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Annual Report & Accounts 2012

President's review

Despite unfavourable market conditions, NLMK Group demonstrated record production levels, increasing steel output by 25% to 14.9 mt. This has allowed the Group to become the largest steel producer in Russia with a 20% market share.

Oleg Bagrin

President

Dear Colleagues,

In 2012, the slowdown in the world economy led to a weakening in the demand for steel, causing consumers to reduce their stocks and prices to fall. Global steel consumption grew by only 1.4%, mainly in developing regions.

Performance highlights

Despite unfavourable market conditions, NLMK Group demonstrated record production levels, increasing steel output by 25% to 14.9 mt. Steelmaking capacity utilization remained stable at over 90%. This has allowed the Group to become the largest steel producer in Russia with a 20% market share.

For more information on our operating results

Sales increased by 18% to 15.2 mt with rolled product sales growing by 22% to a record 10.6 mt. The share of finished products in the total sales grew to 70% in 2012. The wide geographic spread of our sales network enabled us to be flexible in the face of the falling demand during the second half of 2012. The product and regional structure of our sales changed in favour of markets and regions with more stable prices.

For more information on our sales

Despite the 12% fall in average selling prices, NLMK’s sales revenue in 2012 increased by 4% to US$ 12.2 billion. Our EBITDA fell by 16% to US$1.9 billion, while our EBITDA margin was 16%, one of the highest in the industry. Over the year, NLMK showed a high level of financial stability, retaining its investment credit ratings from three leading agencies.

For more information on our financial performance

Investments in 2012

Investments fell from their 2011 peak by 29%, to US$ 1,435 million. The Group continued to implement projects initiated earlier aimed at increasing operating efficiency and reducing costs. Construction of the NLMK Kaluga Mini Mill, with a capacity of 1.5 mt continued, with the launch date expected to be in mid-2013. The facility will guarantee further growth in steel production, making NLMK one of the leaders in the sale of rebar in Russia. Part of the investment was used to improve the quality of existing products as well as to selectively increase capacity in niche segments. Finally, we plan to reduce capex in the medium term that would also contribute to the gradual deleveraging.

For more information on our investment strategy

Priorities for development

In the current stage of the economic cycle, NLMK’s priorities for development are focused on increasing the efficiency of the business and upon integrating the various component parts of the NLMK Group into a single, smoothly operating mechanism. Another important aim remains the increase in raw material self-sufficiency, relying on the Group’s asset potential, the use of new technology and new methods. The growth in production at one of the lowest-cost ore production facilities in the world, Stoilensky, will soon allow us to fully meet our requirements for iron ore.

A series of projects has been initiated at the first steelmaking stage to reduce the cost of raw materials and to optimize technical processes. The effect from these management improvements is expected to save up to US$ 100 million annually.

For more information on our key investment projects

NLMK possesses a range of high quality assets and modern technology but we have yet to tap their full synergetic potential. A key role in achieving this will be played by our employees and so one of our current top priorities is to make all of our business processes and management systems, as well as personnel training and development programmes, more effective.

Management system

Our aim is to build a stable, sustainable, and responsible business, striking the ideal balance between achieving high performance today and building platforms to secure long-term value leadership for tomorrow.

We attach great significance to team values, ensuring that everyone has a personal stake in, and takes responsibility for, the final result and, to that end, we have in place measurable objectives and a clear motivation scheme. In order to meet our day-to-day challenges, it is more important than ever before that we have leaders in every section of the Group - committed, strong personalities able to think critically and to act decisively.

For more information on our personnel policy

Responsible business

While aiming for financial and operating efficiency, we must not forget our responsibility to society. This is an important element in the long-term value of our business and one of the main priorities of NLMK’s Board of Directors and the Management Board. We will endeavour to continue to improve conditions for our staff, including salaries, working conditions, and health and safety. We attach vital significance to reducing the Company’s impact on the environment. Investments in environmental projects and human capital are among our top priorities, consistently reflected in the Group’s development programme.

For more information on our environmental initiatives

Outlook

We do not expect the period of instability in the global  economy to end soon. As a global industry, steelmaking is fully experiencing the consequences of the weak global markets. We are not seeing the signs of stable growth in steel consumption that we saw up until 2008 and in the first years of post-crisis recovery. In the face of continuing weak demand, the industry has to complete the transformation and improvement stage, using the potential of streamlining inefficient capacities, eliminating regional supply/demand imbalances and using new technology and solutions. On a positive note, the need for structural change is widely understood today.

In 2013 we expect a marginal increase in the demand for steel that will continue to be driven by developing countries. The imbalance between production and demand will be the decisive factor in determining the price dynamic over the coming year. Competition for the end user will remain fierce, creating the conditions for further localization of end product markets.

We are convinced that NLMK has strong competitive advantages that will ensure the Group’s stability and success in the current market conditions. NLMK management has proved to be capable of completing large-scale development projects in crisis conditions and, furthermore, is committed to achieving the targets of improving business efficiency and creating the conditions for further increasing the value of the Group.

Finally, I would like to thank each of the 63,000 NLMK  employees working in 13 countries for their contribution to our results. I am confident that together we can build an even more successful and stable future.

Yours sincerely,


Oleg Bagrin

President (Chairman of the Management Board)

Steel products sales vs consumption growth 2012/2011

NLMK sales growth

World steel consumption growth

Sources: World Steel Association, World Steel Dynamics
Crude steel production growth 2012/2011

NLMK

World



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2012 EBITDA margin

NLMK

Global average

NLMK position in Russian steel industry
Sources: Metal Expert, Company data
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Capex and steel output

Steel output (mt), lhs

Capex (US$ bn), rhs

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NLMK maintains a strong competitive advantage in production costs (US$/t)
Source: World Steel Dynamics
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