NLMK Annual Report 2012


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NLMK Annual Report 2012

  1. 1. NLMKAnnual Report 2012
  2. 2. XXNLMK Group is a leading international steelcompany with a vertically integrated businessmodel.Stagesofproductionthataremorerawmaterialandresourceintensiveareconcentratedincost-efficientregions.ThishasenabledtheGrouptoattainandthentoretainitspositionasoneofthelowest-costproducersintheworld.FinishedproductsareproducedclosetoourmaincustomersinRussia,NorthAmerica,andtheEU.NLMKisoneofthemostefficientandprofitablesteelmakersintheworldthankstoourself-sufficiencyinkeyrawmaterialsandenergy,coupledwiththetechnologicalsuperiorityofourproductioncapacity.Weofferourcustomersadiversemixofhigh-qualityproducts,ensuringourleadingpositioninlocalmarketsandsaleseffectiveness.Thankstoourflexibleproductionchain,balancedproductmix,efficientsalessystem,andwidespreadcustomerbase,weareabletoreactquicklytochangingmarketconditions.Aftercompletingaphaseofexpansion,theGroupisnowfocusedonincreasingproductionefficiency,improvingthequalityofproduction,andstrengtheningourpositiononthemarkets.www.NLMK.comYou will find navigational aids throughoutthis report that will guide you to furtherinformation:Links to pagesin the Annual ReportLinks to further contentonlineLinks to related videomaterial onlineLinks to othercorporate documentsKPIsNLMK shares are quoted on the Russiantrading platforms MICEX and RTS of theMoscow Exchange, and as Global DepositaryShares (GDS) on the London Stock Exchange(LSE).NLMK ticker codesReutersNLMKq.L (LSE), NLMK.RTS (RTS), NLMK.MM(MICEX)BloombergNLMK LI (LSE), NLMK RU (RTS), NLMK RM (MICEX)Indices which include NLMK shares(as at March 2013)Moscow Exchange (RTS-MICEX)(NLMK’s share = 1.02%)Moscow Exchange (RTS-MICEX) Metals and MiningSector (NLMK’s share = 15%)Credit ratingsStandard and Poor’s BBB-Moody’s Baa3Fitch BBB-Our MissionOurmissionistoincreasetheGroup’slong-termvaluethroughadoptingandcontinuouslyimprovingasustainablemanagementandoperationalbusinessmodel.
  3. 3. NLMK Annual Report 2012 01IIIVIIIVVIIIn 2012, NLMK Group produced 15 mt of steel, becoming the leaderin steel output in Russia. The following competitive advantages arethe driving force behind our success:Inside this reportNLMK Group’s business model is based on a balance in ourproduction chain, product portfolio, and sales markets.Page 02Section IUnderstanding NLMKPerformance highlights 04Key milestones 06Our business model 08Group structure 12Where we operate 14Products and uses 16NLMK’s balanced growth strategy is based upon the developmentof low-cost upstream and midstream facilities, coupled withdownstream assets located close to the end-users.Page 18Section IIStrategic reviewChairman’s statement 20President’s review 22Management Q&A 24Market review 28Strategy 34Strategy in action 36Research & Development 46Key performance indicators 48Risk management 52Efficiency and safety have always beenat the heart of our business.Page 56Section IIIPerformance reviewGroup sales 58Financial review 62Operating review 67NLMK Russia 68NLMK Europe 76NLMK USA 80Corporate responsibility 84NLMK is led by a team of professionals who have extensive experiencein managing the Group in times of difficult market conditions and whoare capable of strengthening its position within the industry.Page 96Section IVGovernanceChairman’s letter 98Board of Directors 100Management Board 102Corporate governance 104Information for shareholders 116As one of the most efficient steel producers in the world,NLMK consistently achieves excellent financial results.Page 120Section VFinancial statementsResponsibility statement 122Report of independent auditors 123Consolidated balance sheets 124Consolidated statements of income 125Consolidated statements of comprehensiveincome and stockholders’ equity 126Consolidated statements of cash flows 127Notes to the consolidated financial statements 128The diversification of the Group’s product portfolio and its salesmarkets enables us to react flexibly to changes in the marketsand to weather industry cycles.Page 148Section VIAppendicesNLMK’s subsidiaries and affiliates 150NLMK’s key products with descriptions 152Glossary 154
  4. 4. 02 NLMK Annual Report 2012Section I:Understanding NLMKIn this section:Performance highlights 04Key milestones 06Our business model 08Group structure 12Where we operate 14Products and uses 16NLMKGroup’sbusinessmodelisbasedonabalanceinourproductionchain,productportfolio,andsalesmarkets.Wecontinuouslyfocusonallofthecomponentsofourbusinessbyinvestinginthedevelopmentofassets,byexpandingourproductlineandbyimprovingproductquality.– Efficientverticalintegrationofrawmaterialassetsandanincreaseinourlevelofenergyself-sufficiencyallowustocontrolproductioncostsandtoreducetheriskscreatedbyvolatilerawmaterialprices.– Wearesupplementinglow-costmidstreamoperationsinRussiathataresufficientinrawmaterialswiththedevelopmentofouroverseasrollingassetslocatedclosetoourextensiveclientbase,whichhasveryexactingrequirementsintermsofqualityandleadtimes.– TheGroupemploysabalancedmodelofsteelproductionthatensuresflexibilityinresponsetochangesindemand.– Oursalesportfolioformostproductsisbalancedbetweendevelopingandmaturemarkets,whichhelpstoensuresolidsalesperformance.– Ourbroadproductportfolioincludesbothordinaryandnicheproductsandthisallowsustoreactflexiblytochangingmarketconditions.Iron ore concentrateIron ore materialsCoke* Data for NovolipetskScrapEnergyFluxesRussiaEU (27)Middle East (incl. Turkey)North AmericaAsia and OceaniaOtherHVA share, rhsNon-consolidated production costConsolidated production costRaw materials and energy self-sufficiency in 2012 Vertical integration steel cash cost reduction effect (US$/t) Group sales by region (mt)For more information on our product portfolio16For more information on our business model08
  5. 5. IIIVIVVIIINLMK Annual Report 2012 03I
  6. 6. 04 NLMK Annual Report 2012UnderstandingNLMK:Performance highlightsInachallengingyear,NLMKdeliveredarobustfinancialperformanceandsignificantlygrewitssteelproductoutputandsales,drivenbyanefficientbusinessmodelandabetterproductmix.Ourfinancialstandingremainsoneofthemostsustainableamongsteelmakingcompanies.Strong financial performanceand increased sales– Consolidated revenue: US$ 12.2 bn (+4%)– Operating cash flow: US$ 1.82 bn (+1%)– Net debt/EBITDA: 1.88 – one of the lowest acrossthe sector– Steel product sales: 15.2 mt (+18%)– HVA sales: 5.4 mt (+20%)– ShareofHVAproductsintotalsales:36%(+1p.p.)Sales revenue (US$ bn)12.16 +4%EBITDA margin15.6% -3.6p.pNet income per share (US$)0.10 -56%Cash flow from operations (US$ bn)1.82 +1%For more information on our financial performance62
  7. 7. NLMK Annual Report 2012 05IIIVIIIVVIIFor more information on our operating performance For more information on our corporate responsibility achievementsFor more information on our KPIsSustainable developmentResilient growth promptedby sustainable and efficientbusiness model– Air emissions: 22.6 kg/t (-19%)– Environmental capex: US$ 77 m– Specific energy intensity of steel production:5.74 Gcal/t (-6%)– Process off-gas utilization rate: 90%– Labour efficiency: 239 t/person (+20%)– Slab cash cost: US$ 388/t (-2%)– Steel output: ~15 mt (+25%)– Finished product output: 15.2 mt (+17%)– HVA product output: 5.5 mt (+20%)– Capacity utilization rate: 96%** Data for NLMK RussiaSteel output (mt)14.92 +25%Capex (US$ bn)1.45 -29%EBITDA (US$ bn)1.90 -16%Specific air emissions (kg/t of steel)22.6 -19%Number of accidents per year80 +467 8448
  8. 8. 06 NLMK Annual Report 2012UnderstandingNLMK:Key milestones8.5 mtNLMK acquires alicence to developthe Zhernovskoye – 1coking coal deposit(Kemerovo region).Potential for increased self-sufficiency in coking coal.200520048.9 mtNLMK’s energycapacities areupgraded.Increase in energy self-sufficiency to 40%.19997.5 mtStagdok, a miningcompany and processorof fluxing limestone,is acquired.100% self-sufficiencyin limestone.19927.2 mtState enterprise NLMKis transformed intoan open joint stockcompany.19977.4 mtDolomit, a miningcompany and processorof metallurgicaldolomite, is acquired.100% self-sufficiencyin dolomite.9.1 mtNLMK acquiresStoilensky, the thirdlargest iron oreproducer in Russia.100% self-sufficiency iniron ore concentrate andsinter ore.NLMK group steelproduction (mt)NLMK,sinceitsinceptionin1931,hasmadeinnovationanddevelopmentitskeystrategy.Inordertoachievethehighestlevelsofefficiencyofproductionofitshighqualitysteels,NLMKhascontrolledandoptimizeditskeyresources,focusedoninnovationandstressedtheneedforhighlevelsofsafetyandsocialresponsibilitytoitsemployeesandtotheareaswhereitoperates.In2012,NLMKbecameRussia’s#1steelmakerintermsofsteeloutputandwasthefirstRussiansteelmakertohaveitsenergyresourcemanagementsystemcertifiedforcompliancewiththerequirementsofinternationalstandardISO50001:2011.Asaresultofthisapproach,NLMKisnowrecognisedasoneoftheworld’smostcompetitivesteelmakers.2003
  9. 9. NLMK Annual Report 2012 07IIIVIIIVVIISee our interactive version of the timeline mtNLMK acquiresDanSteel*, a Danishsteel rolling companywith a capacity of500,000 t/y.The bulk of NLMK DanSteelslab needs are provided byNLMK.NLMK acquires VIZ-Steel, the second largestRussian electricalsteel producer with acapacity of 200,000 t/y.100% of VIZ-Steel semi-finished product needs areprovided by NLMK.NLMK grows its share in thedomestic and internationalelectrical steel markets.Coke producer Altai-Koks is acquired.Over 100% self-sufficiencyin coke.NLMK and theDuferco Group createa JV that consists of1 steelmaking and 5rolling mill companiesand a network of steelservice centres inEurope and the USA.Further geographicdiversification, movingcloser to end customers.Product mix diversificationwith an expanded valueadded share.201112.0 mtNLMK acquires SteelInvest and Financerolling assets, formerlypart of the NLMK-Duferco JV.NLMK grows HVAproduction capacities in thetraditional sales markets andenhances direct access to theEU/USA customer base.NLMK balances expandinglow-cost steel production inRussia with the downstreamoperations close to end users.NLMK acquiresNational Laminations,a service centre inIndia specializing intransformer steelprocessing anddistribution.Enhances NLMK’s position inthe Indian market.NLMK wins the rightto explore and developthe Zhernovski Glubokisite (Kemerovo region)and Usinsky-3 (north ofthe Komi Republic).Provides an option toget integration into theproduction of high-qualitycoking coal to cover asubstantial part of NLMK’scoal needs.201011.5 mtNLMK acquires VMIRecycling Group, aRussian companyspecializing in scrapcollection andprocessing.Increase in scrap self-sufficiency to 80%.* NLMK DanSteel starting from 2 August 2011** NLMK Indiana starting from 27 July 2010Formoreinformationonourfuturedevelopmentplansandkeyinvestmentprojects3614.9 mt+25% y-o-yNLMK Group becomesRussia’s #1 steelmakerin terms of steeloutput – NLMK’sassets producedapproximately 20%of all steel in Russia.Expanded steel output ina cost-efficient location.NLMK DanSteelcompletes therevamping of its rollingmill, designed forplates of 5-200 mm inthickness and widthsup to 4,000 mm.Strengthened positions inthe plate markets, includingsuch new high growthmarkets as off-shore drillingplatform manufacture andthe off-shore wind sector.NLMK is ranked secondamong World’s 35Most CompetitiveSteelmakers - WorldSteel DynamicsAnalysts highlighted NLMK’scompetitive advantages, suchas low production costs, self-sufficiency in raw materials,strong financial performance,proximity to key salesmarkets, and pricing policy,as well as the company’sactivities in the areas ofsocial and environmentalresponsibility and workers’safety.NLMK became the firstRussian steelmakerto have its energyresource managementsystem certified forcompliance withthe requirements ofinternational standardISO 50001:2011.International auditorsrecognize NLMK’s effortsto introduce Best AvailableTechnologies (BATs) aimedat optimizing energyconsumption and enhancingthe sustainable use of naturalresources, and, as a result,to reduce the Company’senvironmental footprint.9.2 mtNLMK/Duferco JVacquires SharonCoating (formerlyWinner Steel), anAmerican rolled steelmanufacturer.Further product andgeographic diversification.NLMK acquires 50%plus one share inMaxi-Group.Diversification into longproducts and metalware,and higher self-sufficiency inscrap in the domestic market.10.5 mtNLMK acquiresinternational tradingcompanies: Novexco(Cyprus) and NovexTrading (Switzerland).Helps develop an effectivesales system, optimizecommodity flows, and furtherenhance presence in the coreexport markets.NLMK acquires BetaSteel**, a US-basedsteel and rolledproduct manufacturer.Diversification into hot-rolledcoils in the USA.201220072008
  10. 10. 08 NLMK Annual Report 2012For more information on our corporate responsibility projectsUnderstandingNLMK:Our business modelNLMKisaverticallyintegratedgroupwithawell-balancedvaluechain,providingcontrolovereverystageofsteelproduction,fromtheminingofrawmaterialstothesaleofhigh-technologyfinishedproductstoendusers.Atallstagesofthisprocess,weadheretoourcommitmenttocorporateresponsibility,seekingtoensurethewell-beingofourstaff,thelocalcommunitiesandtheenvironment.Sustainable developmentCorporate responsibility is centre stage in our businessmodel, being an integral element of each link in thevalue chain. NLMK encourages high standards ofsocial welfare and environmental protection andprevents violations of human rights in the regions inwhich it operates.Our corporate responsibility policy is geared toachieving sustainable development objectives that arealigned with the long-term economic interests of theGroup. We strive to protect our employees, throughimproving their standard of living, and providing safe,secure working conditions. We care about ecologyand minimize our impact on the environment. Wecreate a positive social environment in the regionswhere we operate and support our local communities.Our verticallyintegratedbusiness modelNLMK has created a unique businessmodel: steel production (the mostmaterial- and resource-intensive partof the metallurgical process) isconcentrated in low-cost regions, whilefinished products are produced muchcloser to the Group’s client base. Thisallows NLMK to minimize expenditureon production and logistics while, at thesame time, swiftly and flexibly adaptingto the changing requirements of ourend users. Vertical integration andeffective oversight of production costsmeans that NLMK is one of the world’slowest-cost producers of high-qualitysteel products.The key stages of ourproduction chain are:1. UpstreamOur Russian assets fully supply theGroup’s requirements for iron oreconcentrate, sinter ore, and coke, andthe majority of our scrap and energyneeds. NLMK manages one of the mostefficient iron ore manufacturers in theworld, situated close to the Group’smain steel production facility, and witha reserve of around five billion tonnes.2. MidstreamNLMK has a flexible production chain.Approximately 20% of our steel isproduced using Electric Arc Furnace(EAF-based) technology and 80% ismanufactured using Basic OxygenFurnaces (BOF) at one of the mosteconomically run companies in theworld: our site at Lipetsk. About 90%of our steelmaking capacity is locatedin Russia, next to our main sources ofraw materials and close to key end usersof our products.3. DownstreamProduction and sale of our wide rangeof finished products is split evenlybetween developing and maturemarkets, thereby ensuring both growthand stability. A substantial part offinished product manufacturing iscarried out by NLMK rolling mills closeto our wide client base, which has strictrequirements in terms of productquality and lead times.84
  11. 11. NLMK Annual Report 2012 09IIIVIIIVVIIFor more information on ourprojects to maximize cost-efficientupstream integration1. UpstreamThe extraction and processing of raw materialsused in steel production.Iron oreIron ore concentrate and sinter ore are the key inputmaterials in pig iron and BOF steel production.AdvantagesStoilensky supplies all of the Group’s requirementsfor iron ore concentrate and sinter ore and, whenour Pelletizing Plant is completed, it will cover allNLMK’s needs for iron ore, including iron ore pellets.In addition, its ferruginous sludge (waste) utilizationtechnology will allow us to further reduce ourconsumption of iron ore.Coke and coking coalCoke is used as a raw material in the production of pigiron. It is obtained by baking a blend of several gradesof coking coals.AdvantagesAltai-Koks and the coke batteries at Novolipetsksupply more than 100% of the Group’s requirementsfor coke, which is used in the blast furnaces toproduce pig iron. In future, the introduction of newtechnologies will bring down the costs connected withthe acquisition of coking coal. The introductionof Pulverized Coal Injection technology (PCI) willpartially supplant expensive coke and natural gaswith a far more cost-effective alternative, while the useof tar pitch will further reduce the use of coke.In addition, NLMK has licences to develop twocoalfields (Zhernovskoye-1 and Zhernovski Gluboki,and Usinsky-3).ScrapSteel is fully recyclable. At the end of their useful life,steel products can be used as input for smelting. Scrapis used in both the EAF and the BOF operations.AdvantagesScrap processing businesses within the NLMK Groupprovide about 85% of the ferrous scrap requiredby our Russian steelmaking plants. To supply theincreased demand for scrap (taking into account thatNLMK Kaluga will come online in 2013), the Groupwill continue to develop its scrap processing division.FluxesFluxes are used to manufacture refractories, in sinterand in BOF processes.AdvantagesStagdok (limestone) and Dolomit (dolomite) fully coverour flux requirements.EnergyElectricity is one of the main energy sources usedin steel production.AdvantagesNLMK has generating plants run mainly on processoff-gases from coke and blast furnace operations.In 2012, Novolipetsk was 53% energy self-sufficient,while at Altai-Koks, enough energy is generatedto meet all of the company’s requirements with theexcess being sold to third-party consumers.100%self-sufficiency iniron ore concentrateand sinter oreOver100%self-sufficiency in fluxOver100%self-sufficiency in coke53%self-sufficiencyin energy85%self-sufficiency in scrap36“Ourextensiveresourcebaseissituatedinalow-costregion(Russia).”
  12. 12. 10 NLMK Annual Report 2012For more information on our projectsto improve cost-effectivenessUnderstandingNLMK:Our business model (continued)2. MidstreamThis is the process of converting raw materials intothe components used to charge the furnaces, as wellas the production of crude steel and cast slabs.ProcessThe Group’s steelmaking operations are well-balanced, using different methods: the Basic OxygenFurnace (BOF) route, representing over 80% (at thelow-cost Novolipetsk site), is complemented byElectric Arc Furnace (EAF) production, representingaround 20% (at NLMK Russia Long, NLMK EuropePlate, and NLMK USA).AdvantagesThis balanced business model allows us to quickly andflexibly adjust our production according to the marketsituation. The steel produced by our Group in Russia isone of the lowest-cost in the world. This is facilitatedby proximity to the sources of iron ore, the relativelylow cost of energy and labour and the highly efficienttechnology we use.This competitive advantage has allowed the Group tofurther expand its low-cost production base in Russia:in 2011, we commissioned a new Blast Furnace anda new Basic Oxygen Furnace, increasing oursteelmaking capacity by 36%. In 2013, we are planningto complete the construction of the NLMK Kalugamini mill. The site will have an EAF with a capacity of1.5 m t/y of steel.“Wemanufacturesteelclosetoourrawmaterialproductionsites.”US$ 388/tslab production cost80%/20%BOF/EAF modelOver15 mt/ysteel productioncapacity38
  13. 13. NLMK Annual Report 2012 11IIIVIIIVVIIFor more information on ourprojects to develop promisingsegments and to maintain efficientand sustainable growth3. DownstreamThe process of creating rolled steel, ready for sale.ProcessNLMK’s steel processing plants are diversified bothgeographically and in terms of the products theymanufacture. Our rolling facilities are located in Russia,Europe, and the USA.AdvantagesNLMK’s strength is the proximity of its finishedproduct manufacturing sites to its end consumers.Russia, the EU and the USA have traditionally beenNLMK’s key sales markets and it is in these regionsthat the Group’s rolling mills are located.Having set up an efficient production flow and flexiblesales strategy, NLMK can adjust its productionprogramme according to the demands of the market.When demand shrinks for high value added (HVA)products, NLMK can switch to standard steelproduction with practically no change in utilizationrates at its core assets and to direct sales to moreprofitable markets. When demand recovers, theCompany increases its HVA product output andreduces the production of ordinary grades.“Werollsteelclosetoourmaincustomers.”Over14 mt/ytotal rolling capacityOver90%of steel produced can beprocessed at our ownrolling mills in Russia andabroad80%of rolled steel is soldclose to where it isproduced36%HVA share in finishedproduct output40
  14. 14. 12 NLMK Annual Report 2012For more information on NLMK Russiaoperating performanceUnderstandingNLMK:Group structureOurverticallyintegratedoperationsareorganizedintothreecleargeographicaloperatingdivisionsandspanvirtuallyallofthesteelmakingvaluechain,fromminingtoprocessingsteelintofinishedproducts.Servicecentresandtradingcompaniesensureuninterruptedjust-in-timedeliveriesandahighlevelofcustomerserviceinover70countriesaroundtheworld.NLMK RussiaThe Group’s key business segment comprising mining,coke chemical, steel producing and rolling assets.Over 90% of steelmaking assets are located in Russia.They account for about 60% of flat steel products and100% of long products. NLMK Russia comprises threebusiness units – NLMK Russia Flat, NLMK Russia Longand NLMK Russia Raw Materials.Core businessesNLMK Russia Flat: NLMK Russia Long: NLMK RussiaRaw Materials:– Novolipetsk– VIZ-Steel– NSMMZ– UZPS– NLMK Kaluga(underconstruction)– Stoilensky– Altai-Koks– Stagdok– Dolomit– VtorchermetNLMKProducts– Slabs– Hot-rolledsteel– Cold-rolledsteel– Galvanisedsteel– Pre-paintedsteel– ElectricalsteelTransformerandDynamosteel– Billets– Rebar– Wirerod– Metalware– Ironoreconcentrate– Sinterore– Coke– Limestone– Dolomite– ScrapSales marketsGlobal market: Russian market:– 16% of theglobal slabmarket– Cold-rolled steel: 24%– Pre-painted steel: 22%– Galvanised steel: 17%– Rebar: 17%– Coke: 8%– 23% of Russian iron oreconcentrate production2012 production highlights– 14.0 mt of crude steel (+25% y-o-y)– 5.1 mt of flat steel (+7% y-o-y)– 1.7 mt of long steel and metalware (+13% y-o-y)– 7.1 mt of coke, 6% moisture (+8% y-o-y)– 15.6 mt of iron ore (+4% y-o-y)– 2.1 mt of dolomite (-2% y-o-y)– 3.6 mt of limestone (+10% y-o-y)– 2.1 mt of scrap processed (-1% y-o-y)Employees~53,90016%68
  15. 15. NLMK Annual Report 2012 13IIIVIIIVVII58.8%28.5%9.9%2.8% 0.01%0.01%68.6%20.3%9.8%1.3%For more information on NLMK USAoperating performanceFor more information on NLMK Europeoperating performanceNLMK EuropeNLMK Europe produces a wide range of HVA flats.NLMK’s industrial model is unique for Europe andis based on the efficient supply of semi-finishedproducts (slabs) from Russia to flexible high-qualityEuropean processing facilities close to key customers.NLMK Europe includes two business units, NLMKEurope Strip and NLMK Europe Plate..NLMK USANLMK USA comprises three flat steel producingassets. The Division has an electric arc furnace(EAF), hot-rolling facilities, and a commondistribution structure.Core businessesNLMK Europe Strip: NLMK Europe Plate:– NLMK La Louvière(Belgium)– NLMK Coating (France)– NLMK Strasbourg (France)– NLMK DanSteel (Denmark)– NLMK Clabecq (Belgium)– NLMK Verona (Italy)Core businesses– NLMK Indiana (Portage, IN)– Sharon Coating (Sharon, PA)– NLMK Pennsylvania (Farrell, PA)Products– Hot-rolled steel– Cold-rolled steel– Galvanized steel– Pre-painted steel– Thick plates, including quenchedand temperedProducts– Slabs– Hot-rolled steel– Cold-rolled steel– Galvanized steelSales marketsEU market:– 3% of the EU strip market– 6% of the EU plate marketSales marketsUS market:– 3% of the US flat steel market2012 production highlights– 0.2 mt of steel (-23% y-o-y)– 2.1 mt of flat steel (-13% y-o-y)2012 production highlights– 0.7 mt of steel (+19% y-o-y)– 1.8 mt of flat steel (+5% y-o-y)Employees~2,900Employees~1,100Our supporting servicesSupporting businesses include service and tradingassets that allow us to diversify our sales, to enhanceour access to core export markets and to establishbetter control over export operations. Sales operationsin the Group’s export markets are handled throughour traders.The Group’s financial reporting is done by 5 segments:– Steel segment. Novolipetsk (Lipetsk site),VIZ-Steel, Altai-Koks, trading companies, as wellas a number of service companies.– Long products segment. NSMMZ, UZPS,scrap collection and processing facilities,and others.– Mining segment. Stoilensky, Dolomitand Stagdok.– Foreign rolled products segment. Rolling millassets located in Europe and the USA.– All others.6% 3%Revenue by segment in 2011-2012Steel segmentForeign rolled products segmentLong products segmentMining segmentAll othersOuter Ring – revenue 2012Total – US$ 12,157 mInner Ring – revenue 2011Total – US$ 11,729 m76 80
  16. 16. 14 NLMK Annual Report 2012NLMK INDIANASHARONCOATINGNLMKPENNSYLVANIAFor more information on our supporting businessesUnderstandingNLMK:Where we operateNLMKGrouphasassetsin13countriesacrossthreecontinents.Wesellourhigh-qualityproductstobuyersinover70countriesworldwide.Wemakeeveryefforttooptimizeeachstepoftheproductionprocessinordertominimizelogisticscostsandtosecureaccesstotheenduser.Supporting businessesNLMK’s supporting businesses, which facilitate the purchase and sale ofproducts, are located in Russia, the USA, Europe, and Asia. They help tooptimize sales in key sales markets and enable direct access to end-users.Group sales by region in 2012*NLMK operationsOther regions of NLMK presenceAssets under constructionService centres and trading companiesSea portsNLMK logistics* The structure is adjusted towards physical unitsof measurements3We operate on 3 continents13Our assets are locatedin 13 countries16We have 16 service centresand trading companiesin key end markets70We sell our steel in over70 countries worldwideEuropeUS$ 2.54 bn(2.82 mt)Other regionsUS$ 1.31 bn(1.61 mt)11%North AmericaUS$ 1.65 bn(2.18 mt)14%83
  17. 17. NLMK Annual Report 2012 15IIIVIIIVVIINATIONAL LAMINATIONSNLMK KALUGADOLOMITNOVOLIPETSKSTAGDOKUSINSKY-3UZPSNLMK VERONANLMKDANSTEELNLMK CLABECQNLMK COATINGNLMKSTRASBOURGNLMK LA LOUVIÈRESTOILENSKYNSMMZVIZ-STEELALTAI-KOKSZHERNOVSKOYE-1 &ZHERNOVSKY GLUBOKYVTORCHERMET NLMK1%100%94%16%20%64%5%19%Asia and OceaniaUS$ 1.36 bn(2.41 mt)16%Middle East, incl. TurkeyUS$ 0.90 bn(1.28 mt)8%RussiaUS$ 4.40 bn(4.88 mt)32%Sales of locally produced finishedproductsThe locality of our business model – breakdown by capacityUpstreamNLMK RussiaNLMK EuropeNLMK USAMidstreamNLMK RussiaNLMK EuropeNLMK USADownstreamNLMK RussiaNLMK EuropeNLMK USA67 58For more information on our consolidatedoperating resultsFor more information on our sales
  18. 18. 16 NLMK Annual Report 20122%9%2%1%4%7%13%6%25%26%4%UnderstandingNLMK:Products and usesTheGroup’sintegratedproductionmodelenablesittoofferitscustomersadiversifiedportfolioofhigh-qualityproductswhile,atthesametime,beingresponsivetochangesinmarketconditions.Steel is of vital importance to us allIt is all around us: outdoors, indoors, at work and atplay. Steel plays an important role in the modern worldand is an integral part of our everyday lives, providingus with food and shelter, transforming our workingdays, enriching our leisure time and making it easierand safer for us to get around. Even when it has beenrepeatedly processed, steel retains its originalproperties and can be used again and again toimprove our quality of life.Strong and durable, steel adapts in line with progress.New technologies mean that the properties and typesof steel can be varied according to customerrequirements.NLMK is a leading international steelmaker. Our steelis used in many different industries for a variety ofproducts:– Construction, including infrastructureconstruction – supporting structures and facingmaterials, reinforced concrete structures, roof tiles,air conditioning systems; railway infrastructure,highway construction, bridges, etc.– Automotive manufacturing – body panelsand parts for cars and commercial vehicles.– Pipes – pipelines, large-diameter pipes for the oiland gas industry, water and gas pipes.– Machine building – mining equipment,agricultural and construction (yellow) machinery,lifting and transport equipment, railwayengineering, shipbuilding, wind powerengineering, heating and power plants andoffshore drilling platforms.– Electrical equipment and instrument making– transformers, electric motors, and generators.– White goods – gas and electric ovens, washingmachines, refrigerators, dishwashers, extractorfans, household boilers, etc.High Value Added productsNLMK is a leading provider of high-quality steelproducts in key sales markets. Our range of highvalue added products includes cold-rolled steel,galvanized steel, pre-painted steel, electrical steel(transformer and dynamo), a wide range of thickplates and metalware. The Group is consistentlygrowing its portfolio of value added productsthrough organic expansion as well as through theacquisition of rolling assets with direct access to keymarket segments.In 2012, we increased sales of value addedproducts by 20% (to 5.4 mt) compared with 2011,while their share in the total portfolio of salesincreased to 36% (up 1 p. p. year-on-year). This waspossible due to the consolidation of rolling assets inthe Company’s key export markets in mid-2011, aswell as to the increased sales of high-marginfinished steel produced by Novolipetsk.Construction, servicecentres, and steelprocessingSales in Russia (mt)3.93Share of Russian sales81%Sales breakdown by product in 2012MetalwareLong productsBilletsDynamo steelTransformer steelPre-painted steelGalvanised steelCold-rolled steelHot-rolled thick platesHot-rolled coilsSlabsPig ironSteel sales: high value added/ordinaryproducts (mt)Ordinary productsHigh value added productsShare of high value added productsin sales portfolio, rhsDiversification of sales by industryin 2012ConstructionMachinery and transportOther
  19. 19. NLMK Annual Report 2012 17IIIVIIIVVIIGalvanized steel is used in theproduction of machine body parts,roofing materials, and load-bearingstructures in hostile environments.Pre-painted steel is used inconstruction for the production ofroofing and finishing materials, andcasings for consumer and whitegoods (household appliances).Transformer (grain oriented) steelis used in the electrical industry forthe manufacture of transformercores and fixed components forelectrical equipment.Dynamo (non grain oriented) steelis used for the production ofelectrical equipment, such ascomponents for electric motorsand generators.ProductsHot-rolled steel is used mainly inthe production of steel structures,guardrails, ship hulls, machinecasings, road-building machinerycomponents, pressure vessels, andbuilding structures.Hot-rolled thick plates are used inthe manufacture of pipes, pressurevessels, ship hulls, and bedplatesfor wind turbines and compressors,as well as in the construction ofbridges.Cold-rolled steel is used widely inthe production of body parts formachines and equipment,load-bearing structures, pipes,lighting masts, and agriculturalequipment.ProductsRebar is used in the constructionof reinforced concrete structuresfor road and building construction,as well as in the manufacture ofparts for machinery.Wire rod is drawn into wire andused mainly in construction,as well as in transport machinebuilding (steel cords).Metalware products are primarilyused in the construction sector(fasteners, nails, mesh), as well asin transport machine building.* W/o hot-rolled thick platesLong steelLong steel is used primarily in construction andinfrastructure projects, which account for over twothirds of the total consumption of this type of product.Long products are also widely used in machinebuilding.Flat steelFlat steel is most widely used in sectors such as construction, electricalequipment, machine building (including automotive), energy,shipbuilding, and pipe manufacture.% of Russian output*16%% of Russian output19%% of Russian output40%% of Russian output100%% of internationalMarket9%% of Europeanoutput11%% of Russian output4%% of Russian output57%% of Russian output29%% of Russian output24%% of Russian output18%AutomotiveSales in Russia (mt)0.25Share of Russian sales5%White goodsSales in Russia (mt)0.07Share of Russian sales1%Machine buildingSales in Russia (mt)0.11Share of Russian sales2%Tube & pipeSales in Russia (mt)0.29Share of Russian sales6%Electrical andinstrument engineeringSales in Russia (mt)0.10Share of Russian sales2%OthersSales in Russia (mt)0.12Share of Russian sales3%
  20. 20. 18 NLMK Annual Report 2012For more information on our key investment projects36For more information on our Research & Development46Section II:Strategic reviewIn this section:Chairman’s statement 20President’s review 22Management Q&A 24Market review 28Strategy 34Strategy in action 36Research & Development 46Key performance indicators 48Risk management 52NLMK’sbalancedgrowthstrategyisbaseduponthedevelopmentoflow-costupstreamandmidstreamfacilities,coupledwithdownstreamassetslocatedclosetotheend-users.Itisalsofoundedonthecontinuousimprovementoftheefficiencyofproductionandsupportingprocesses.– Westriveforself-sufficiencyinkeyrawmaterialsinordertoguaranteestabledeliveriesand,hence,toremainaleaderintermsofcostefficiencyintheworldsteelindustry.– Wehaveexpandedourlow-coststeelproductionfacilitiesinRussia.Constantupgradingandoptimizationofourtechnicalprocessesallowsustoimproveoureconomicefficiencyandtoachievebetterresults.– WearedevelopingfacilitiesfortheproductionoffinishedproductsinRussiaandabroadandwearemovingclosertothecustomerbyopeningnewservicecentres.Weinvestinqualityinordertomeetgrowingandrapidlychangingcustomerneeds.Byofferinghighvalueaddedproductsandbyexpandingourrangeofnicheproducts,weareincreasingtheprofitabilityofourbusinessandtherebyensuringitsstability.Crude steel and finished steel capacity growth (mt) Balanced downstream expansion NLMK sales growth vs world steel consumption growth(index, base = 2007)Crude steel capacityFinished steel capacityRussiaEuropeUSAShare of international downstream capacities, rhsNLMK salesWorld steel consumptionSources: Worldsteel Association, Company’s data
  21. 21. IIIVIVVIIIINLMK Annual Report 2012 19
  22. 22. 20 NLMK Annual Report 2012For more information on the market environment28For more information on our financial performance62Dear Shareholders,The past year has been a challenging one for theglobal steel industry. The imbalance betweendemand and supply has grown and there are nowapproximately 0.5 bn t of surplus production capacity.This situation in the industry is nothing new but thistime it is on a much greater scale and is exacerbatedby high raw material prices. The risk of a prolongedrecession in the Eurozone and the lack of clear signalsof accelerated growth from the Chinese economymake the crisis in the traditional steel producingregions especially grave. Under these conditions, themost stable companies are those that have been ableto integrate quality raw material sources, that haveaccess to large markets, or are able to supply premiumproducts and services. In the course of the last fifteenyears, we have established exactly this type ofbusiness – one that focuses on our main advantages,stable and capable of developing under any marketconditions. The result has lived up to our expectationsand has been well worth the effort. NLMK isconsistently one of the most profitable companiesin the industry, demonstrating impressive growth.Performance overviewIn 2012, as the result of our new efficient productionfacilities in Russia, the Group increased productionby 25% to 14.9 mt. Sales also increased to a record15.2 mt, thanks to the close integration with ourrolling assets in key markets. Profits (EBITDA) wereUS$ 1.9 billion and profitability reached 16%, one ofthe highest in the industry.Strategicreview:Chairman’s statementOurstrategyisaimedatincreasinglong-termvalueandprovidingtheconditionsforgrowthandourkeyfocuswillbeoncontinuingtostrengthenthestabilityofourbusiness.Crude steel production (mt)Excess capacity (mt)Capacity utilization rates, rhsWorld steel capacity and run ratesThis year, the decision to pay out dividends wastaken based on an all-round analysis of possibledevelopment scenarios. We came to the conclusionthat the Group has sufficient internal resources tomaintain stability. This certainty is supported, amongother things, by our unchanged high investment graderatings, the successful placement of the secondEurobond issue in February 2013 and an agreement
  23. 23. NLMK Annual Report 2012 21IIIVIVVIIIIFor more information on our employeesFor more information on our corporate governanceFor more information on our strategyFor more information for our shareholders1161049034Corporate governanceI would like to note the importance of the continuity inthe successful development of the Group. Last year,Oleg Bagrin took over as President of the Group. Hehas been on the Board of Directors since 2004 andwas recently Chairman of the Strategic PlanningCommittee. I am confident that, under his leadership,the management team will be able to successfully takeon the challenges we face today and move forward.I also consider it vitally important that all membersof the Board of Directors have the rich industryexperience necessary to fairly assess the work of themanagement team, to make timely and relevantdecisions and to implement rigorously changes toimprove the business. The investment communityand experts have a high regard for NLMK’s level oftransparency and its overall system of corporategovernance, which is rightly considered to be oneof the best in the industry.EmployeesI am deeply confident that the long-term success ofthe Group is down to the quality of our HR policy, ledby a cohesive management team, which motivates allstaff. Therefore in 2010, as Chairman of the HumanResources, Remuneration and Social PoliciesCommittee of the Board of Directors, I made thedecision to lead work on making constantimprovements in this area. I envisage one of the mainprojects for the near future to be increasingorganizational efficiency, developing a culture ofinvolvement where all staff members take an interestin the results of their work. The aim of this is toestablish the conditions required for all employees torealize their full potential.Corporate responsibilityOne of the key goals for us is to improve the workingconditions and safety for our employees. Productionupgrades and the management’s consistent effortshave allowed us to make significant progress in thisarea. Nonetheless, today it is critically important forus to continue to fight against the conscious violationsof safety rules, to ensure that normative documentscorrespond to the actual state of things and to preventdangerous situations through the efforts of ourengineering personnel. We are committed toconsistently improving the working conditions forour staff and to making working conditions safer.Over the last ten years, US$ 870 million has beeninvested into projects directly related to watertreatment and dedusting systems, to reducingemissions and waste. This means that despite a 38%growth in production, we have reduced emissions pertonne of steel by 42% at Novolipetsk. We are alsostriving to make improvements at our other sites andour new mill in Kaluga is designed as the cleanest inRussia. Investments in reducing environmental impactmay not bring the highest capital returns today butthey are critically important for the long-term valueof the Group.Summing up, I would like to particularly note thecontribution of the Group’s employees in achievingexcellent results in 2012 and wish NLMK continuedsuccess for the benefit of all of its staff andshareholders.Sincerely,on restructuring with the workers of La Louvière, ourBelgian asset. Based on this, we have decided to payout dividends for 2012 in the amount of RUB 0.62 pershare, or 20% of the Company’s net profit, strictly inline with our dividend policy that the Company hasadhered to over the last ten years.StrategyOur strategy is aimed at increasing long-term valueand providing the conditions for growth and our keyfocus will be on continuing to strengthen the stabilityof our business. Through a programme ofmodernization coupled with an increase in productioncapacity, we have been able to diversify bothgeographically and in terms of our product range.Over 90% of our steel production is in Russia, whereour raw material assets are located, and this enables usto retain our leading position as a cost-effectiveproducer. Meanwhile, the significant growth infinished product manufacturing capacity, includingthe organic growth of niche segments and theacquisition of rolling assets, has allowed us to increasesales of high value added products in close proximityto our end consumers. This is true for sales ofautomotive steel and thick plates in Europe and ofpre-painted steel and rebar in Russia.The period of organic growth that began in 2005 willcome to an end in 2013 with the launch of NLMKKaluga mini mill. The focus today is on furtherimproving the business, which includes making effortsto lower costs, through improving the supply of rawmaterials and by increasing operating efficiency.Another important area is expanding sales of newproducts and developing better service.Going forward, we intend to stick to our conservativefinancial policy and investment discipline. We believeit is optimal to invest only in those projects thatguarantee high returns on capital. If it is not possible toinvest on this basis, funds will be returned toshareholders.Vladimir LisinChairman of the Board of DirectorsSustainable production growthCrude steel production at Novolipetsk (mt), lhsSpecific air emissions (kg/t), rhsDividend payment (US$ m), lhsDividend payout ratio, rhs* The total dividend payment for the year 2012 is subject to approval bythe annual General Meeting of shareholders, to be held in June 2013Productivity growth at Novolipetsk (t/employee) Dividend payments (US$ m)
  24. 24. 22 NLMK Annual Report 2012Dear Colleagues,In 2012, the slowdown in the world economy ledto a weakening in the demand for steel, causingconsumers to reduce their stocks and prices to fall.Global steel consumption grew by only 1.4%, mainly indeveloping regions.Performance highlightsDespite unfavourable market conditions, NLMKGroup demonstrated record production levels,increasing steel output by 25% to 14.9 mt. Steelmakingcapacity utilization remained stable at over 90%. Thishas allowed the Group to become the largest steelproducer in Russia with a 20% market share.Sales increased by 18% to 15.2 mt with rolled productsales growing by 22% to a record 10.6 mt. The share offinished products in the total sales grew to 70% in2012. The wide geographic spread of our salesnetwork enabled us to be flexible in the face of thefalling demand during the second half of 2012. Theproduct and regional structure of our sales changed infavour of markets and regions with more stable prices.Despite the 12% fall in average selling prices, NLMK’ssales revenue in 2012 increased by 4% to US$ 12.2billion. Our EBITDA fell by 16% to US$1.9 billion, whileour EBITDA margin was 16%, one of the highest in theindustry. Over the year, NLMK showed a high level offinancial stability, retaining its investment credit ratingsfrom three leading agencies.For more information on our financial performanceFor more information on our salesFor more information on our operating resultsStrategicreview:President’s reviewDespiteunfavourablemarketconditions,NLMKGroupdemonstratedrecordproductionlevels,increasingsteeloutputby25%to14.9mt.ThishasallowedtheGrouptobecomethelargeststeelproducerinRussiawitha20%marketshare.2012 EBITDA marginCrude steel production growth2012/2011Steel products sales vs consumptiongrowth 2012/2011NLMKGlobal averageNLMKWorldNLMK sales growthWorld steel consumption growthSources: World Steel Association, World Steel Dynamics625867
  25. 25. NLMK Annual Report 2012 23IIIVIVVIIIINLMK possesses a range of high quality assets andmodern technology but we have yet to tap their fullsynergetic potential. A key role in achieving this will beplayed by our employees and so one of our current toppriorities is to make all of our business processes andmanagement systems, as well as personnel trainingand development programmes, more effective.Management systemOur aim is to build a stable, sustainable, andresponsible business, striking the ideal balancebetween achieving high performance today andbuilding platforms to secure long-term valueleadership for tomorrow.We attach great significance to team values, ensuringthat everyone has a personal stake in, and takesresponsibility for, the final result and, to that end, wehave in place measurable objectives and a clearmotivation scheme. In order to meet our day-to-daychallenges, it is more important than ever before thatwe have leaders in every section of the Group -committed, strong personalities able to think criticallyand to act decisively.Responsible businessWhile aiming for financial and operating efficiency,we must not forget our responsibility to society.This is an important element in the long-term value ofour business and one of the main priorities of NLMK’sBoard of Directors and the Management Board. Wewill endeavour to continue to improve conditions forour staff, including salaries, working conditions, andhealth and safety. We attach vital significance toreducing the Company’s impact on the environment.Investments in environmental projects and humancapital are among our top priorities, consistentlyreflected in the Group’s development programme.For more information on our personnel policyInvestments in 2012Investments fell from their 2011 peak by 29%, toUS$ 1,435 million. The Group continued to implementprojects initiated earlier aimed at increasing operatingefficiency and reducing costs. Construction of theNLMK Kaluga Mini Mill, with a capacity of 1.5 mtcontinued, with the launch date expected to be inmid-2013. The facility will guarantee further growthin steel production, making NLMK one of the leadersin the sale of rebar in Russia. Part of the investmentwas used to improve the quality of existing productsas well as to selectively increase capacity in nichesegments. Finally, we plan to reduce capex in themedium term that would also contribute to thegradual deleveraging.Priorities for developmentIn the current stage of the economic cycle, NLMK’spriorities for development are focused on increasingthe efficiency of the business and upon integrating thevarious component parts of the NLMK Group intoa single, smoothly operating mechanism. Anotherimportant aim remains the increase in raw materialself-sufficiency, relying on the Group’s asset potential,the use of new technology and new methods. Thegrowth in production at one of the lowest-cost oreproduction facilities in the world, Stoilensky, will soonallow us to fully meet our requirements for iron ore.A series of projects has been initiated at the firststeelmaking stage to reduce the cost of raw materialsand to optimize technical processes. The effect fromthese management improvements is expected to saveup to US$ 100 million annually.Oleg BagrinPresident (Chairman of the Management Board)OutlookWe do not expect the period of instability in theglobal economy to end soon. As a global industry,steelmaking is fully experiencing the consequences ofthe weak global markets. We are not seeing the signsof stable growth in steel consumption that we saw upuntil 2008 and in the first years of post-crisis recovery.In the face of continuing weak demand, the industryhas to complete the transformation and improvementstage, using the potential of streamlining inefficientcapacities, eliminating regional supply/demandimbalances and using new technology and solutions.On a positive note, the need for structural change iswidely understood today.In 2013 we expect a marginal increase in the demandfor steel that will continue to be driven by developingcountries. The imbalance between production anddemand will be the decisive factor in determining theprice dynamic over the coming year. Competition forthe end user will remain fierce, creating the conditionsfor further localization of end product markets.We are convinced that NLMK has strong competitiveadvantages that will ensure the Group’s stability andsuccess in the current market conditions. NLMKmanagement has proved to be capable of completinglarge-scale development projects in crisis conditionsand, furthermore, is committed to achieving the targetsof improving business efficiency and creating theconditions for further increasing the value of the Group.Finally, I would like to thank each of the 63,000NLMK employees working in 13 countries for theircontribution to our results. I am confident thattogether we can build an even more successful andstable future.Yours sincerely,NLMK position in Russian steel industrySources: Metal Expert, Company dataCapex and steel output NLMK maintains a strong competitive advantagein production costs (US$/t)Steel output (mt), lhsCapex (US$ bn), rhsSource: World Steel Dynamics65 For more information on our investment strategy36 For more information on our key investment projects90For more information on our environmental initiatives94
  26. 26. 24 NLMK Annual Report 2012Strategicreview:Management Q&AQ. What is NLMK Europe’s strategy forthe next 5 years?A. The key strategic priorities for thedevelopment of NLMK Europe over the nextfew years are improved operating efficiency andadvances in the production of high value addedsteels, primarily niche products. Among these,the expansion of our production anddistribution network for plates and NLMK’sdeeper penetration into the Europeanautomotive market rank amongst the mostimportant. To this end, we have implemented anumber of important capex projects to upgradethe Division’s rolling equipment: we’vecommissioned a new mill at NLMK DanSteeland have launched brand new rolling facilities atNLMK Clabecq. These measures have allowedus to expand the product mix and to improvethe quality of our products.In the future, we plan to direct investmentstowards debottlenecking initiatives in our flatsteel operations. This will enable us to reducesignificantly our working capital and, mostimportant, to attract new clients. We areconvinced that the Division’s further integrationwithin the Group’s Russian assets will createfurther opportunities for continuous efficiencyimprovements throughout the value chain.Horacio MalfattoPresident (CEO) of NLMK EuropeFor more information on NLMK Europe division76Q. How does steelmaking overcapacity inthe world impact the Group’s strategy?A. Overcapacity in the global steel industry hasbecome one of the consequences of the economiccrisis that began in 2008 and continues to this day.According to preliminary estimates, overcapacity insteel production is around 500 million tonnes,which represents more than a quarter of theworld’s total capacity. This situation has a negativeimpact on the prices for steel products and,ultimately, it leads to a fall in profitability for manycompanies around the world. Given theseconditions, the basic principles of the Group’sstrategy, including maintaining its stability andsearching for ways to improve its efficiency, areparticularly relevant.At the same time, changing market conditions haveled to an evolution of the Group’s strategicpriorities. While, in previous years, the Group hasactively increased its capacity almost doubling itduring the past five years, today we are focusing onmaximizing the efficiency of the business,balancing elements in the production chain andoptimizing business processes. NLMK will continueto focus on improving product quality anddeveloping the production of high value added andniche products.Q. What are the Group’s main mediumterm strategic priorities? What keyinvestment projects is the Groupplanning to implement in the shortand medium term?A. The key project for 2013 is the launch of theNLMK-Kaluga mini mill. This project will enableNLMK Group to increase its production capacityfor high quality long products by 70%.The programme to develop transformer steelproduction is in its final stage: manufacture ofhigh-permeability transformer steel will beginat Novolipetsk in 2013.Recently, special emphasis has been placed onprogrammes to reduce costs at all levels ofproduction: including through increasing energyefficiency, by cutting expenditure and by the useof less expensive raw materials without loweringthe quality of the products manufactured.In the medium-term, one of our strategic goalsis to enhance vertical integration of raw materials.The key investment projects in this area are theconstruction of our own pellet production facilitiesand an increase in the production of iron oreconcentrate at Stoilensky. These projects will allowus to attain 100% self-sufficiency in iron ore.We also intend to implement several projectsto develop our own scrap processing network.Oleg BagrinPresident (Chairman of the ManagementBoard), Member of the Board of DirectorsFor more information on our strategy34
  27. 27. NLMK Annual Report 2012 25IIIVIVVIIIIQ. What is the optimal debt leveragefor the Group? Will NLMK’s financialpolicy change in the medium-term?A. NLMK traditionally follows a conservativefinancial policy.The growth of debt in recent years has beendue to an Upgrade and DevelopmentProgramme at NLMK, which has includedinvestment projects requiring substantial capitalexpenditures together with the acquisition ofnew assets. Nevertheless, at the close of 2012,the ratio of net debt to EBITDA remains one ofthe lowest in the industry at 1.88.Today, the most capital-intensive phase of thisdevelopment has been completed and, since2011, investment has fallen by 25–30% per year.The decrease in capital intensity in theCompany’s future development will enable us toput in place a flexible financial strategy and toreduce the debt burden; in the medium term,we are focused on a target ratio of net debt toEBITDA of 1.0. We also adhere to a balanceddividend policy, which envisages a dividend ofbetween 20% and 30% of net income,depending on the results for the year.Q. Should we expect any changes tothe Dividend Policy in the near future?A. There have been no significant changes toNLMK’s Dividend Policy since it was adopted in2005. The aim of the Dividend Policy is toprovide stable dividend payments to theGroup’s shareholders, taking into account profitlevels and the funds needed to further developNLMK.Provided that dividend payments do notnegatively affect the Group’s financial positionor hinder its growth potential, NLMK pays out aminimum of 20% of its consolidated net income.Moreover, NLMK aims to pay out an average ofat least 30% of consolidated net income asdividend payments over a five-year period.NLMK’s current Dividend Policy is wellbalanced and it is unlikely to be significantlyamended in the near future.Grigory FedorishinVice President, FinanceFor more information on our Dividend Policy118For more information on our financial position62Q. Please describe the situation in theraw material markets in 2012. Whatchanges are expected in 2013?A. In 2012, the world faced a global steeloverproduction crisis and this imbalance ofsupply and demand was also evident on thecommodity markets. According to experts,2013 will be quite a difficult year forsteelmakers, which, of course, will affect themarkets for coal and iron ore.The imbalance on the coal market and thesharp decline in prices for steel products led toa correction in coking coal prices in the secondhalf of 2012. On the Russian market, the price ofcoking coal in 2012, to some extent, reflectedthe trends on foreign markets but with a certaintime lag. Russia produces about 80 mt/y ofcoking coal, of which it consumes 65%. In 2013,we expect a gradual increase in the supply ofcoal with a stable level of consumption by steelcompanies. However, demand in the exportmarkets remains poor and this will continue toput pressure on domestic prices.In 2012, the global iron ore market wasunstable and prices were volatile. The mainfactors behind this were high inventory levelsof iron ore fines in Chinese ports coupledwith an increase in supply from major oremanufacturers. Although a reduction is possiblein 2013, it is expected that iron ore prices willremain at moderately high levels. On the whole,the mining industry in Russia experienced anupturn in 2012, where domestic companiesincreased production by 0.6% year-on-year to105.2 mt. It is expected that the price dynamicsof the Russian iron ore market will depend ondevelopments in global markets.Alexander SaprykinVice President, Strategic Raw Materials Division
  28. 28. 26 NLMK Annual Report 2012Strategicreview:Management Q&A (continued)Q. What are the Company’s plans forthe Usinsky-3, Zhernovskoye-1 andZhernovski Gluboki coal deposits?A. Work to assess the development prospectsfor the Zhernovskoye-1 and Usinsky-3 coaldeposits is currently being carried out underlicence agreements. Since the development ofthese fields is a capital-intensive process, theschedule for further investment depends toa large extent on how the industry develops.Because difficulties on the raw materials andsteel markets are expected to continue, a higherpriority for the Company are projects to reducethe consumption of valuable grades of coal andcoke in the blast furnace. With a much lowercapital cost compared to developing ourown coalfields, these techniques producea significant operational benefit, allowing theGroup to remain one of the lowest-costproducers on the world steel market.Nevertheless, the cost-effective verticalintegration of our main raw material remains oneof the Company’s key strategic objectives in themedium term.Konstantin ArshakuniDirector for Strategy and BusinessDevelopmentFor more information on our projects to maximizecost-efficient upstream integration into key resources36Q. When will NLMK Kaluga belaunched? What products will itproduce? Who will be its keyconsumers?A. NLMK Kaluga is a mini mill equipped withan electric arc furnace with a capacity of1.5 mt/y of steel and an integrated rolling millfor the production of a wide range of rebar andstructural shapes. Hot testing is expected tobegin in May 2013. By the end of 2012,cumulative capex for this project totalled aboutRUB 30 billion.The plant is located in central Russia, close tomajor consumers and key raw material suppliersand its commissioning will strengthen NLMK’sposition on the growing Russian market for longproducts, with a 23% share of the rebar marketand a 12% share of the market for structuralshapes. The Group will have a 33% share of themarket for rolled steel used in construction inCentral Russia.NLMK Kaluga incorporates the latest technicaland technological developments, therebyensuring the production of the highest-qualityproducts and improved technical and economicperformance. An SAP ERP management systemwill be introduced at the plant.Alexander BurayevDirector for Long Products and MetalwareFor more information on NLMK Kaluga project43Q. How will Russia’s accession to theWTO impact the steel sector and theCompany’s business?A. Russia’s accession to the World TradeOrganisation (WTO) will have both positive andnegative consequences for the steel industry.The import duty rates for the majority of steelproduct types will remain unchanged at 5%,therefore we do not expect a significantincrease in competition from internationalsuppliers in the Russian market. Moreover,Russian exporters will now have a mechanism tocontest discriminatory decisions through WTOarbitration and the automatic dissolution of thequota agreement between Russia and the EUwill allow Russian producers to increase theirsupplies of steel products to the Europeanmarket.In fact, as far as NLMK is concerned, there willbe very little change, since the company hasheld a stable share of the European market formany years and has long-term partnerships withcustomers in the region.On the other hand, WTO membership brings arange of risks for the Russian steel industry. WTOaccession increases the risk of anti-dumpingtariffs being introduced with regard to Russiansteel producers. In addition, increasedcompetition in the Russian machine andequipment markets could have a negativeimpact on steel product consumption.In any case, we do not expect WTOmembership to resolve all issues. The effect willbe all-encompassing and will be determined forthe most part by how Russia moves forwardalong the path to development, increasedinvestment and economic growth.Anton BazulevDirector of External Relations
  29. 29. NLMK Annual Report 2012 27IIIVIVVIIIIQ. Would you qualify the key CRtrends as positive (CO2emissions,water consumption, waste recycling,etc.)?A. As a socially responsible company, NLMK iscommitted to continually reducing its negativeimpact on the environment.Over the last five years, environmentalinvestments have totalled around US$ 650million. Significant investments have enabledthe introduction of new, environmentallyfriendly equipment and a number of newenvironmental technologies and the increase inthe degree of processing of by-products andpreviously unused waste.As a consequence, NLMK has achievedimpressive results. With a substantial increasein production at the main site, over a five-yearperiod specific air emissions have reducedby more than a quarter and specific waterconsumption has decreased to a level that issuperior to the best available technology in theindustry. We have also eliminated completelythe discharging of pollutants into watercourses.We attach great importance to industrial wasteprocessing and, in 2012, the recycling rate atNovolipetsk was 93%.The Company will continue to adhere to theprinciple of sustainable development, whileminimizing negative effects on the environmentin the regions where it operates.Yury LarinVice President, Technology Development &Operational EfficiencyFor more information on our environmentalprotection initiatives94Q. What is the amount of funds allocatedby NLMK Group towards financing socialprogrammes in 2012? What are the keyprojects implemented in the reportingperiod? How does the Group support itsemployees?A. NLMK has made improvements in the qualityof life of its employees and the development ofregions where the Group’s assets are located a keypriority and achieves this, in part, by offeringassistance to local residents.We ensure that our employees receive high-qualitymedical care under voluntary health insuranceschemes, that they participate in additional pensionarrangements and that they have the opportunityto improve their living conditions. The Grouphas a number of recuperation and recreationprogrammes for employees and their familiesand also provides social support for veteransand pensioners.The Group focuses particularly on thedevelopment of local communities: we areimplementing programmes to improve the socialenvironment, to provide financial assistance toeducational, cultural and sports institutions andto help vulnerable people. For example, in 2012we have continued the infrastructure improvementassistance programme for local residents thatwe began in 2010. NLMK has provided promptassistance to residents of the Lipetsk Regionto help them manage the consequences of anatural disaster.In 2012, we continued to work on promotinga healthy lifestyle and supporting sport among theGroup’s employees and local residents, as wellas undertaking efforts to provide young peoplewith career counselling. In total, the Group spentapproximately RUB 1.5 billion (US$ 48 million) onsocial programmes in Lipetsk in 2012.Stanislav TsyrlinVice President, HR & Management SystemFor more information on our employees90 For more information on our community engagement92
  30. 30. 28 NLMK Annual Report 2012PMI (Purchasing Managers Index), 50 = no changeRussiaChinaEU-27USASources: PMI Markit survey tracker, ISM, China Federation of Logistics &Purchasing, HSBC, Markit EconomicsReal GDP growth201120122013ESources: The World BankIndustrial production growth201120122013ESources: CRUIn2012,thedevelopmentofthesteelmarketingeneralwasreminiscentofthescenarioin2011:ashort-termspikeindemandinH1gavewaytoincreasingdifficultiesintheoveralleconomyoftheEUinH2,whichprecipitatedafallinthedemandforandpricesofsteelandrawmaterials.Strategicreview:Market reviewDemand on the world market has shown cyclicalgrowth over the last four years. On the one hand, theproblems in certain regions have worsened: the EUdebt crisis and the issue of the US national debt inparticular continue to have a negative influence onglobal economic growth and the market for steel.On the other hand, economic growth in developingcountries, a significant proportion of which consists ofgrowth in fixed capital investment, partiallycompensates for the stagnating demand for steel in anumber of developed nations. Thus, we are witnessinga deepening global imbalance: the consumption and,as a result, the production of steel is shifting todeveloping nations at the same time as a significantproportion of production capacity in developedeconomies remains idle, which leads to a persistentunderutilization of capacity.Global economic environmentThe beginning of 2012 saw economic recoveryfollowing weak growth at the end of 2011. Actionstaken in Europe with regard to fiscal and creditpolicies, as well as a relaxing of monetary control indeveloping nations, strengthened the real sector ofthe economy and improved the climate in the financialmarkets. Nevertheless, in the middle of the year, theexacerbation of the debt crisis in Europe and growingconcern over the ‘fiscal cliff’ in the US sharplyincreased tension and uncertainty in the globalmarkets. The decline in direct foreign investment andin demand for export products on the part of thedeveloped world, were manifested in a slowdown inindustrial production worldwide. Measures taken bythe European Central Bank have improved thesituation on the financial markets; however, in the realsector, the trends were bidirectional during the secondhalf of the year. Whereas, in the developing world, therate of economic growth has gradually increasedowing to a renewed influx of capital and an increase indomestic demand, in the developed world, a failure toresolve fundamental economic problems has resultedin a recession. As a result, in 2012 the rate of growth inthe world economy slowed in comparison with 2011,from 2.7% to 2.3%.Global commodity marketsThe state of the global market for raw materials hasreflected the general changes in the economy. Thesteel sector has experienced a substantial downwardtrend in profit margins, as a result of which steelcompanies have been forced to cut production costs,including expenditure on inward raw materials. This,to a significant degree, made inevitable the decline indemand and prices for iron ore and coking coals,which lasted for the greater part of 2012.
  31. 31. NLMK Annual Report 2012 29IIIVIVVIIIIIron ore inventories at Chinese ports (index, January 2008 = 1)Source: BloombergWorldwide iron ore reserves in 2012AustraliaBrazilRussiaChinaIndiaUSACanadaUkraineOther regions21%17%15%13%4%4%4%4%18%Sources: US Geological Survey 2013, NLMKWorldwide coking coal reserves in 2012USAChinaIndiaRussian FederationAustraliaSouth AfricaKazakhstanOther regions27%15%14%12%9%8%5%10%Sources: BP Statistical Review, NLMKIron ore marketAs in previous years, iron ore prices on theinternational market were set by demand fromChina, the world’s largest ore importer. In 2012,the volume of international trade was 1.16 billiontonnes, and China’s share in the total import ofiron ore exceeded 64%.In the latter half of 2012, against the background ofa significant drop in demand for steel raw materials,the price minimum on China’s spot market reachedthe limit of US$ 86–90/tonne (for ore with an ironcontent of 62%). The three-year record fall in oreprices in August and September 2012 forced thelargest suppliers of this raw material to suspend anumber of projects to expand production capacity.Prices for iron ore in Russia reflected to a significantdegree the trends on the international markets.In particular, prices for pellets in H2 2012 decreasedby an average of 18% relative to H1 2012, stabilizing ata level of around US$ 100/tonne at the end of the year.Coking coal marketThe primary suppliers of raw materials on the globalmarket are companies from Australia (54% ofinternational trade) and North America (37%). In thefirst half of 2012, export prices for Australian cokingcoal remained relatively stable (at US$ 224/tonne forhard grades of coal), owing to seasonal high demand.In H2 2012, in the wake of falling demand in the steelsector, price indicators for coal of all coking gradesslumped on average by 22% relative to H1 2012. In thesecond half of 2012, the coking coal market remaineda little volatile although, towards the end of 2012, theprices for Australian high-quality coking coal stabilizedat US$ 157/tonne.Iron ore exports and imports in 2012AustraliaBrazilIndiaChinaJapanSouth KoreaOther AsiaWestern EuropeOther regionsOuter Ring – ExportsTotal exports = 1.079 bn tInner Ring – ImportsTotal imports = 1.162 bn tIron ore prices (US$/t)Iron ore fines, China, CIFPellets, Russia, FCASources: Metal Bulletin, Metal-Expert, Metal-CourierHard coking coal prices (FOB Australia) (US$/t)Coking coal, Australia, FOBCoking coal, Russia, FCASources: Metal Bulletin, Metal Expert, Metal Courier49%32%4%15%64%11%5%6%9%5%Coking coal exports and imports in 2012AustraliaUnited StatesCanadaRussiaJapanKoreaWestern EuropeChinaIndiaBrazilOther regionsOuter Ring – ExportsTotal exports = 226 mtInner Ring – ImportsTotal imports = 226 mt54%24%13%4%5%21%16%15%7%7%21%13%Sources: Goldman Sachs, NLMKSources: Morgan Stanley Research, NLMK
  32. 32. 30 NLMK Annual Report 2012Strategicreview:Market review (continued)Global steel marketIn 2012, the dynamics of the international steel market,on the whole, corresponded to the changes occurringin the global economy. In H1 2012, prices and demandfor steel products grew; this was accompanied byrestocking and in a number of areas, prices for steelproducts increased by 8–10%. However, in the middleof the year, the worsening global economy had anegative impact upon the industry. In addition to adecrease in demand for steel as the result of aslowdown in the growth rate of industrial productionin developing nations and a fall in production indeveloped countries, downward pressure on priceswas put by destocking during a period of uncertaintyin the market. As a consequence, capacity utilizationdecreased, triggering a fall in demand and,correspondingly, a fall in the price of raw materials.At the end of the year, regardless of weak seasonaldemand for steel products, prices on the globalmarket gradually began to increase, encouraged bythe low level of warehouse stocks and the recovery inprices for raw materials.According to the World Steel Association, in 2012,the growth of global apparent use of steel slowed to1.4% against 7.3% in 2011. Ferrous metal producersresponded by decreasing the rate of production – theincrease in global crude steel production growth fell to0.7% in comparison with 7.3% in 2011. Steelmakingcapacity utilization was 78.8%. As before, Asiancountries produced the majority of the world’s steel(65%) and China strengthened its leading position inglobal ferrous metallurgy, with its share of steelproduction rising to 46.3%. During 2012, there was anincrease in exports of steel from China (up 16%year-on-year) at the same time that imports of steelproducts by the developed world (excluding the USA)decreased. Most of the increase in imports came fromdeveloping countries in Asia: Thailand, Indonesia,Malaysia, and the Philippines.Developed marketsAgainst a backdrop of exacerbated debt problemsin Europe and the threat of a sharp decline ingovernment spending in the USA, economic growthin the developed world continued to slow during2012, falling from 1.6% in 2011 to 1.3% in the reportingperiod. A decline in investment and internaldemand led to a slowdown in the rate of growth ofindustrial production, although it remained positive:0.7% against 2.7% in 2011. Hence, the steel sectorin the developed world had to adapt to the decreasein demand for its products as a consequence of theslowdown in the growth rate of the steel-consumingindustries. The growth in apparent steel use in thedeveloped world for 2012 dropped by 0.3% againsta growth of 6% in 2011. Following a short-lived upturnat the beginning of the year, H2 2012 prices in thedeveloped markets began to slump under pressurefrom negative market sentiment and fading demand.Consequently, Q4 2012 saw an average 12–14%plunge in prices for rolled steel in the EU and theUSA, compared to the peak values at the beginningof the year.Apparent steel use (ASU) by sector in 2012ConstructionMachinery and transportOtherSources: WSASteel inventories (index, January 2008 = 1)ChinaUSAEurope (Germany)Sources: BloombergWorld steel production and apparent steel use (ASU)World steel production (mt)World ASU (mt)Steelmaking capacity utilization rate, rhsSources: WSA, WSDKey trends in the global steel marketin 2012:– Growth in steel output by 0.7% and a lowcapacity utilization rate at 78.8%– Reduction in apparent steel use growth rateto 1.4%– Reduction in average steel product prices– Lower financial performance across the sector– Lower rolled product imports by developedcountries– Contraction in global trade – ”regionalization”of demandWorld steel production and apparent steel use (ASU) in 2012ChinaEU (27)CISNorth AmericaJapanIndiaSouth KoreaOtherOuter Ring – Steel OutputTotal output = 1.55 bn tInner Ring – ASUTotal ASU = 1.41 bn tSources: WSA46%14%7%8%7%5%4%9%46%12%4%9%5%5%4%15%
  33. 33. NLMK Annual Report 2012 31IIIVIVVIIIIEU marketThe GDP of the European Union is estimated to havefallen 0.4% in 2012, against a growth of 1.5% in 2011.Industrial production in Europe in 2012 decreased by2.5% compared with a growth of 3.3% in the previousyear. This created serious downward pressure on theconsumption of ferrous metals: the decrease indemand at the end of 2012 is estimated at 9%, againsta growth of 7% in 2011. The apparent rolled steel usein Europe decreased by 14.5%. Demand for thick platefell by 2%. Prices for rolled steel in the EU fell by anaverage of 7–12% during the year for each mainproduct type.The unfavourable economic situation in the Europeansteel industry, as well as the traditionally higher costsof production of liquid steel in comparison with otherregions of the world, caused companies to close or toidle their steelmaking capacity and to restructure theirEuropean assets. As a result, the focus in the Europeansteel industry has shifted from production of liquidsteel to production of high value added finishedproducts, for which demand is more stable.US marketThe rate of growth of GDP in the USA in 2012increased to 2.2% compared with 1.8% in 2011.Nevertheless, due to uncertainty with regard to futurefiscal policies, the rate of growth of industrialproduction slowed from 4.1% in 2011 to 3.7% in 2012.Despite the decrease in investment expenditure,consumer demand, including in the housing market,remained stable. The positive trends in the mainsteel-consuming industries has allowed demand toincrease by 7.8%. Market capacity for rolled steel grewby 4.4%. At the same time, a decrease in buyer activityin the light of the poor overall economic situation in H22012, the pressure of imports and the fall in the priceof raw materials has led to a decrease in rolled steelprices in the domestic market, by an average of10–12% in comparison with 2011.US domestic market prices (FOB Midwest) (US$/t)Hot-rolled steelCold-rolled steelGalvanized steelSources: Metal Bulletin ResearchEurope steel output and run ratesSteel output (mt)Run rates, rhsSources: WSA, Goldman Sachs, NLMKUS steel output and run ratesSteel output (mt)Run rates, rhsSources: WSA, Goldman Sachs, NLMKEurope apparent steel use (ASU)Hot-rolled steel (mt)Plates (mt)Growth in total ASU, y-o-y, rhsSources: GFMS Flat Steel Product 5 Year Forecast, CRU Steel SheetsProducts MarketUS apparent steel use (ASU)Hot-rolled steel (mt)Galvanized steel (mt)Growth in total ASU, y-o-y, rhsSources: CRU Steel Sheets Products MarketHot-rolled steelCold-rolled steelGalvanized steelThick platesSources: Metal Bulletin ResearchEurope domestic market prices (EXW) (€/t)For more information on our sales in the European market60For more information on our sales in the North America market60
  34. 34. Russian construction sector performanceThe construction sector consumes more thanhalf of the steel products on the Russian market.In 2012, the industry showed strong growth, withsteel consumption increasing by 14%. New housingin Russia amounted to 65.2 million m2in 2012,exceeding, for the first time, the pre-crisis level of2008. Support for the housing market continuesto come from the development of the Russianmortgage market: in 2012, the volume of mortgageloans increased by 44% year-on-year, reachingRUB 1,029 billion.The active development of the construction sector,which accounts for about 90% of the consumptionof long products in Russia, led to the Russianmarket becoming a net importer of long productsin H2 2012. The launch of new production unitsin 2013, including NLMK Kaluga, will be able tocompensate for the shortage of long products onthe market, satisfying the demands of the growingconstruction sector.32 NLMK Annual Report 2012Emerging marketsIn developing countries, the rate of economic growthsurpassed the indicators for the developed worldalthough it slowed from 5.9% in 2011 to 5.1% in 2012.The rate of growth in industrial production decreasedfrom 8.7% in 2011 to 6.1% in 2012; this was the resultof a fall in demand on the part of the developed worldand a decrease in the influx of investment in themiddle of the year. Nevertheless, in H2 2012,industrial production growth rates and, consequently,demand for steel products in developing marketsbegan to recover, owing to an increase in fixed capitalinvestment.In 2012, the rate of growth in apparent steel use in thedeveloping countries fell from 7.7% in 2011 to 2.5% in2012. In China, the rate of growth in apparent steeluse in 2012 was 1.9% against 8% in 2011; in India, it fellto 2.6% in comparison with 7.5% in 2011; in Centraland South America, it remained at 2.6%; and incountries in the Middle East and West Africa, growthin apparent steel use increased to 2.2% against 1.4%in 2011.Prices on developing markets in 2012 followed generalglobal trends. Prices for major types of rolled productsin the Middle East and in Asia (including China)dropped by between 10% and 14% compared with2011 levels.Russian marketRussia experienced a slowdown in the rate ofeconomic and industrial growth in 2012: GDPincreased by 3.5% against 4.3% in 2011 while industrialproduction increased by 2.6% against 4.7% in theprevious year. However, regardless of the slowingeconomic growth rate, demand for steel productscontinued to outstrip the growth in steel production(in 2012 4.5% against 3%, respectively). Hence, thelargest growth in demand came from the constructionsector, which was reflected in an 8.5% increase inconsumption of long products in comparison with2011.Exports of steel products from Russia increased by 5%in 2012 to 25.3%, owing to a significant growth in theexport of semi-finished products (slabs and billets).The major export markets continued to be Europe, theMiddle East, and Southeast Asia. At the same time,imports of finished steel products in 2012 grew by6.5% in comparison with the previous year and, in themiddle of the year, Russia became a net importer oflong products.Prices on the Russian domestic market in 2012decreased in comparison with 2011, the consequenceof the fall in prices on the global steel market. Pricesdecreased by 14% for hot-rolled and cold-rolledproducts and by 4% for pre-painted steel.Strategicreview:Market review (continued)“Regardlessoftheslowingeconomicgrowthrate,demandforsteelproductscontinuedtooutstripthegrowthinsteelproduction(in20124.5%against3%,respectively).Hence,thelargestgrowthindemandcamefromtheconstructionsector.”Russia apparent steel use (ASU)Flat steel (mt)Long steel (mt)Growth in total ASU, y-o-y, rhsSources: IA “Metal Expert”Russia domestic market prices (EXW), US$/tHot-rolled steelCold-rolled steelGalvanized steelRebarSources: Metal CourierRussia steel output and run ratesSteel output (mt)Run rates, rhsSources: Rosstat, Goldman Sachs3. ‘92 ‘94 ‘96 ‘98 ‘00 ‘02 ‘04 ‘06 ‘08 ‘10 ‘12Steel consumed by Russian construction sector (mt)Flat steelLong steelSource: Metal ExpertFor more information on our sales in the Russian market59
  35. 35. Postponed steel consumption in RussiaWith the global trend of localized steelmaking, it isimportant for NLMK to extend its range of finishedproducts in the priority Russian market, which hasgreat growth potential.An important factor in the increasing demand forsteel products in Russia is the catch-up effect ofpostponed consumption. According to a number ofexperts, the amount of postponed steelconsumption resulting from the decline in industrialproduction in the 1990s and the significantdeterioration of the housing stock and fixed assetsof industrial enterprises is about 170 mt. Expertspredict that the residential, commercial, andinfrastructural construction industries, as well asthe automotive industry, which are majorconsumers of steel products in Russia, will show arising demand for steel products in the long run.The expected increase in demand is due to anumber of fundamental factors, including the lowlevel of available living space and vehicles incomparison to developed countries and theunder-investment in infrastructure.NLMK Annual Report 2012 33IIIVIVVIIIIOutlookThe increase in economic growth and industrialproduction rates, predominantly due to thedeveloping nations in Asia (primarily China), theMiddle East, and Latin America, may lead to someincrease in the rate of growth in global demand forsteel during 2013. According to the World SteelAssociation (WSA) forecast, the growth rate for globalapparent steel use may increase to 2.7% in 2013.Under these conditions, the growth in global demandmay be 4–5% for rolled products as a whole and 3–4%for long products.At the same time, we do not anticipate significantchanges in the price levels for steel products as aconsequence of the ongoing issues with excesscapacity in the industry and the lack of theprerequisites for significant changes in raw materialprices.EU marketIn 2013, some stabilization of the economic situation inEurope is possible in the light of further measuresbeing implemented to resolve debt problems and tocontinue the ‘adaptive’ monetary policies of theEuropean Central Bank (ECB).Over the course of the year, demand for steelproducts is expected to stabilize, primarily in sectorssuch as machine-building and energy; nevertheless, ina number of sectors, including construction andinfrastructure, it is possible that demand will weaken.On the whole, at the end of 2013, demand for steel willnot exceed 2012 levels, remaining in the range of140 mt.US marketIn 2013, the rate of economic growth in the US mayslow because of a number of structural problems inthe economy and a decrease in government spending.Nevertheless, the projected rate of growth in apparentsteel use will remain higher than the global average,facilitated by growth in the residential constructionand the automotive industries, as well as the rapiddevelopment of the pipe industry as a result of theexpansion in oil and gas production.Russian marketThe Russian market has a huge potential for growth inthe long term. A significant lack of investment in theresidential and infrastructure construction sectorscoupled with the deterioration in the available housingstock and the potential for expansion in the transportindustry (as a result of both the growth of real incomeamong the general population and the need to replaceolder vehicles) will lead to stable rates of growth insteel consumption in the future.If official forecasts for macroeconomic indicators in2013 are achieved – including a 3.6% growth in GDP, a3.2% increase in industrial production and a 6.5% risein fixed capital investment – steel consumption inRussia could increase by 2–4% compared with 2012.“Theincreaseineconomicgrowthandindustrialproductionrates,predominantlyduetothedevelopingnationsinAsia(primarilyChina),theMiddleEast,andLatinAmerica,mayleadtosomeincreaseintherateofgrowthinglobaldemandforsteelduring2013.”10205030407060065423927 25 2318%44%38%Russia RussiaUS SouthernEuropeCentral &North EuropeChina EasternEuropeover 43 years18 - 43 yearsunder 18 yearsSources: Rosstat, BPIEFloor space per capita in 2012 – Russia vs othercountries (m2) and housing stock age in RussiaApparent steel use in the main export marketsASU in 2012 (mt)Source: WSA706050403020100 ‘91‘92‘93‘94‘95Postponed steel consumption is approximately 170 mt‘96‘97‘98‘99‘00‘01‘02‘03‘04‘05‘06‘07‘08‘09‘10‘11 ‘12Steel consumption in Russia (mt)Source: WSA
  36. 36. 34 NLMK Annual Report 2012Strategicreview:StrategyOur strategy is focused on retaining the trust of our shareholders by providing consistently high financial returns and complete business transparency.The Group has a considerable number of opportunities to achieve this goal thanks to the creation of a platform for sustainable growth.Strategic objective Description1. Maximize cost-efficientupstream integration intokey resources– Develop extraction and production processes; reduce consumption ofpotentially limited raw materials for which integration is absent orincomplete.36 For more information on this objective2. Improve cost-effectiveness– Deliver maximum level of potential for increasing the efficiency ofproduction through investment programmes and operationalefficiency.38 For more information on this objective3. Develop promisingsegments– Maximize financial outcomes by entering promising product, regional,and industry segments, increasing our market share in each.– Continuously improve product quality and develop competitivetechnological advantages.For more information on this objective4. Maintain efficient andsustainable growth– Cost-effective production and sales growth.– Maximize capacity utilization.– Protect the value generated in the initial process stages through themanufacture of higher value added products.For more information on this objective5. Operate in a safe, sociallyand environmentallyresponsible manner– Ensure manufacturing process complies with the highest occupationalhealth and safety standards.– Systematically minimize environmental impact.– Create a positive social environment both onsite and more widely inthe regions in which we operate.For more information on this objective“TheGroup’sstrategyisfocusedondevelopingasustainablebusinessmodel.Weaimtoensureexcellentlong-termresultswhilemaintainingbestpracticesinoperationalmanagementandcorporategovernanceandaconservativefinancialpolicy.ThelynchpinoftheGroup’sstabilityliesinhavinganeffectiveandbalancedvaluecreationchain,fromlow-costproductionofrawmaterialstothemanufactureofuniquesteelproductswithhighaddedvalue.Theplatformforsustainable,consistentgrowththathasbeencreatedoverthelastdecadeoffersthenecessaryflexibilityandcapacityfortacklingkeystrategicandoperationaltasks.”Vladimir LisinChairman of the Board of Directors, Chairman of the Strategic Planning Committee404244
  37. 37. NLMK Annual Report 2012 35IIIVIVVIIIISee more on pages 2, 18, 56, 96, 120 and 148Our mission is to increase the Company’s long-term value through adopting and continuouslyimproving a sustainable management and operational business model.responsiblemannersociallyandenvironmentally5. Operateinasafe,sustainable growth4. Maintain efficient andpromising segments3. Developcost-effectiveness2. Improveofkeyrawmaterialsupstreamintegration1.Maximizecost-efficientWetransformideas and resources into clean and durable steel productsthatimproveour everyday lives. We source ideas from our employees, customers,andbusiness partners. We aim to control our resources utilizingand reusing them safely and responsibly.Upstream, Midstream& DownstreamFor more information aboutthe key stages of ourbusiness model please seepage 08CorporateresponsibilityFor more information aboutour corporate responsibilityplease see pages 84 to 95
  38. 38. 36 NLMK Annual Report 2012For more information on the risks we face progressingagainst our strategyStrategicreview:Strategy in actionCutting costs throughresource-efficiencyAt Novolipetsk blast furnace operations,construction is under way of a pulverized coalinjection unit at blast furnaces #3–5. In 2013, apulverized coal injection unit with a capacity ofapproximately 2.6 mt/y of pig iron (or about 20% ofthe entire Novolipetsk capacity) is scheduled forcommissioning at BF-5. There is a plan in place togradually assimilate this technology and to apply itto blast furnaces # 3, 4, 6, and 7.It is expected that the introduction of thistechnology will in future allow the site to reduce itsconsumption of natural gas and coke whenproducing pig iron, due to the injection of lowergrade, steam coal into the blast furnaces.Project parameters:Capacity:To be confirmedLaunch date:2013Capex*:RUB 3,747 m (US$ 117 m)**Capex allocated by the end of 2012:RUB 2,710 m (US$ 85 m)**– 20-30% reduction in specific cokeconsumption– 70-80% reduction in specific natural gasconsumption* Construction cost design parameters, total cost of BF# 3-5 PCI** Including VATHow we do it:– Develop extraction and production; reduceconsumption of potentially limited raw materials forwhich integration is absent or incomplete.– The viability of integration is defined on the basis ofcriteria for maximizing economic impact andreducing the risks of loss of raw material security.What we did in 2012:– Improved technologies for coke and chemicalproduction to enable cheaper grades of coalto be used.– Expanded capacity for the collection of scrapin order to increase the level of self-sufficiencyin scrap ferrous metals.– Expanded capacity for the production of lime inorder to satisfy the Company’s increasing demanddue to the growth in steelmaking capacity.KPIs:– Self-sufficiency in iron ore > 100%(after construction of the Pelletizing Plant).– High level of self-sufficiency in scrap metal:85% in 2012.What we plan to do in 2013:– To continue to build our own facilities to produceiron ore pellets in order to reduce dependency onexternal purchases.– To further develop our scrap-collecting base.– To improve and optimize initial processing stages(coke and chemical and blast furnace production)with the aim of incorporating cheaper rawmaterials.Risks:– Risk of a reduction in the price of rawmaterials linked to the expected increasein extraction capabilities across the world asa result of investment projects, both plannedand underway, being implemented by majorraw materials suppliers.– Risks linked to inflation in operating costs.– Risks linked to infrastructure limitations.– Risks linked to the implementation ofinvestment projects.What we said we would do in 2012:– Begin construction of our own facilities toproduce iron ore pellets in order to reducedependency on external purchases.– Continue to develop the Vtorchermet NLMKscrap-collecting base in order to supply, in asustainable manner, the steelmaking facilitiesof the Group’s Russian assets with our own scrap.For more information on the key performance indicatorsused to monitor our progress against objectives48 For more information on our responsible use of resources95522437658015. 2011BF-72012-14EPulverizedcoal injectiontechnologyPulverizedcoal injectiontechnology2014E 2016E2014-2015ECoal consumption trends at Novolipetsk (mt)
  39. 39. NLMK Annual Report 2012 37IIIVIVVIIII30% capacity expansionat StoilenskyAs part of a strategy to strengthen the cost-effectiveintegration of its major raw material, the Companyis undertaking a large-scale development programmeat Stoilensky to meet the Group’s total demandfor high quality iron ore, including pellets and ironore concentrate.Key to this programme is the construction of aPelletizing Plant with a capacity of 6 mt/y. The projectbegan in 2012.For more information on NLMK Russia Raw Materialsoperating performance732010155012+ over 6 mt14>182010 2011 Launchin 2015Increased iron ore concentrate and pellet capacity (mt)Iron ore concentrate1082460-2-4-362011 Launchin 2015PelletsFurthermore, in order to guarantee the necessarysupply of raw materials to the plant, parts of itsinfrastructure are to be improved:– A 30% increase in mined ore, up to 42 mt/y,by extending the open pit area.– The construction of Section 5 of the BeneficiationPlant to increase production of iron ore concentrateby 30% from 14 mt/y to 18 mt/y.– The construction of fine and medium crushingfacilities, together with other infrastructure.Project parameters:Capacity:42 mt/y of ore (+30%)18 mt/y of iron ore concentrate (+30%)6 mt/y of pelletsLaunch date:To be confirmedCapex:To be confirmed– 100% self-sufficiency in iron ore