 (495) 926 7761
www.severstal.com
Corporate Secretary
Artem Bobulich
Tel: +7 (8202) 53 0900
Fax: +7 (8202) 53 2159
Email: [email protected]
Public Relations
Vladimir Zaluzhsky
Tel/Fax: +7 (495) 926 77 66
Email: [email protected]
Anastasia Mishanina
Tel/Fax: +7 (495) 926 77 66
Email: [email protected]
Investor Relations
Vladimir Zaluzhsky
Tel/Fax: +7 (495) 926 77 66
Email: [email protected]
Evgeny Belov
Tel/Fax: +7 (495) 926 77 66
Email: [email protected]
Human Resources
Alexandr Chigarkov
Tel: +7 (495) 926 77 61
Email: [email protected]
Corporate Social Responsibility
Natalia Poppel
Tel/Fax: +7 (495) 926 77 66
Email: [email protected]
Auditor
JSC KPMG
10, Presnenskaya Naberezhnaya,
Block C, fl oor 31, Moscow, 123112, Russia
Tel: +7 (495) 937 4477
Fax: +7 (495) 937 4499
Contacts
Registrar
ZAO Partnyor
Address: 22, Pobedy Avenue, Cherepovets
162606, Vologda Region, Russia
Tel: +7 (8202) 53 6021
Fax: +7 (8202) 55 3335
Licence no.: 10–000–1–00287
Date of issue: 04.04.2003 r.
Expiry date: no expiry date
Issued by: FSFM of Russia