Severstal: Overview and Forecast

Alexander Andrianov, Finance Director

London

February 2003

Russian Steel Industry:what’s inside?

Alexander Andrianov, Finance Director, Severstal

Moscow

March 2003

2

Table of Contents

• Overview of the Russian steel sector

• Industry consolidation

• Financing

3

Sector Overview

Sector Overview

4

2002 Key Results

• Russia is a top 5 global producer

• The crude steel output increased by 1.8% in 2002 to 58.5 m tons

• In 2002 Russian steel mills produced 48.6 m tons of rolled products, or 3.9% y-o-y

• Steel prices recovered in H2 2002 after poor performance in H2 2001 and Q1 2002

5

Macroeconomic Environment

Weighted average world steel price index (Apr-94=100)

60

70

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

6

Traditional Factors

• Export growth

• Low energy, gas and railroad tariffs

• Antidumping procedures against producers from Kazakhstan and Ukraine

• Low financial leverage

Became less important

7

New Factors

• Ruble Appreciation• Increasing domestic demand for higher value-

added products• New tactics in the antidumping procedures

against Russian steel producers• Acquisition of downstream assets in Europe• Higher energy independence• Regional Distribution

Became more important

8

2002 Operational Results

2002 2001 ChangeMMK 11,031 10,315 6.9%Severstal 9,648 9,303 3.7%NLMK 8,553 7,912 8.1%EvrazHolding 13,449 14,400 -6.6%Mechel 3,861 3,796 1.7%Nosta 2,914 2,591 12.5%Oskolsky 2,196 2,119 3.6%Other 6,844 7,026 -2.6%Total 58,496 57,462 1.8%

Source: Chermet

Thousand tons

9

Competitive Environment

Nosta5%

Oskolsky4%

Other12%

Mechel7%

EvrazHolding

22%

NLMK15%

MMK19%

Severstal16%

The division of the Russian Market in 2002

10

Production and Consumption

Rolled Products Production and Consumption in Russia, thousand tons

Source: Chermet, Ministry of Economic Development, self estimations

46,830 48,656 49,300

23,35022,40023,906

0

20,000

40,000

60,000

2001 2002 2003F

Production Domestic Consumption

11

2003 and Beyond

• In 2003 domestic consumption (+4.2%) will grow faster than production of rolled products (+1.3%)

• Possible oil price correction could restrict demand from fuel sector and pipe plants

• Car producers, especially foreign car makers, will increase consumption of quality products

• The share of machinery in total consumption will increase

• Other consumers will show marginal growth

12

Prospective Customers

• Pipe industry

• Energy Machinery

• Sea Drilling Platforms

• Foreign Companies (FDI)

• Infrastructure

13

Industry Consolidation

Industry Consolidation

14

Prologue

• The Russian steel sector outperformed the global steel industry in terms of consolidation

• Government interference in the steel industry in Russia is minimal compared to EU and USA

• Sufficient difference in degree of vertical integration between the key Russian steel makers

• Deficit of high quality acquisition objects inside Russia

• Low market valuation makes mergers between Russian or foreign companies highly questionable

15

Why Consolidation?

Iron Ore Coal Pig Iron Scrap Raw material

Asia OtherLAm

NAm

EU Russia Steel Producers

Construction Autos

Pipes

Machinery

Other

SteelConsumers

• The world steel industry is in the middle of the production chain• The raw material suppliers are more consolidated with better

control on prices

• The steel buyers influence the prices at the bottom of cycle

16

Steel Industry Consolidation

0%

20%

40%

60%

80%

WorldTop 10

WorldTop 20

RussianTop 4

• The Russian steel industry is ahead of the world in terms of consolidation

• The world steel industry has a lot room for mergers and acquisitions

• The Russian steel sector has few opportunities to increase concentration inside the country

Source: self estimations

Steel Industry Consolidation

17

Consolidation Drivers

• Increasing share on the market • Securing raw material supply• Establishing transportation infrastructure • Privatization opportunities

• Upstream and downstream consolidation• Declining long-term steel prices• Limited opportunities for further cost cuts

Internationally

Domestically

Horizontal consolidation prevailed

Horizontal+Vertical consolidation

18

Global Trends

• Globalization

• Cut of overproduction

• Entry barriers and costs are lower• Cost-cutting and downsizing• Need for continuous improvement• Fewer players – more winners?

Trends Purposes and/or Results

• Subsidies restriction

• New technologies (mini-mills)

• Restructuring

•“Price scissors”

19

Strategic Cooperation

DisadvantagesAdvantagesLow cost of slabs & HRC

Difficulties in accessing foreign markets

Russian steel companies

International steel companies

High cost of slabs & HRC

Good finishing facilities and attractive domestic markets

ProtectionismWith some short-term relief, make life even more difficult for the future

ConsolidationAchieving healthy and cost-effective industry structure, but painful today

Scenarios

20

Who Will Win?

• Vertical integration into raw materials, especially iron ore

• Location in a soft currency environment • Ownership of infrastructure facilities • Reputable corporate governance• Large domestic market share, especially in the most

profitable products

The most successful steel producers should obtain the following advantages

Severstal can benefit by most of these advantages

21

Severstal in the Global Environment

• Desire to increase the raw material security supply • Experience in cooperation with leading international

steel makers - SeverGal • Substantial share on the domestic steel market• Growing presence in value-added products• Possibility to diversify operations geographically• Stable and relatively high operating margins• Additional debt capacity

Severstal is well positioned to expand its operations

22

Financing

Financing

23

Financing Development

The Russian steel industry needs external financing to provide

• Fixed assets modernization• Backward integration in the raw materials • Forward integration in the pipe and rolling

capacities• Integration within the domestic market or with

the leading international producers• Restructuring of the assets

24

Financial Policy of Severstal

• Debt is cheaper. Equity needs better compliance with equity market regulations.

• 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 subsidiaries)

• Severstal diversifies its deposits by maturity in respect of currency

25

Severstal Capital Expenditures

• Over the period from 2003 to 2005 total investment requirements are US$ 675 m.

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

Capex in 2000-2006, $ m

0

50

100

150

200

250

2001 2002E 2003F 2004F 2005F

26

Sources of External Financing

• Severstal uses debt financing only. As at 1 January 2003 Severstal’s debt profile comprised US$ 140 mil., 86% of which is dollar denominated

• Planned debt financing through domestic bonds emission at aggregate amount of US$ 100 mil. maturing within 4 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 revenues

27

Bank Loans

• Right now Severstal has no intention to draw jumbo syndicated loans from commercial banks, but club loans and bilateral deals can’t be excluded

• In project financing Severstal will continue to cooperate with the EBRD, and a syndication will be a choice only in case of mega projects

• Severstal receives loans from international export agencies without additional bank guarantees

• Financial coverage on the P&L basis is unacceptable due to the cyclical nature of the industry

• Eurobonds will become opportunity only after the substantial decrease in yields

28

Additional Debt Capacity

• 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

Severstal can increase debt capacity to finance capex and/or buying of assets observing the key

principals

29

Disclaimer

This presentation contains certain forward-looking statements regarding the anticipated market evolution and future prospects of Severstal. While these statements are based on the company's best estimates as of the date hereof, the actual results will vary due to market conditions, the action of competitors, consumer demand, steel prices, economic conditions and other factors.

Certain numbers in this presentation are based on unaudited financial statements. The company makes no representation, direct or implied, that these figures are true and correct, and you should not rely on these numbers as having been audited or otherwise independently verified. Certain numbers may be presented differently once audited, and the company takes no responsibility and accepts no liability for such changes and accepts no responsibility for providing the final audited financial statements to you once the audit has been completed.