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Annual Report & Accounts 2012

Group sales

“The Group’s sales strategy has once again demonstrated its flexibility and effectiveness. In 2012, NLMK’s sales increased by 18%, while the world steel market grew by just 1.4% compared with the previous year.

We successfully took advantage of the favourable conditions on the Russian market, where construction was the main driver behind the growth in the demand for steel. The construction industry accounted for 69% of NLMK’s sales in Russia. At the same time, the diversification of our product portfolio and our direct access to clients in the major US and European markets allowed us to continue to realize the Group’s potential for growth and strengthen our position on overseas markets.”

Dmitry Baranov

Vice President, Sales

NLMK’s sales strategy is based on building effective product sales channels, developing an active and flexible marketing strategy and effectively managing human resources.

The Russian market remains key for the Group but we are also seeking to develop sales of niche, high value-added products and to maximize sales volumes to ensure that our capacity is used efficiently.

2012 sales

Despite the instability in the global steel market, with high price volatility due to low demand and surplus production, the Group increased sales by 18%, maintaining maximum capacity utilization. This was possible because of NLMK’s balanced business model, producing steel in low-cost regions and manufacturing finished products close to our main customers.

In 2012, sales rose to 15.2 mt (+18% y-o-y). Sales of finished products reached 10.6 mt (+22% y-o-y), including HVA products amounting to 5.4 mt (+20% y-o-y), while growth in the sales of semi-finished products was 10% y-o-y. The significant growth in sales of finished products, including high value-added products, is a result of the mid-2011 consolidation of rolling assets in NLMK’s key export markets, as well as to an increase in sales of finished products manufactured at the Lipetsk site.

Steel product sales (mt)

Russia

EU

North America

Other export regions

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Sales by region in 2011-2012

North America

Middle East, incl. Turkey

EU

Asia and Oceania

Other regions

Russia

Outer Ring – Sales in 2012

Total sales 2012 – 15.18 mt

Inner Ring – Sales in 2011

Total sales 2011 – 12.84 mt

Note: the structure is adjusted towards physical units of measurements
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Sales by product in 2011-2012

Pig iron

Slabs

Hot-rolled

Cold-rolled

Galvanized

Pre-painted

Transformer

Dynamo steel

Billets

Long products

Metalware

Outer Ring – Sales in 2012

Total sales 2012 – 15.18 mt

Inner Ring – Sales in 2011

Total sales 2011 – 12.84 mt

Note: the structure is adjusted towards physical units of measurements
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Sales structure change 2012/2011
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Sales in our local markets

In recent years, through the implementation of a balanced growth strategy, NLMK has become a global player on the international steel market. The Group’s assets, spread over three continents, provide a unique production chain that forms the basis of the Group’s primary competitive sales advantage: geographical and product flexibility.

The successful integration of its European and American assets into the production and sales chain has allowed the Group to turn semi-finished products, manufactured at low cost in Russia, into high value-added products.

  • ‘NLMK in the Russian steel market and regional distribution’ annual conference

    In 2012, in the midst of a weakening market situation and at a time of high price volatility in overseas markets, NLMK maximized its presence on the Russian domestic market, which saw significant growth in key sectors for the Group: construction, infrastructure and the automotive industry.

    In 2012, NLMK Group sales in Russia totalled 4.9 mt (up 14% compared with 2011). The Russian market accounted for 32% of total product sales. The main reason for the growth in sales was an increase in the supply of high value-added products and long products. Sales of HVA products increased by 10% in 2012 compared with 2011, to 2.2 mt. NLMK traditionally occupies a leading position among Russian manufacturers of premium products. The Group’s share of the Russian cold-rolled steel sector in 2012 was 24%; it accounted for 22% of the pre-painted sector and 17% of the galvanized sector.

    The growth in consumption of long products by the Russian construction sector in 2012 exceeded the expectations of those involved in the industry. Construction activity continued to be supported by favourable financial conditions. Consumption of re-bar in Russia increased by 19% in 2012.

    NLMK’s sales of long products and metalware went up by 17% to 1.7 mt. Sales of re-bar as a share of total sales volumes grew by +10%, while metalware sales increased by 25%. Sales of wire rod decreased by 19.6%, principally due to the decision to redirect a significant proportion of product toward the manufacture of metalware, a higher value-added product.

    At the end of 2012, NLMK’s share of the Russian re-bar market was 17%, in line with the previous year’s results. Following the launch of production at NLMK Kaluga in mid-2013, we expect the Group’s share of the re-bar market to increase. NLMK secured 22% of the metalware market (+2 p.p. y-o-y).

    The Group’s products are supplied to a wide range of customers. The majority of NLMK’s sales are to service centres and steel processing companies (61%), followed by the construction industry (19%).

    The Central Region remains NLMK’s key market within Russia, accounting for 52% of domestic sales. Other important sales markets include the Volga (14%), North Caucasus (9%), and the Urals (9%) regions.

    NLMK Russian market position in 2012
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    Russian sales by product in 2011-2012

    Pig iron and Slabs

    Hot-rolled

    Cold-rolled

    Galvanized

    Pre-painted

    Transformer

    Dynamo steel

    Billets

    Long products

    Metalware

    Outer Ring – Sales in 2012

    Total sales 2012 – 4.88 mt

    Inner Ring – Sales in 2011

    Total sales 2011 – 4.27 mt

    Note: the structure is adjusted towards physical units of measurements
    Download graph
    Russian sales by industry in 2012

    Metal traders

    Construction

    Tube&pipe

    Automotive

    Machine building

    Electric and instrument engineering

    Others

    Household appliances

    Metallurgical complex

    Note: the structure is adjusted towards physical units of measurements
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    Sales by Russian regions in 2012

    Central

    Volga

    North Caucasus

    Urals

    Central Black Earth

    Volgo-Vyatka

    Nothwestern

    West Siberian

    East Siberian

    Nothern

    Far Eastern

    Note: the structure is adjusted towards physical units of measurements
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    NLMK supplies steel products to Russian pipe manufacturers

    In July 2012, NLMK concluded a long-term contract with Vyksa Steel Works (part of the United Metallurgical Company (OMK)) for the supply of continuously cast slabs. These will be rolled into plates at the VMZ Mill-5000 (MKS-5000), which the company will then turn into large-diameter pipes for mainline oil and natural gas pipelines.

    NLMK’s strategic partnership with OMK facilitates the import substitution of quality rolled plates for the manufacture of pipes on the Russian market, which will allow the Group to strengthen its position as one of the leading suppliers of high-quality products to the Russian pipe sector.

  • Slowing GDP growth, a reduction in industrial production and debt problems had a negative effect on the European steel market in 2012. Compared with 2011, the production of steel fell by 4.7%, while apparent use fell by 8.6%.

    However, Europe remains one of the key sales markets for NLMK products. The integration of European rolling assets in mid-2011 provided the Company with new opportunities to promote its products to European customers and as a result, Europe accounted for 19% of sales in 2012.

    NLMK supplied 2.82 mt of steel products to the EU market in 2012, the majority of which were high value-added products. High value-added products accounted for 57% of sales in the European market (compared with 44% in 2011). The growth in sales of HVA products is a result of the integration of European rolling assets into the Group. The reduction in sales of semi-finished products is due to the fact that, in 2012, the majority of these were turned into finished products. In 2012, a total of 1.9 mt of slabs was supplied internally to the Group’s European assets.

    Key customers for the Group’s products in the EU thick plate market are the machine building and shipbuilding industries, ‘yellow goods’ manufacturers and the wind power industry. The main customers in the flat products sector are the automotive and machine building industries and pipe manufacturers.

    For more information on the European market developments
    EU sales by product in 2011-2012

    Pig iron and slabs

    Long products and metalware

    Hot-rolled

    Plates

    Cold-rolled

    Galvanized

    Pre-painted

    Dynamo

    Transformer

    Outer Ring – Sales in 2012

    Total sales 2012 – 2.82 mt

    Inner Ring – Sales in 2011

    Total sales 2011 – 2.86 mt

    Note: the structure is adjusted towards physical units of measurements
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    NLMK Europe Strip share in sales to European automotive companies
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    Automotive industry: one of the key sales markets for NLMK Europe Strip

    One of the most important segments of the European market for the Group are car and truck manufacturers. Approximately 33% of all rolled products produced by NLMK in Europe are supplied to large automotive companies, their contractors and service centres (contract sales). We are proud to say that today Volkswagen, Daimler, General Motors, Opel, Fiat, Renault and many others make their cars using NLMK steels.

    Commitment to innovation is the key driver of our success. We are constantly pushing forward, searching for new opportunities, developing new products that respond to the needs of our end-consumers to the fullest. One of the Group’s most recent achievements is the production of high-strength steels with ultra-low carbon content, the so called IF (Interstitial Free) steels that are in high demand in the automotive sector. In 2012, NLMK Strasbourg signed a contract for the supply of IF steels to Renault. In the future, we intend to continue expanding NLMK Europe Strip HVA product portfolio by increasing niche product output. Successful penetration into a market with such high quality demands was made possible by using semi-finished products (slabs) supplied by NLMK’s Lipetsk site that had undergone large-scale upgrades of its steelmaking capacities.

  • The North American market saw some economic recovery during 2012, with a slight growth in the demand for steel compared with 2011. With regard to prices, a downward trend was observed: prices for hot-rolled coils dropped 11% compared with 2011 while prices for cold-rolled and galvanized steel fell by 10%.

    In 2012, the Group supplied 2.18 mt of steel products to the American market, increasing sales by 26% y-o-y. North America accounted for 14% of NLMK’s consolidated sales in 2012 (13% in 2011). The increase in sales is explained primarily by the consolidation of a range of US assets into the Group in mid-2011.

    American sales were principally to the automotive, heavy machine building and pipe manufacturing industries and also to service centres.

    For more information on the US market developments
    North America sales by product in 2011-2012

    Pig iron and slabs

    Hot-rolled

    Plates

    Cold-rolled

    Galvanized

    Pre-painted

    Transformer

    Outer Ring – Sales in 2012

    Total sales 2012 – 2.18 mt

    Inner Ring – Sales in 2011

    Total sales 2011 – 1.65 mt

    Note: the structure is adjusted towards physical units of measurements
    Download graph

Other export sales

While there was little business activity in the developed markets, NLMK increased its sales in regions where market conditions were more favourable. Thanks to a developed sales structure, a wide product mix and a stable position in niche sectors, NLMK was able to react quickly to a very volatile market and to increase its sales in Asia (up 81% y-o-y) and Central and South America (2.5 times higher than in 2011). This led to significant growth in the Company’s other export sales figures, which increased by 30% y-o-y, totalling 5.3 mt.

Other export sales by region in 2011-2012

Middle East, incl. Turkey

Asia and Oceania

Africa

Central and South America

CIS

Other regions

Outer Ring – Sales in 2012

Total sales 2012 – 5.30 mt

Inner Ring – Sales in 2011

Total sales 2011 – 4.06 mt

Note: the structure is adjusted towards physical units of measurements
Download graph

Outlook

 

Our local markets

Russia

If official forecasts for macroeconomic indicators in 2013 are achieved – including 3.6% growth in GDP, a 3.2% increase in industrial production and a 6.5% rise in fixed capital investment – steel consumption in Russia could increase by 2-4% compared with 2012.

The EU and USA

Increased buyer activity as a result of the need to restock and a rise in the price of raw materials could have a positive impact on prices in the first half of 2013. However, real demand will remain weak and growth in production will outstrip the expansion of demand, which could result in falling prices in both the EU and the USA in 2013.

We expect to maintain stable sales in these markets thanks to our effective sales policy, high product quality, and wide client base.

Other export markets

A favourable conclusion to the year in China, a market that was characterized by buoyant prices for steel products, has created the preconditions for higher price levels in the region at the beginning of 2013. If this trend is supported by the macroeconomic indicators, the markets in developing countries could prove more attractive to steel producers in 2013.

Based on this scenario of events, NLMK will continue to carefully monitor emerging opportunities to refocus sales on the most profitable markets, assisted by our balanced product portfolio and diversified sales structure.