Transcript Severstal: Overview and Forecast
Severstal:
Alexander Andrianov, Finance Director
London February 2003
Table of contents
• Market Position • Operations • Financials • Stock Market • Environmental Protection • Conclusions
2
Overview and Forecast
Market position
3
Geographical position KORELSKY OKATISH -IRON ORE Murmansk OLKON -IRON ORE Vorkuta VORKUTAUGOL - COAL FINLAND WATERWAY TO THE BALTIC SEA Arkhangelsk Uhta CHEREPOVETZ - STEEL MILL RUSSIA St-Petersburgh ESTONIA Cherepovetz LATVIA Moscow LITHUANIA BELARUS PONLAND UKRAINE PIPE PLANT GAZ- CAR PRODUCER KAMAZ- TRUCK PRODUCER KUZBASUGOL - COAL Nijniy Novgorod Vyksa Naberejnye Chelny Ulyanovsk Samara UAZ - JEEP PRODUCER Kemerovo KAZAKHSTAN AVTOVAZ- CAR PRODUCER
4
Overview Holding the leader position in the Russian steel industry and supplying domestic and foreign customers with high quality steel products
The optimisation of the company's steel production assets by modernising production facilities to increase the quality and expand the mix of its steel products Investing in raw material suppliers, transportation facilities, steel consuming businesses and other projects, which add value to Severstal's core business by reducing costs and improving the reliability of raw material supplies as well as the delivery of finished products Investing in the company's workforce and consequently increasing productivity.
Developing motivation system 5
Strategy
• • • • •
Purchases
Uninterruptible supplying of Severstal To secure its raw materials supply safety, Severstal uses the strategy of vertical integration Severstal’s strong position influences the domestic raw material market Reducing of total purchasing costs Installation of automated systems for management customs • • • • • •
Production
Reducing costs and increasing quality Change over to 100% continuous casting steel Increasing the share of higher value-added products Targeting key consumers Investing in quality Developing projects of producing higher value-added products (Severgal) • • • •
Sales
The domestic market is the top priority for Severstal Development of relationship with principal clients Development of sales network in export markets and direct sales in the domestic market Acquisitions and JV allow to increase shipments to automotive and pipe industries • • • •
Human Capital
Developing training program for all categories of employees Developing a system of employee incentives Developing through its own training center ‘Total Quality Management’ program, ‘Production consulting’ program, the ‘Preparation of managers for spin-off businesses’ and an internal course for top managers (‘TOP 100’), international MBA 6
Macroeconomic Environment Russia
• • • • • • • Since 1999 the greatest output growth rate had the automotive industry ( 9% - 2000, 12% - 2001, 0% - 2002), fuel and energy complex ( 4, 4.5 and 7%) and heavy-machinery ( 20, 7 and 2%). The latest tendencies are the increasing of zinc-coated steel consumption in the automotive industry and high quality strips in FEC.
Rolled products average spot prices were 304 US$ in 20021 per ton.
World market
For last 10 years, the world steel output has increased by more than 100 m. tons. The total capacity now is 1bln. tons That exceeds the world steel consumption. As a result of previous tendency - large amount of mergers and integrations and ineffective capacities cut-back In 2002 average spot price was 266 US$ per ton. Prices on almost all products are going up.
Severstal expects further prices increase.
Weighted average world steel price index (Apr-94=100)
Asian crisis preludes global price fall 120 Asian boom boosts global prices Previous cyclical peak 110 100 90 80 70 Jun-95 Sep-96 Dec-97 Mar-99 Jun-00 Sep-01 60 Dec-02 7
Macroeconomic Environment (continued)
• • •
Anti-dumping Proceedings
Import taxes are increased: USA - 30%, Mexico - 35%, Malaysia - 50%, Iran - 25%.
Argentina, Brazil, Columbia, Peru, Venezuela,Chile are likely to follow them.
Temporary import taxes are introduced against zinc-coated products from Kazakhstan and Ukraine.
Government View 1. Russian steel export protection 2. Domestic market protection
• • • • • • • • Key industries of strategic importance to Severstal include: automotive industry, pipe manufacturing, heavy machinery, ball bearing production, shipbuilding, white goods manufacturing In 2000, Severstal began the production of high quality thin cold rolled steel sheet for refrigerators produced by Electrolux Development of new products for special need of main clients (e.g., alumni-silicon galvanized sheet) Relationships with key customers are based on quarterly and half-year contracts Severstal expects sales to domestic market will rise up to approximately 52% of total sales in 2003 Severstal expects expansion of marketing outlets in automotive industry and pipe manufacturing due to its acquisitions and JV Severstal’s average price on export sales in 2002 was 13% higher, and - on domestic sales - 3% higher than prices of its major competitors Almost 77 % of Severstal’s domestic sales are made directly to end users, while export sales are conducted through Severstal’s export trading subsidiaries 8
Market position
Severstal continues to be among the world’s 20 largest steel producers. According to the annual research by the ‘Metal Bulletin’ magazine, Severstal occupies 19 place with 9.6 million tons of total steel output in 2002.
Among Russian ferrous metal producers, Severstal is the largest company in terms of revenues and the second largest in terms of volume of steel and rolled products output.
50 40 30 20 10 0 9
Market position (continued)
The increase in margins on domestic sales has, in part, caused Severstal to direct more of its sales to domestic customers.
Another reason of export sales reducing is antidumping proceedings.
Sales 1999 - 2002 by market, thousand tons
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
4723 3118
1999
4413 3876
2000
4413 4111 3876 4349
2001 2002E Export Domestic 10
Domestic sales DOMESTIC REVENUES in 2002E (% of Total Revenues by Product) DOMESTIC CONSUMPTION BY INDUSTRY in 2002E (% of Domestic Sales Revenue)
Hot-rolled sheet Cold-rolled sheet Steel sections 100% 80% 60% 40% 20% 0% 0.0
20.0
40.0
60.0
80.0
DOMESTIC SALES REVENUE BY INDUSTRY (% of Domestic Sales)
100.0
Fuel and Energy Complex Automotive Industry Metalware Heavy Machinery White Goods Shipbuilding Regional Distribution 0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
Severstal sells to customers in a number of different industries. The main customer base in the domestic market are the
automotive industry and pipe manufacturing
companies. Severstal increasingly focuses on customers with demand for higher value-added products.
32% of sales to pipe industry comprised high-quality alloyed strip.
The automotive industry mostly consumes cold-rolled sheets (65%) and thin hot-rolled sheets (18%). 2000 2001 2002E Regional Distribution Shipbuilding White Goods Heavy Machinery Metal processors Automotive Industry Fuel and Energy Complex 11
Export sales
Severstal exports its products to 94 countries world-wide, which makes it the largest exporting company among Russian steel producers.
Severstal's export sales include a higher share of value added products such cold-rolled, pickled and galvanised steel. Europe, in particular the Western Europe, is a strategic market for Severstal's exports. The company has strong relationships with its European customer base and is confident that its joint venture with Arcelor will further increase the company’s position in this market.
EXPORT CONSUMPTION BY REGION in 2002E (% of Export Sales Revenue)
USA Central and South America Africa Middle East Europe Central and South-East Asia 0 5 10 15 20 25 30 35 40
EXPORT SALES REVENUE BY REGION (% of Export Sales)
USA 100% 80% Central and South America 60% Africa 40% Middle East 20% Europe 0% 2000 2001 2002E Central and South-East Asia 12
Key customers
Severstal's major clients: Viksa metallurgical works, Cherepovets Steel Rolling Plant, AutoVAZ and GAZ, accounted for approximately 24% of the total volume of Severstal’s domestic sales in 2002. others Viksa metallurgical works - pipe 76% producing company, accounts for more than 7% of Severstal's total sales revenues.
LARGEST DOMESTIC MARKET CUSTOMERS BY SALES VOLUME
ChSPZ 31% Key clients 24% Viksa Metallurgical Works 41% AutoVAZ 16% GAZ 12% Key customers in the domestic automotive sector are Gorkovsky Automotive Works (GAZ), Voljsky Automotive Works (AvtoVAZ), Ijmash Auto and UAZ Principal domestic customers in pipe manufacturing are the Vyksunsky and Chelyabinsky pipe plants The major consumer in metal processors is Cherepovets Steel Rolling Mill (ChSPZ), which is a part of the metallurgical branch of Severstal Group
KEY CUSTOMERS BY SALES VOLUME IN INDUSTRIES in 2002, %
80
72 70
60 40 20 0 Automotive Industry Metal processors
30 30 16 11 3
Fuel and Energy Complex Shipbuilding Heavy Machinery White Goods Regional Distribution 13
Challenges and Competitive Advantages 12 000 10 000 8 000 6 000 4 000 2 000 0 8 315 OUTPUT, thousand tons 8 384 8 060 9 011 8 521 7 351 7 151 7 966 9 595 2000 Severstal 2001 NLМК 2002E ММК 2 500 2073 2 000 SALES REVENUE, mn $ 1 789 1 555 1922 1 526 1 818 1 276 1 559 1 151 1 500 1 000 500 0 2000 Severstal 2001 NLMK 2002E MMK 300 250 200 150 100 50 0 239 174 186 2000 Severstal PRICES, $/tn 202 161 173 2001 NLМК 214 192 190 2002 ММК
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Competitive Environment Russian Steel Industry
•Magnitogorsky Metallurgical Kombinat (MMK) •
Severstal
•Novolipetsky Metallurgical Kombinat (NLMK) •
West-Siberian
•
Nijny Tagil Metallurgical Kombinat (NTMK)
•
Kuznetsky
•Mechel •Nosta •Oskolsky Tons 2000 2001 2002 Domestic Sales 47% 47% 52% Export Sales 53% 53% 48% GMK EurasHolding
Production output in 2001 Severstal
MMK Mechel NLMK West Sibirean Nosta KMK NTMK Î skolsky
Severstal
-
Coke 4028
4869 2257 4349 3385 1312 1193 2893
4100 Cast iron 7447.9
8657.9
2905 7464 4546 1786 2751 4629 -
2002 7732 Steel 9303
10314.6
3796 7912 5579 2591 3596 5225 2119
Rolled metal 8060
9108.7
2837 7374 4632 1944 2627 3625 1886
9648 8521 The division of the Russian Market (2002)
Os kols ky 4% Nos ta 5% Mechel 7% EvrazHoldin g 22% Other 12% MMK 19% NLMK 15% S evers tal 16% 15
Overview and Forecast
Operations
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Flow diagram Converter Shop Coke-Oven Plant Electric Steel Melting Shop Blast Furnace Plant Sintering Plant Open Hearth Shop Hot Strip Rolling Shop № 2 Hot Strip Rolling Shop № 1
This shops will be closed
Hot Strip Rolling Shop № 3 Cogging Mill Cold Strip Rolling Shop Formed Section Shop Section Rolling Shop
/ 100 / 100 / 80 100 125 150
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Production facilities
Coking Plant Sintering Plant Blast Furnace Basic Oxygen Converters Electric Arc Furnace Open Hearth Furnace Continuous Casting Hot Rolling Mills Cold Rolling Mills Section Rolling Mills Cold Roll-Forming Lines Pipe Rolling Mills Hot Dip Galvanising Lines Continuous Picking Lines
Production capacity (Mn tn/year)
4.1
7.6
7.6
8.0
1.3
1.8
8.8
8.2
2.5
2.2
0.25
0.28
0.5
2.8
Equipment
7 Batteries 8 Machines 4 Furnaces 3 Furnaces 2 Furnaces 3 Furnaces 7 Casters 4 Mills 2 Mills 3 Mills 4 Lines 6 Mills 2 Lines 3 Lines Severstal has a crude steel production capacity of 10.9 million tonnes per annum. With a total production output of 9.65 million tonnes in 2002, Severstal’s crude steel capacity utilisation rate was 88.5 %, or 3 p.p. higher than in 2001. Between 1995 and 2000, the company’s average capacity utilisation rate was 80.9%, compared with 76% on average for the Russian steel industry.
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Production efficiency
Fuel consumption kg/ton Electricity consumption kW*h/ton
Hot rolling mill
Severstal (mill 2000) Arcelor
Cold rolling mills
Severstal (cold rolling) Nippon Steel (Nagoya) 85.4
78.9
2 1 0 5
Low grade and waste production, % 3.54
3.79
4 3
Low-grade Waste 0.58
0.54
1999 2000 114.9
81 76.8
55.8
2001
4.62
0.75
Metal yield, % Planned idle time, % 95 97.7
87 92 16.7
16.19
12.8
5.49
3.69
2002E
0.67
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Exports by product Severstal ММК NLMK
Other rolled steel products 57% Other rolled steel products 60% Other rolled steel products 31% Cold rolled flat products 23% Cold rolled flat products 16% Coated rolled steel products 1% Cold rolled flat products 14% Coated rolled steel products 1% Electric steel 1% Semi-finished 16% Coated rolled steel products 4% Semi-finished 23% Semi-finished 53% Value-added products 27% Value-added products 17% Value-added products 16%
Total export sales 4.1 m t 4.8 m t 5.1 m t
Severstal has the biggest share of high value-added products on export markets. It differs Severstal from other Russian metallurgical manufactures 20
Domestic market by product
Other rolled steel products 70%
Severstal
Semi-finished 0% Cold rolled flat products 23% Coated rolled steel products 7% Value added products 30% Other rolled steel products 70%
ММК
Semi-finished 3% Semi-finished 0% Cold rolled flat products 20% Coated rolled steel products 7% Value added products 27% Other rolled steel products 48%
NLMK
Cold rolled flat products 38% Coated rolled steel products 13% Electric steel 1% Value added products 52%
Total sales 4.4 m t 4.2 m t 2.1 m t
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Total sales by product
Other rolled steel products 63%
Severstal
Semi-finished 8% Cold rolled flat products 23% Other rolled steel products 61% Coated rolled steel products 6% Value added products 29%
Total sales 8.5 m t ММК
Semi-finished 14% Semi-finished 38%
NLMK
Cold rolled flat products 20% Coated rolled steel products 5% Value added products 25% Other rolled steel products 35% Cold rolled flat products 22% Coated rolled steel products 4% Electric steel 1% Value added products 27%
9.0 m t 7.2 m t
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Production development Coking plant and blast furnaces Steel-making facilities Casting facilities Rolling facilities Energy saving
• • • Reconstruction of blast furnaces №№ 1,2,4,5 Reconstruction of coke-oven batteries №№ 3,4,7 Environmental protection • • • Open hearth furnaces shutdown Iron desulphurisation unit Environmental protection • • • Reconstruction of continuous casting machine in BOF plant Construction of continuous casting machine for long products in EAF plant 100% continuous casting in BOF and EAF plants • • • • • • Reconstruction of mills: automation, quality improvement of rolling and cutting Reconstruction of mill 5000 to produce high quality strips for large diameter pipes Increase in pickling capacity to 1.8 million tonnes per year Conversion to 100% hydrochloric pickling Increase own power generating facilities to 245.3 million kW*hours Installation of new drives with lower electricity consumption in shops
US$ 296 million US$ 75 million US$ 120 million US$ 250 million US$ 11.6 million
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Overview and Forecast
Financials
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Financial result for 2002
• • • • • In 2002 the revenues went up by 7.5% y-o-y mainly due to higher prices both on the domestic and export markets.
Increase in prices contributed up to 93% of the total revenue growth. Costs grew 3.6% all through the year due to increase in prices and structure of suppliers of raw materials, tariffs on electricity and gas.
Severstal took steps to hold its costs through internal saving programs and purchase optimization.
Severstal took a conservative approach for forecasting, and the actual results turned to be generally better than expected.
$’000 2,500 2,000 1,500 1,000 500 0 1999 Sales 2000 Gross profit 2001 2002E Profit from operations Sales Cost of sales Gross profit Profit from operations Capex Net cash from operating activities
2001
1,789 1,463 326 92 79 80
2002E
1,924 1,515 409 277 119 109 25
Changes in sales for 2002 $’000 +23 801 2 000 000 1 789 137 1 500 000 +124 748 + 410 -14 540 6 538 16 942
due to change in volumes
35 886 88 182 267 133
due to change in prices due to change in product mix
- 14 540
other
1 113 017 1 000 000 1 923 556 1 106 760 500 000 676 120 0 2001 actual
- domestic market
Total change + 134 419
- export
815 785 2002E
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Cost of sales structure
Repair and maintenance 8.4% Depreciation 12.4% Labour 11.3%
2002 2001
Other expenses 8.3% Fuel and energy 9.7% Coal 13.6% Ore and alloys 23.9% Other materials 12.4% Repair and maintenance 9.2% Depreciation 8.8% Labour 12.9% Other expenses 6.9% Fuel and energy 10.4% Coal 11.7% Other materials 13.2% Ore and alloys 26.9% 27
Capital expenditure
• • Over the period from 2003 to 2005 total investment requirements are US$ 674 m.
These investments will be financed by own resources at 55%, and 45% externally.
• • • • • •
Major items:
Reconstruction and commission of blast furnace #4 Repair of blast furnaces currently operating Modernisation of all continuous casting machines at converter shop Reconstruction of Mill 5000: installation of automated systems; reconstruction of heating facilities; installation of sheet straightening machines Conversion to 100% hydrochloric pickling at cold rolling shop Construction of additional set of bell-type annealing furnaces at cold rolling shop
Capex in 2000-2006, $ mn
250 200 150 100 50 0 2001 2002E 2003F 2004F 2005F 28
Financial policy
• Debt is cheaper. Equity needs better compliance with equity market regulations. Severstal moves towards this through IAS accounting and consolidation • Severstal works exclusively with banks that provide complex services for clients, and that consider Severstal as VIP client, providing it with favourable fees • Severstal places its free cash only in reliable banks (like foreign bank branches) • Severstal diversifies its deposits by maturity in respect of currency and type of value stock 29
Financial Management
• • • • • • • •
Sources of external financing
Severstal uses debt financing only. As at 30 September 2002 Severstal’s debt profile comprised US$ 155 mil., 66% of which is dollar denominated Planned debt financing through syndicated loan and domestic bonds emission at aggregate amount of US$ 200 mil. maturing within 3 years Severstal shifted to long term debt because they have more beneficial credit terms Banks’ practice is to secure its loans by pledging of assets and export revenues
Working capital management
Severstal performs working capital management through its budgeting system, which consists of: Inventory stock control – keeping necessary volume of stock according to production requirements and repair and maintenance requirements Allowable level of receivables – a monthly control of debtors level for individual customer Available level of payables – seeking for most beneficial contract terms with suppliers Monthly payment planning – any payment can be made in accordance with authorized budget 30
Social Responsibility
• Severstal employs about 37,700 people of total 350,000 living in Cherepovets.
• Social assets comprise certain cultural, resort and sports facilities (ice hockey stadium, basin, sports grounds), as well as certain food processing and catering facilities. Severstal regards its employees as one of its key success factors and intends to provide them with a set of social services. The total amount spent in 2002 for social services provided to its employees is $ 9.6 million. In 2001 it was $11.8 million.
• Severstal also maintains a voluntary pension fund for its former employees. Payments to the pension fund were $ 4.5 million in 2002 and $ 4.8 million in 2001.
• In 2002, Severstal comprised 45.7% in Cherepovets’ budget tax income and 50.2% in Vologodskaya oblast’s budget tax income. In 2001, it was 50.5% and 56.3% respectively.
31
Key resume points
• Strong liquidity position • Good relationship with banks to meet necessary funding requirements at beneficial cost • Significant own profits and cash flows • No events of default on liabilities • Costs planning and control in place • Internationally recognizable financial reporting and forecasting 32
Overview and Forecast
Stock Market
33
Ownership Structure As of 01.01.2003
Other 9.46% A.Mordashov
16.63% Severstal group 21.99% Portfolio Investors 8.20% Severstal Garant 43.72% 34
Share Performance
• • Severstal outperformed the Russian stock index in the H1 2002. The higher steel prices supported the buying rage of the market players. In the H2 2002 Severstal followed the general decline in the market, but it is 20% higher YTD.
The restructuring of the company was also a strong incentive to increase the share of Severstal in portfolios as the dividend payout (shares of Severstal-Auto and Severstal –Resource) gave the cheap entry into the new sectors of the market. We expect Severstal would outperform the market in the mid term period.
90
Severstal Performance, $
60 30 03/01/02 03/05/02 03/09/02 03/01/03
Severstal vs. RTS Index,
(03/01/02 = 1.0) 2.0
1.8
1.6
1.4
1.2
1.0
01/02 03/02 05/02 07/02 Severstal 09/02 11/02 01/03 RTS 35
Overview and Forecast
Environmental Protection
36
Principles of environmental protection policy Severstal’s environment management system is certified in September 2001 with ISO – 14001
• To continuously reduce the harmful impact of production activities on environment to technically achievable and economically acceptable level; • To optimize production processes for continuous reduction of specific consumption of natural resources and energy per ton of output and to utilize accumulated and generating waste; • To continuously improve the environmental management system as a part of stable competitive advantage; • To hold the fair and constructive dialog with all interested parties 37
Pollution Emission Pollution emission into atmosphere
‘000 tons
Pollution emissions in waters
‘000 tons
Stocking of production waste
‘000 tons 500 400 300 200 100 0 20 15 10 5 0 800 600 400 200 0 353 418 12 264 16 496 1999 Actual 339 388 18 16 533 703 2000 335 392 17 17 546 773 2001 Limit 339 408 16 18 486 641 2002 38
Environmental protection expenditures
$ mn 75 60 45 45.1
30 15 18.1
1.4
0 1999* 2000 Statutory charge for pollution Current costs 7.0
6.1
1.6
2001 5.1
2.2
1.6
2002 4.8
2.0
1.9
New environmental activities *
-
current costs reduced due to changes in calculation methodology according to new Statutory rules 39
The major environmental activities
• • • • • • • • • • • • • • • • • • • •
1999
cleaning complex for Fuchs ladle furnace; construction of equipment for production waste utilization; construction of water recycling unit in hot rolling shop #1; construction of cleaning complex at drainage output construction of water recycling unit in BOF shop
2000
construction of cleaning complex at drainage output construction of oiled calx utilization unit in hot rolling shop #2; construction of equipment for production waste utilization; reconstruction of cyclone cell system in agglomerate shop; completion of construction of water recycling unit in BOF shop
2001
reconstruction of cyclone cell system in agglomerate shop; construction of supporting dams and inclined drainage unit in the ash-and-slag storage; reconstruction of biochemical entrapment equipment to clean and recycle the cooling in the coke shops
2002
reconstruction of the primary furnace in the stove of the blast furnace #5 construction of the oil waste recovery unit construction of the gas cleaning unit in the pig iron desulphurization shop 40
Overview and Forecast
Conclusions
41
Challenges and advantages
• • • • • • •
Main challenges
Cycle in the steel industry Higher competition level Complexity of consolidation Quotas, anti-dumping Excessive capacities in the steel industry Competition by mini-mills Increasing share of Ukrainian manufactures in the Russian market
Competitive advantages
• • • • • • • • • • • • • Geographic Location Transportation facilities (alternative) Security of Raw Materials and Energy Supply Tight Production Costs Control Personnel’s qualification Low labour costs Product Range Customer Base Technology Financial Position Production capacities Corporate Governance Stable Ownership Structure 42
Final Summary
• Severstal objectives are: modernization of production facilities, value-added products development (SeverGal) and increasing productivity • The capital investment program includes a number of projects aiming at manufacturing of value-added products, maintenance volumes of production and improvement of products quality. The management structure provides the suitable level of controllability of the Group’s companies • Severstal’s strategy provides long-term attractive return on employed capital, stable cash flow and increasing profit • The management system is being introduced within the Group’s companies, increasing their transparency and operational efficiency. The company is going through its transformation intro a leading integrated steel manufacturer.
• Although, the domestic market of high quality steel products is increasingly competitive, Severstal believes its cost control strategy and upgrading production facilities policy will lead to a significant efficiency advantage over a number of competitors and ultimately preserves Severstal’s leading position.
• As part of it’s development, Severstal applies for a long-term corporate credit rating to enhance the company’s liquidity 43