"Russia in the context of current global steel trends and challenges" by Andrey Laptev

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Published on February 18, 2014

Author: SeverstalOAO

Source: slideshare.net


Presentation of Andrey Laptev, Head of Corporate Strategy Severstal Group, for Adam Smith Conferences.

RUSSIA IN THE CONTEXT OF CURRENT GLOBAL STEEL TRENDS AND CHALLENGES Andrey Laptev, Head of Corporate Strategy February 12th, 2014

Where the Global Steel Industry is Today CAPEX and leverage position Average EBITDA margin, % Total CAPEX, $ bn (LHS) 16.7% Median Net debt/EBITDA (RHS) 58 5 55.1 12.6% 4.0 3.7 10.7% 3.2 52 9.0% 7.7% 7.0% 3.2 3.2 4 3 47.4 1.8 47.0 45.4 46 46.5 46.0 2 1 40 2008 2009 2010 2011 2012 2013E 0 2008 2009 2010 2011 2012 2013E • Subdued profitability • Negative FCF • Excessive leverage Source: Bloomberg, Severstal estimates * Top-40 – companies, constituents of Bloomberg Global Steel Producers Index Page 2

The Steel Overcapacity Challenge • Healthy post-crisis demand growth was insufficient to offset existing structurally excess capacity and new additions Global crude steel nominal excess capacity, mmt 1500 40% 33% 30% 1000 23% 500 23% 24% 21% 22% 20% 15% 10% 0 0% 2007 2008 2009 Global excess steel capacity, mln tonnes (LHS) Source: Worldsteel, Severstal estimates 2010 2011 2012 2013 Excess capacity as % of total global crude steel capacity (RHS) Page 3

Wait for “Invisible Hand” or Search for Solutions? Chinese steel capacity regulation plans  Government measures Solutions in other industries  Capacity discipline SSAB / Ruukki merger  Local markets consolidation Page 4

US Market: A Healthy Example HRC prices by region, $/t US domestic (EXW) EU Southern (EXW) China export (FOB) Russia export (FOB) $800 $750 $700 $650 $600 $550 $500 $450 $400 20-Dec-12 24-Feb-13 1-May-13 6-Jul-13 10-Sep-13 15-Nov-13 20-Jan-14 • Capacity eliminations • Market consolidation • Healthy long-term demand Source: Metal Bulletin Page 5

Russian Steel Demand Supported in 2013-2014 Steel consumption by the main demand segments in Russia Industry Estimated volume in 2013, mmt Steel consumption growth, y-o-y, % 2013 Main drivers in 2013-2014 2014F 13 • • Localization Households income growth -3.5% • • • White goods Handling equipment Agricultural machinery • • New pipelines projects (“South Stream”) Drilling activity Construction • • Mortgage growth Liquidation of savings • Machinery 1.8 -10.5% • Automotive Demand growth in Europe and the USA Removing sanctions against Iran Tubes and pipes 9 6% Construction 20 5.5% 43.8 3%* Domestic demand Exports 25 -7.9% • Source: Metal Expert, Severstal estimates * In Severstal product range Page 6

Tougher Competition on Export Markets Global crude steel production growth by region in 2013, YoY % 10% 8% 6% 4% 2% 0% -2% -4% 6.8% 7.5% Middle East China 3.1% Total world: +3.5% 1.9% -1.9% -1.5% -0.8% North America -2.7% CIS (ex. Russia) -1.8% EU Russia South America Other Asia Japan Chinese finished steel exports, mln t 80 66 60 56 52 43 40 20 20 11 7 7 2001 2002 2003 59 24 8 2000 27 48 55 0 Source: Worldsteel, CRU 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Page 7

Russian Domestic Market Challenge Selected pig iron, steel and rolling capacity additions in Russia Year Company Project Domestic sales, as % of total 2012 Capacity, mtpa 2013 84% 77% 2011 MMK Cold Rolling Mill-2000 2,0 2012 NLMK BF #7 at Lipetsk plant 3,4 2013 NLMK Kaluga mini-mill 1,5 2013 UMMC Tyumen mini-mill Severstal Balakovo mini-mill 1,0 2013 Novorosmetall New EAF at Abinskiy plant 63% 0,5 2013 59% 1,3 39% 33% Peer 1 Source: Company data, press releases Severstal Peer 2 Source: Company data Note: For Peer 2 domestic sales include sales to Russia & CIS Page 8

Key Players’ CAPEX is Back to Normal Group CAPEX, $mln 1600 80% 80% 72% 1200 58% 54% 50% 48% 800 1460 40% 1400 1134 850 400 60% 976 20% 500 0 0% Peer 2 Peer 1 CAPEX Average in 2010-2013 Source: Company data, Severstal estimates Note: For CAPEX/EBITDA ratio guided 2014 CAPEX and 9M2013 annualized EBITDA are used CAPEX 2014E Severstal CAPEX/EBITDA, % CAPEX/EBITDA Average in 2010-2013, % Page 9

Russian Steelmakers’ Profitability Stabilized Severstal’s Russian Steel Segment EBITDA per tonne vs Key peers, $/t Average (Peer 1, Peer 2) 163 Severstal 117 115 102 93 74 82 82 73 60 2011 2012 1Q'13 2Q'13 3Q'13 Source: Company data, Severstal estimates Page 10

Healthy Long-term Demand Fundamentals in Russia Mortgage loan penetration, % of GDP Growth of automotive production using local steel Source: Citigroup, Severstal analysis FIFA World Cup 2018: Steel Demand ~2 mmt Infrastructure projects Page 11

Severstal: Responding to the Challenges Cost Position Middle-to-the-left position of all our assets on the cost curve Margins Targeting cycle-average EBITDA margin of c. 20% CAPEX Medium-term target of $1.0bn per annum Net debt Striving to keep Net debt/EBITDA below 1.5x Dividends Payout of not less than 25% of Net Income FCF Stable positive free cash flow Page 12

Thank You!

Disclaimer These materials are confidential and have been prepared by OAO Severstal (Severstal) solely for your information and may not be reproduced, retransmitted or further distributed to any other person or published, in whole or in part, for any other purpose. These materials may contain projections and other forward-looking statements regarding future events or the future financial performance of Severstal. You can identify forward-looking statements by terms such as “expect,” “believe,” “estimate,” “intend,” “will,” “could,” “may” or “might”, or other similar expressions. Severstal cautions you that these statements are only predictions and that actual events or results may differ materially. Severstal will not update these statements to reflect events and circumstances occurring after the date hereof. Factors that could cause the actual results to differ materially from those contained in projections or forward-looking statements of Severstal may include, among others, general economic and competitive environment conditions in the markets in which Severstal operates, market change in the steel and mining industries, as well as many other risks affecting Severstal and its operations. These materials do not constitute or form part of any advertisement of securities, any offer or invitation to sell or issue or any solicitation of any offer to purchase or subscribe for, any securities of Severstal in any jurisdiction, nor shall they or any part of them nor the fact of their presentation, communication or distribution form the basis of, or be relied on in connection with, any contract or investment decision. No representation or warranty, express or implied, is given by Severstal, its affiliates or any of their respective advisers, officers, employees or agents, as to the accuracy of the information or opinions or for any loss howsoever arising, directly or indirectly, from any use of these materials or their contents.

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