Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview...

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Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003

Transcript of Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview...

Page 1: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

Severstal: Overview and Forecast

Alexander Andrianov, Finance Director

London

February 2003

Overview and Forecast

London

February 2003

Page 2: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Table of contents

• Market Position

• Operations

• Financials

• Stock Market

• Environmental Protection

• Conclusions

Page 3: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Overview and Forecast

Market position

Page 4: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Geographical position

Arkhangelsk

Naberejnye Chelny

Uhta

FINLAND

UlyanovskSamara -

Vyksa

St-Petersburgh

Murmansk

Moscow Nijniy Novgorod

ESTONIA

UKRAINE

RUSSIA

BELARUS

LITHUANIA

LATVIA

KAZAKHSTAN

CHEREPOVETZ - STEEL MILL

OLKON -IRON ORE

KORELSKY OKATISH -IRON ORE

Vorkuta

VORKUTAUGOL - COAL

KUZBASUGOL - COAL

Kemerovo

PONLAND

KAMAZ- TRUCK PRODUCER

AVTOVAZ- CAR PRODUCER

UAZ - JEEP PRODUCER

PIPE PLANT

GAZ- CAR PRODUCER

WATERWAY TO THE BALTIC SEA

Cherepovetz

Page 5: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Overview

Investing in the company's workforce and consequently increasing productivity. Developing motivation system

Modernisationof Production

StrategicIntegration

HumanCapital

Holding the leader position in the Russian steel industry and supplying domestic and foreign customers with high quality steel products

The optimisation of the company's steel production assets by modernising production facilities to increase the quality and expand the mix of its steel products

Investing in raw material suppliers, transportation facilities, steel consuming businesses and other projects, which add value to Severstal's core business by reducing costs and improving the reliability of raw material supplies as well as the delivery of finished products

Page 6: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Strategy

Purchases Production Sales Human Capital

• Uninterruptible supplying of Severstal

• To secure its raw materials supply safety, Severstal uses the strategy of vertical integration

• Severstal’s strong position influences the domestic raw material market

• Reducing of total purchasing costs

• Installation of automated systems for management customs

• Reducing costs and increasing quality

• Change over to 100% continuous casting steel

• Increasing the share of higher value-added products

• Targeting key consumers

• Investing in quality• Developing projects of

producing higher value-added products (Severgal)

• The domestic market is the top priority for Severstal

• Development of relationship with principal clients

• Development of sales network in export markets and direct sales in the domestic market

• Acquisitions and JV allow to increase shipments to automotive and pipe industries

• Developing training program for all categories of employees

• Developing a system of employee incentives

• Developing through its own training center

• ‘Total Quality Management’ program, ‘Production consulting’ program, the ‘Preparation of managers for spin-off businesses’ and an internal course for top managers (‘TOP-100’), international MBA

Page 7: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Macroeconomic Environment

World market

RussiaWeighted average world steel price index

(Apr-94=100)• Since 1999 the greatest output growth rate had the automotive industry ( 9% - 2000, 12% - 2001, 0% - 2002), fuel and energy complex ( 4, 4.5 and 7%) and heavy-machinery ( 20, 7 and 2%). The latest tendencies are the increasing of zinc-coated steel consumption in the automotive industry and high quality strips in FEC.

• Rolled products average spot prices were 304 US$ in 20021 per ton.

• For last 10 years, the world steel output has increased by more than 100 m. tons. The total capacity now is 1bln. tons That exceeds the world steel consumption.

• As a result of previous tendency - large amount of mergers and integrations and ineffective capacities cut-back

• In 2002 average spot price was 266 US$ per ton. • Prices on almost all products are going up.• Severstal expects further prices increase.

60

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80

90

100

110

120

Dec-02 Sep-01 Jun-00 Mar-99 Dec-97 Sep-96 Jun-95

Asian boom boosts global prices

Asian crisis preludes global price fall

Previouscyclical peak

Page 8: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Macroeconomic Environment (continued)

Anti-dumping Proceedings

Government View

1. Russian steel export protection 2. Domestic market protection

• Import taxes are increased: USA - 30%, Mexico - 35%, Malaysia - 50%, Iran - 25%.• Argentina, Brazil, Columbia, Peru, Venezuela,Chile are likely to follow them.• Temporary import taxes are introduced against zinc-coated products from Kazakhstan and Ukraine.

• Key industries of strategic importance to Severstal include: automotive industry, pipe manufacturing, heavy machinery, ball bearing production, shipbuilding, white goods manufacturing• In 2000, Severstal began the production of high quality thin cold rolled steel sheet for refrigerators produced by Electrolux• Development of new products for special need of main clients (e.g., alumni-silicon galvanized sheet)• Relationships with key customers are based on quarterly and half-year contracts• Severstal expects sales to domestic market will rise up to approximately 52% of total sales in 2003• Severstal expects expansion of marketing outlets in automotive industry and pipe manufacturing due to its acquisitions and JV• Severstal’s average price on export sales in 2002 was 13% higher, and - on domestic sales - 3% higher than prices of its major competitors• Almost 77 % of Severstal’s domestic sales are made directly to end users, while export sales are conducted through Severstal’s export trading subsidiaries

Page 9: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Market position

Severstal continues to be among the world’s 20 largest steel producers. According to the annual research by the ‘Metal Bulletin’ magazine, Severstal occupies 19 place with 9.6 million tons of total steel output in 2002.Among Russian ferrous metal producers, Severstal is the largest company in terms of revenues and the second largest in terms of volume of steel and rolled products output.

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Page 10: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Market position (continued)

Sales 1999 - 2002 by market, thousand tons

The increase in margins on domestic sales has, in part, caused Severstal to direct more of its sales to domestic customers.

Another reason of export sales reducing is antidumping proceedings.

4349387638763118

4111441344134723

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1999 2000 2001 2002E

Export

Domestic

Page 11: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Domestic sales

Severstal sells to customers in a number of different industries. The main customer base in the domestic market are the automotive industry and pipe manufacturing companies.

Severstal increasingly focuses on customers with demand for higher value-added products.

32% of sales to pipe industry comprised high-quality alloyed strip.

The automotive industry mostly consumes cold-rolled sheets (65%) and thin hot-rolled sheets (18%).

DOMESTIC REVENUES in 2002E (% of Total Revenues by Product)

0.0 20.0 40.0 60.0 80.0 100.0

Steel sections

Cold-rolled sheet

Hot-rolled sheet

DOMESTIC CONSUMPTION BY INDUSTRY in 2002E (% of Domestic Sales Revenue)

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0

Regional Distribution

Shipbuilding

White Goods

Heavy Machinery

Metalware

Automotive Industry

Fuel and Energy Complex

DOMESTIC SALES REVENUE BY INDUSTRY (% of Domestic Sales)

0%

20%

40%

60%

80%

100%

2000 2001 2002E

Regional Distribution

Shipbuilding

White Goods

Heavy Machinery

Metal processors

Automotive Industry

Fuel and Energy Complex

Page 12: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Export sales

Severstal exports its products to 94 countries world-wide, which makes it the largest exporting company among Russian steel producers.

Severstal's export sales include a higher share of value added products such cold-rolled, pickled and galvanised steel.

Europe, in particular the Western Europe, is a strategic market for Severstal's exports. The company has strong relationships with its European customer base and is confident that its joint venture with Arcelor will further increase the company’s position in this market.

EXPORT CONSUMPTION BY REGION in 2002E (% of Export Sales Revenue)

0 5 10 15 20 25 30 35 40

Central and South-East Asia

Europe

Middle East

Africa

Central and South America

USA

EXPORT SALES REVENUE BY REGION (% of Export Sales)

0%

20%

40%

60%

80%

100%

2000 2001 2002E

USA

Central and South America

Africa

Middle East

Europe

Central and South-EastAsia

Page 13: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Key customers

Key customers in the domestic automotive sector are Gorkovsky Automotive Works (GAZ), Voljsky Automotive Works (AvtoVAZ), Ijmash-Auto and UAZ

Principal domestic customers in pipe manufacturing are the Vyksunsky and Chelyabinsky pipe plants

The major consumer in metal processors is Cherepovets Steel Rolling Mill (ChSPZ), which is a part of the metallurgical branch of Severstal Group

Severstal's major clients: Viksa metallurgical works, Cherepovets Steel Rolling Plant, AutoVAZ and GAZ, accounted for approximately 24% of the total volume of Severstal’s domestic sales in 2002. Viksa metallurgical works - pipe producing company, accounts for more than 7% of Severstal's total sales revenues.

LARGEST DOMESTIC MARKET CUSTOMERS BY SALES VOLUME

Key clients24%

others76%

Viksa Metallurgical Works41%

ChSPZ31%

AutoVAZ16%

GAZ12%

KEY CUSTOMERS BY SALES VOLUME IN INDUSTRIES in 2002, %

72 70

30 30

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AutomotiveIndustry

Metalprocessors

Fuel andEnergy

Complex

Shipbuilding HeavyMachinery

White Goods RegionalDistribution

Page 14: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Challenges and Competitive Advantages

OUTPUT, thousand tons

8 5218 0608 315

7 1517 351 7 966

9 5958 384 9 011

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4 000

6 000

8 000

10 000

12 000

2000 2001 2002ESeverstal NLМК ММК

SALES REVENUE, mn $

1 7892073 1922

1 1511 276

1 5261 559

1 8181 555

0

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1 000

1 500

2 000

2 500

2000 2001 2002E

Severstal NLMK MMK

PRICES, $/tn

239

202214

174161

192186 190173

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Severstal NLМК ММК

Page 15: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Competitive Environment

Russian Steel Industry

•Magnitogorsky Metallurgical Kombinat (MMK)•Severstal•Novolipetsky Metallurgical Kombinat (NLMK)•West-Siberian•Nijny Tagil Metallurgical Kombinat (NTMK)•Kuznetsky•Mechel•Nosta•Oskolsky

Tons 2000 2001 2002Domestic Sales 47% 47% 52% Export Sales 53% 53% 48%

GMK EurasHolding

Production output in 2001

The division of the Russian Market (2002)

Coke Cast iron Steel Rolled metal

Severstal 4028 7447.9 9303 8060

MMK 4869 8657.9 10314.6 9108.7

Mechel 2257 2905 3796 2837

NLMK 4349 7464 7912 7374

West Sibirean 3385 4546 5579 4632

Nosta 1312 1786 2591 1944

KMK 1193 2751 3596 2627

NTMK 2893 4629 5225 3625

Î skolsky - - 2119 1886

2002

Severstal 4100 7732 9648 8521

Nos ta5%

Os kols ky4%

Other12%

Mechel7%

EvrazHolding

22%

NLMK15%

MMK19%

Severs tal16%

Page 16: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Overview and Forecast

Operations

Page 17: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Flow diagram

100

100

80100

125150

/

/

/

Hot Strip Rolling Shop № 2

Formed Section Shop

Section Rolling Shop

Cogging Mill

Converter Shop

Electric Steel Melting Shop

Coke-Oven Plant

Blast Furnace Plant

Sintering Plant

This shops will be closed

Open Hearth Shop

Hot Strip Rolling Shop № 1

Hot Strip Rolling Shop № 3

Cold Strip Rolling Shop

Page 18: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Production facilities

Severstal has a crude steel production capacity of 10.9 million tonnes per annum. With a total production output of 9.65 million tonnes in 2002, Severstal’s crude steel capacity utilisation rate was 88.5 %, or 3 p.p. higher than in 2001. Between 1995 and 2000, the company’s average capacity utilisation rate was 80.9%, compared with 76% on average for the Russian steel industry.

Production capacity (Mn tn/year)

Equipment

Coking Plant 4.1 7 BatteriesSintering Plant 7.6 8 MachinesBlast Furnace 7.6 4 FurnacesBasic Oxygen Converters 8.0 3 FurnacesElectric Arc Furnace 1.3 2 FurnacesOpen Hearth Furnace 1.8 3 FurnacesContinuous Casting 8.8 7 CastersHot Rolling Mills 8.2 4 MillsCold Rolling Mills 2.5 2 MillsSection Rolling Mills 2.2 3 MillsCold Roll-Forming Lines 0.25 4 LinesPipe Rolling Mills 0.28 6 MillsHot Dip Galvanising Lines 0.5 2 LinesContinuous Picking Lines 2.8 3 Lines

Page 19: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Production efficiency

Low grade and waste production, %

Fuel consumption

ElectricityconsumptionkW*h/ton

Metal yield,%

Planned idle time,%

Hot rolling mill

Severstal (mill 2000) 85.4 114.9 95 16.7Arcelor 78.9 81 97.7 16.19Cold rolling millsSeverstal (cold rolling) 76.8 87 12.8Nippon Steel (Nagoya) 55.8 5.49

kg/ton

92

0.67

3.69

0.58 0.54 0.75

4.623.793.54

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1999 2000 2001 2002E

Waste

Low-grade

Page 20: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Exports by product

4.1 m t 4.8 m t 5.1 m t

Severstal

Cold rolled flat products

23%

Other rolled steel products

57%

Semi-finished16%

Coated rolled steel products

4%

Value-addedproducts

27%

ММК

Other rolled steel products

60%

Cold rolled flat products

16%

Coated rolled steel products

1%

Semi-finished23%

Total export sales

NLMK

Other rolled steel products

31%

Semi-finished53%

Cold rolled flat products

14%

Coated rolled steel products

1%

Electric steel1%

Severstal has the biggest share of high value-added products on export markets. It differs Severstal from other Russian metallurgical manufactures

Value-addedproducts

17%

Value-addedproducts

16%

Page 21: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Domestic market by product

4.4 m t 4.2 m t 2.1 m tTotal sales

Value added products30%

Value added products27%

Value added products52%

Severstal ММК NLMK

Other rolled steel products

70%

Semi-finished3%

Coated rolled steel products

7%

Cold rolled flat products

20%

Other rolled steel products

48%

Semi-finished0%

Coated rolled steel products

13%

Electric steel1%

Cold rolled flat products

38%

Other rolled steel products

70%

Cold rolled flat products

23%

Coated rolled steel products

7%

Semi-finished0%

Page 22: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Total sales by product

8.5 m t 9.0 m t 7.2 m tTotal sales

Value added products29%

Value added products25%

Value added products27%

Severstal ММК NLMK

Other rolled steel products

63%

Cold rolled flat products

23%

Coated rolled steel products

6%

Semi-finished8%

Other rolled steel products

61%

Semi-finished14%

Coated rolled steel products

5%

Cold rolled flat products

20%

Other rolled steel products

35%

Semi-finished38%

Coated rolled steel products

4%

Electric steel1%

Cold rolled flat products

22%

Page 23: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Production development

Rollingfacilities

Castingfacilities

Steel-makingfacilities

Coking plant and blast furnaces

Energy saving

US$ 296 million

US$ 120 million

US$ 75 million

US$ 250 million

US$ 11.6 million

• Reconstruction of blast furnaces №№ 1,2,4,5• Reconstruction of coke-oven batteries №№ 3,4,7• Environmental protection

• Open hearth furnaces shutdown• Iron desulphurisation unit• Environmental protection

• Reconstruction of continuous casting machine in BOF plant• Construction of continuous casting machine for long products

in EAF plant• 100% continuous casting in BOF and EAF plants

• Reconstruction of mills: automation, quality improvement of rolling and cutting

• Reconstruction of mill 5000 to produce high quality strips for large diameter pipes

• Increase in pickling capacity to 1.8 million tonnes per year• Conversion to 100% hydrochloric pickling

• Increase own power generating facilities to 245.3 million kW*hours

• Installation of new drives with lower electricity consumption in shops

Page 24: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Overview and Forecast

Financials

Page 25: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Financial result for 2002

• In 2002 the revenues went up by 7.5% y-o-y mainly due to higher prices both on the domestic and export markets.

• Increase in prices contributed up to 93% of the total revenue growth.

• Costs grew 3.6% all through the year due to increase in prices and structure of suppliers of raw materials, tariffs on electricity and gas.

• Severstal took steps to hold its costs through internal saving programs and purchase optimization.

• Severstal took a conservative approach for forecasting, and the actual results turned to be generally better than expected.

$’000

2001 2002ESales 1,789 1,924Cost of sales 1,463 1,515Gross profit 326 409Profit from operations 92 277Capex 79 119Net cash from operating activities 80 109

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Page 26: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Changes in sales for 2002

- 14 540

other

35 886 88 182

due to changein prices

16 9426 538

due to change in volumes

133267

due to change inproduct mix

1 923 556

815 785

1 106 760

676 120

1 113 017

1 789 137

Total change

+ 134 419

500 000

1 000 000

1 500 000

2 000 000

0

- domestic market - export

$’000

+23 801

+124 748

+ 410-14 540

2001actual

2002E

Page 27: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Cost of sales structure

2002 2001

Coal11.7%

Ore and alloys26.9%

Other materials

13.2%

Fuel and energy10.4%

Labour12.9%

Depreciation8.8%

Repair and maintenance

9.2%

Other expenses

6.9%Coal13.6%

Ore and alloys23.9%

Other materials12.4%

Fuel and energy9.7%

Labour11.3%

Repair and maintenance

8.4%

Depreciation12.4%

Other expenses

8.3%

Page 28: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Capital expenditure

• Over the period from 2003 to 2005 total investment requirements are US$ 674 m.

• These investments will be financed by own resources at 55%, and 45% externally.

Major items:• Reconstruction and commission of blast furnace #4• Repair of blast furnaces currently operating• Modernisation of all continuous casting machines at

converter shop• Reconstruction of Mill 5000: installation of automated

systems; reconstruction of heating facilities; installation of sheet straightening machines

• Conversion to 100% hydrochloric pickling at cold rolling shop

• Construction of additional set of bell-type annealing furnaces at cold rolling shop

Capex in 2000-2006, $ mnTotal investmentrequirements

US$ 752 m

Own

resou

rces

55.6%

Debt

finan

cing

44.4%

Total investmentrequirements

US$ 674 m

Own

resou

rces

55%

Debt

finan

cing

45%

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2001 2002E 2003F 2004F 2005F

Page 29: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Financial policy

• Debt is cheaper. Equity needs better compliance with equity market regulations. Severstal moves towards this through IAS accounting and consolidation

• Severstal works exclusively with banks that provide complex services for clients, and that consider Severstal as VIP client, providing it with favourable fees

• Severstal places its free cash only in reliable banks (like foreign bank branches)

• Severstal diversifies its deposits by maturity in respect of currency and type of value stock

Page 30: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Financial Management

Sources of external financing• Severstal uses debt financing only. As at 30 September 2002 Severstal’s debt

profile comprised US$ 155 mil., 66% of which is dollar denominated• Planned debt financing through syndicated loan and domestic bonds emission at

aggregate amount of US$ 200 mil. maturing within 3 years• Severstal shifted to long term debt because they have more beneficial credit terms• Banks’ practice is to secure its loans by pledging of assets and export revenuesWorking capital management

Severstal performs working capital management through its budgeting system, which consists of:

• Inventory stock control – keeping necessary volume of stock according to production requirements and repair and maintenance requirements

• Allowable level of receivables – a monthly control of debtors level for individual customer

• Available level of payables – seeking for most beneficial contract terms with suppliers

• Monthly payment planning – any payment can be made in accordance with authorized budget

Page 31: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Social Responsibility

• Severstal employs about 37,700 people of total 350,000 living in Cherepovets.

• Social assets comprise certain cultural, resort and sports facilities (ice hockey stadium, basin, sports grounds), as well as certain food processing and catering facilities. Severstal regards its employees as one of its key success factors and intends to provide them with a set of social services. The total amount spent in 2002 for social services provided to its employees is $ 9.6 million. In 2001 it was $11.8 million.

• Severstal also maintains a voluntary pension fund for its former employees. Payments to the pension fund were $ 4.5 million in 2002 and $ 4.8 million in 2001.

• In 2002, Severstal comprised 45.7% in Cherepovets’ budget tax income and 50.2% in Vologodskaya oblast’s budget tax income. In 2001, it was 50.5% and 56.3% respectively.

Page 32: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Key resume points

• Strong liquidity position• Good relationship with banks to meet necessary

funding requirements at beneficial cost• Significant own profits and cash flows• No events of default on liabilities• Costs planning and control in place• Internationally recognizable financial reporting and

forecasting

Page 33: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Overview and Forecast

Stock Market

Page 34: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Ownership Structure

As of 01.01.2003

A.Mordashov16.63%

Severstal-group

21.99%

Severstal-Garant43.72%

Portfolio Investors

8.20%Other9.46%

Page 35: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Share Performance

• Severstal outperformed the Russian stock index in the H1 2002. The higher steel prices supported the buying rage of the market players. In the H2 2002 Severstal followed the general decline in the market, but it is 20% higher YTD.

• The restructuring of the company was also a strong incentive to increase the share of Severstal in portfolios as the dividend payout (shares of Severstal-Auto and Severstal –Resource) gave the cheap entry into the new sectors of the market. We expect Severstal would outperform the market in the mid-term period.

Severstal Performance, $

Severstal vs. RTS Index, (03/01/02 = 1.0)

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Severstal RTS

Page 36: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Overview and Forecast

EnvironmentalProtection

Page 37: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Principles of environmental protection policy

Severstal’s environment management system is certified in September 2001 with ISO – 14001

• To continuously reduce the harmful impact of productionactivities on environment to technically achievable andeconomically acceptable level;

• To optimize production processes for continuous reduction ofspecific consumption of natural resources and energy per tonof output and to utilize accumulated and generating waste;

• To continuously improve the environmental management system as a part of stable competitive advantage;

• To hold the fair and constructive dialog with all interested parties

Page 38: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Pollution Emission

Pollutionemission into atmosphere

Pollutionemissionsin waters

Stocking ofproduction

waste

‘000 tons

‘000 tons

‘000 tons

Actual Limit

353339 335 339

418

388 392408

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641

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Page 39: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Environmental protection expenditures

- current costs reduced due to changes in calculation methodology according to new Statutory rules*

$ mn

1.91.61.61.4 2.02.26.1

18.1 4.85.17.0

45.1

0

15

30

45

60

75

1999* 2000 2001 2002

Statutory charge for pollution New environmental activities

Current costs

Page 40: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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The major environmental activities

• 1999• cleaning complex for Fuchs ladle furnace;• construction of equipment for production waste utilization;• construction of water recycling unit in hot rolling shop #1;• construction of cleaning complex at drainage output• construction of water recycling unit in BOF shop

• 2000• construction of cleaning complex at drainage output• construction of oiled calx utilization unit in hot rolling shop #2;• construction of equipment for production waste utilization;• reconstruction of cyclone cell system in agglomerate shop;• completion of construction of water recycling unit in BOF shop

• 2001• reconstruction of cyclone cell system in agglomerate shop;• construction of supporting dams and inclined drainage unit in the ash-and-slag storage;• reconstruction of biochemical entrapment equipment to clean and recycle the cooling in the coke shops

• 2002• reconstruction of the primary furnace in the stove of the blast furnace #5• construction of the oil waste recovery unit• construction of the gas cleaning unit in the pig iron desulphurization shop

Page 41: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Overview and Forecast

Conclusions

Page 42: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Challenges and advantages

• Cycle in the steel industry • Higher competition level• Complexity of consolidation• Quotas, anti-dumping• Excessive capacities in the steel

industry• Competition by mini-mills• Increasing share of Ukrainian

manufactures in the Russian market

• Geographic Location

• Transportation facilities (alternative)

• Security of Raw Materials and Energy Supply

• Tight Production Costs Control

• Personnel’s qualification

• Low labour costs

• Product Range

• Customer Base

• Technology

• Financial Position

• Production capacities

• Corporate Governance

• Stable Ownership Structure

Main challenges Competitive advantages

Page 43: Severstal: Overview and Forecast Alexander Andrianov, Finance Director London February 2003 Overview and Forecast London February 2003.

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Final Summary

• Severstal objectives are: modernization of production facilities, value-added products development (SeverGal) and increasing productivity

• The capital investment program includes a number of projects aiming at manufacturing of value-added products, maintenance volumes of production and improvement of products quality. The management structure provides the suitable level of controllability of the Group’s companies

• Severstal’s strategy provides long-term attractive return on employed capital, stable cash flow and increasing profit

• The management system is being introduced within the Group’s companies, increasing their transparency and operational efficiency. The company is going through its transformation intro a leading integrated steel manufacturer.

• Although, the domestic market of high quality steel products is increasingly competitive, Severstal believes its cost control strategy and upgrading production facilities policy will lead to a significant efficiency advantage over a number of competitors and ultimately preserves Severstal’s leading position.

• As part of it’s development, Severstal applies for a long-term corporate credit rating to enhance the company’s liquidity