· PDF fileSTRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX 3 Severstal Annual Report 2017 Table of contents Strategic

Driving growth through innovation

ANNUAL REPORT

2017

STRATEGIC REPORT RESPONSIBILITY CORPORATE GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION APPENDIX

3Severstal

Annual Report 2017

Table of contents

Strategic report 4

Severstal at a Glance 6

Chairman’s Review 10

Strategy and Business Review 12

CFO’s Review 18

Market Trends 20

Risk management 22

Divisional review 26

Responsibility 32

Our commitment to sustainable development 34

Health and Safety 35

Environmental Protection 36

Social investment 37

Talent development 39

Corporate Governance 42

Board of Directors composition 44

Corporate Governance Statement 50

Board committees and reports from their chairs 56

Financial Statements 62

Auditor’s Report 64

Consolidated income statements 68

Consolidated statements of comprehensive income 69

Consolidated statements of fi nancial position 70

Consolidated statements of cash fl ows 71

Consolidated statements of changes in equity 72

Notes to the consolidated fi nancial statements 73

Additional information 132


Appendix 136

Appendix 138

Contacts 143

1.

2.

3.

4.

5.

6.

17,848 (33%) 2016: 5,916Revenue

2,162 (43%) 2016: 1,517Profit from operations

2,577 (35%) 2016: 1,911EBITDA

1,393 (36%) 2016: 1,021Free Cash Flow

1,914 (30%) 2016: 1,477Net cash from operating activities

US$ million

STRATEGIC REPORT

Strategic report 4Severstal at a Glance 6Chairman’s Review 10Strategy and Business Review 12CFO’s Review 18Market Trends 20Risk management 22Divisional Review 26

We use certain alternative performance measures

(“APMs”) in this Annual Report that are used by

management to assess the underlying performance

of the business and as information in recommending

dividends. EBITDA, which is widely used in the industry,

represents profi t from operations plus depreciation and

amortisation of productive assets (including the Group’s

share in depreciation and amortisation of associates

and joint ventures) adjusted for gain/(loss) on disposals

of PPE and intangible assets and for share in associates’

and joint ventures’ non-operating income/(expenses).

A reconciliation of Operating Profi t to EBITDA is set

out in the Appendix. Free Cash Flow is used by the

Board of Directors, in conjunction with Net Debt (being

Total Debt Finance less Cash and Cash Equivalents)

as a guide in recommending dividend payments.

Free Cash Flow is determined as the aggregate amount

of the following items: Net cash from operating

activities from continuing operations, CAPEX, proceeds

from disposal of PPE, interest received and dividends

received. A reconciliation of Free Cash Flow to Net cash

from operating activities is set out in the Appendix.

STRATEGIC REPORT

STRATEGIC REPORT

6Severstal

Annual Report 2017

Severstal at a Glance

PAO Severstal (“Severstal”, “the Company”, or “the Group”) is a vertically integrated

steel and steel-related mining company with its major assets located in Russia

and investments in other regions. The Company was founded in 1955 at the

Cherepovets Steel Mill in Russia. Severstal’s strategy is to maximise shareholder value

by building a healthy and high-quality business that generates higher than market

average earnings throughout the economic cycle. The Company comprises two major

operational divisions: Severstal Resources and Severstal Russian Steel.

Severstal ResourcesSeverstal’s mining assets are a fundamental part of the

Company’s vertically integrated business model. Severstal

Resources supplies almost all of the iron ore and approximately

60% of the hard coking coal consumed by Severstal’s steel

business, while also selling signifi cant volumes to external

customers both in Russia and abroad.

Severstal Russian SteelThe Company’s core asset is the Cherepovets Steel mill, one

of the lowest cost steel mills in the world, strategically located

near to the Company’s mining operations, the Baltic ports and

Russia’s industrial heartland. Severstal Russian Steel is a leading

Russian steel producer. The division has a broad product portfolio,

comprising a majority of high value-added fl at steel products

and increasing volumes of long products for construction and

downstream sales.

Vorkuta

Olenegorsk

Yakovlevskiy Mine

Kostomuksha

St. Petersburg

Vsevolozhsk MoscowKaluga

Orel

CherepovetsSheksna

Balakovo

Volgograd

Kolpino

Severstal’s share capital structure

A.Mordashov – 77.03%

Free float – 20.15%

Treasury shares – 2.82%


7Severstal

Annual Report 2017

Listing and tickers

Moscow Exchange (MICEX) – CHMF GDRs on the London Stock Exchange (LSE) – SVST

Indexes

Index Weight*

RTS 1.38 %

MICEX 1.38 %

MSCI Russia 1.78 %

FTSE Russia IOB 2.10 %

Russian Depositary Index 1.54 %

Bloomberg World Iron/Steel Index 2.64 %

* as at 11 December 2017

Credit ratings

Standard&Poor’s Moody’s Fitch Ratings

PAO Severstal Credit Rating/Outlook BBB-/Stable Baa3/Positive BBB-/Stable

Date of Rating** 20 September 2016 29 January 2018 20 October 2016

** “Date of Rating” does not refl ect subsequent confi rmations

Our key performance indicators remain the same, we will add Total Shareholder Return

(TSR) during 2018

Target Current progress Track record

Safety Eliminate all fatalities LTIFR for 20170.96

Customer careLead in Russia in level of service and

qualityA comprehensive system in place

Customer

satisfaction* with

Q4 2015

Q3 2017

Cost positionMiddle-to-the-left position for all our

assets on the cost curveOn integrated basis: Achieved

HR

C c

ost

, $/t

*

* World Steel Dynamics, 2016

cost position

EBITDA margin>20%

through the cycle32.8% for 2017

32.8%

Smart CAPEX Below $1 bln/year $591 mln of cash CAPEX for 2017

$591m$439m $525m

Free cash fl ow Always positive through the cycle $1,393 mln for 2017

$1,021m$1,552m

$1,393m

Dividend payoutUp to 100% FCF if

Net debt/EBITDA is below 1.0x**$1.5bn paid*** in 2017

$1.6b

$0.7b $1.0b $0.9b$1.4b$1.5b

Low debt Net debt/EBITDA <1.5x 0.4x at the end of 2017

* Severstal analysis, quarterly and annual reports. ** Dividend policy: Not less than 50% of the net profi t for the reporting period provided that Net debt/EBITDA is below 1.0x. Should the ratio increase to higher

than 1.0x, Severstal would return to its previous dividend payout of 25% of net profi t. *** The majority of cash out for: Q4 16, Q1 17, Q2 17, Q3 17 dividends paid in 2017, subject to FX.

STRATEGIC REPORT

8Severstal

Annual Report 2017

More of 2017 in Figures & Charts

Operational performance, million tonnes 2017 2016 Change, %

Steel products (Consolidated) 10.9 10.7 2%

Coking coal concentrate 3.3 4.1 (20%)

Iron ore pellets 11.1 10.8 3%

Iron ore concentrate 4.3 4.1 5%

Financial performance

Profi tability highlights, million US$

EBITDA EBITDA margin Revenue

20172016 20172016 201720162015 2015 2015

6,3965,916

7,848

2,096 2,577

32.8% 32.8%

1,911

32.3%

Working capital dynamic and smart CAPEX*, million US$

NWC as at the end of the periodCAPEX*

20172016 201720162015 2015

439 525591

491

830

578

* Consisting of cash outlays for purchases of property, plant and equipment and intangible assets

Working capital turnover, days NWC/Revenue, %

57

Q1 16

51

37

Q1 15 Q2 15

32

Q3 15

60

Q4 15

40

Q2 16

44

Q3 16

32

15.7%

14.0%

10.1%8.8%

16.5%

11.0%12.0%

8.8%

12.9%11.8%

10.8%9.5%

Q4 16 Q1 17

47 43

Q2 17

39

Q3 17

35

Q4 17


9Severstal

Annual Report 2017

Sustainable Free Cash Flow generation, million US$

Other adj.

to FCF

(439)

1,867

124 1,552

Other adj.

to FCF

Other adj.

to FCF

(525)

1,477

OCF

2016

69 1,021

FCF

2016

Capex*

2016

OCF

2015

FCF

2015

Other adj.

to FCF

(591)

1,914

OCF

2017

70 1,393

FCF

2017

Capex*

2017

Capex*

2015

* consisting of cash outlays for purchases of property, plant and equipment and intangible assets

Clear dividend policy and sustainable returns, RUB

50.00

40.00

30.00

20.00

10.00

00.00

60.00

1.89

FY

2012

0.43

Q1

2013

2.03

Q2

2013

2.01

Q3

2013

3.83

FY

2013

2.43

Q1

2014

2.14

Q2

2014

54.46

Q3

2014*

14.65

FY

2014

12.81

Q1

2015

12.63

Q2

2015

13.17

Q3

2015

20.27

FY

2015

8.25

Q1

2016

19.66

Q2

2016

24.96

Q3

2016

27.73 27.72

FY

2016

24.44

Q1

2017

22.28

Q2

2017

35.61

Q3

2017

FY

2017**

* Q3 2014 dividends include special dividends

** to be approved at AGM

Debt maturity schedule*, million US$

880

2022+

563

11

701

2018 2019 2020 2021

* Debt represents the principal amount of debt. Figures exclude accrued interest and unamortised

balance of transaction costs.

Net debt, Net debt/EBITDA, million US$

2,727

1Q 17

788

2,722

2Q 17

827

2,693

3Q 17

703

4Q 17

1,062

2,013

4Q 16

859

Total debt, $m Net debt, $m Net debt/ EBITDA, x

0.3x

0.4x0.4x 0.4x 0.4x2,093

STRATEGIC REPORT

10Severstal

Annual Report 2017

Chairman’s Review

Dear Shareholders,

In 2017, Severstal reinforced its leading position despite

challenging macroeconomic conditions. Our clear and

focused strategy and vertically-integrated business

model once again enabled us to perform resiliently in an

uncertain economic environment.


11Severstal

Annual Report 2017

Strength throughout the cycleThis year was marked by industry-wide challenges, as raw

materials prices fl uctuated and overcapacity continued to weigh

on steel prices. China’s commitment to closing ineffi cient steel

and mining facilities supported growth in global steel demand in

2017. I am pleased to report that against this backdrop we

made progress against each of our strategic priorities during

2017, delivering robust cash generation while driving effi ciency,

maintaining a strong balance sheet and making progress on

our initiatives to enhance customer care and product quality. Amid

changing market conditions, the strategic location of Severstal’s

assets allows the Company to take advantage of more attractive

pricing at different stages of the industry cycle, by shifting

additional sales volumes between domestic and export markets.

In 2017, our fl exible sales model and integrated business enabled

Severstal to capitalise on a recovery in the domestic demand,

driven by Russian GDP growth. Severstal remains one of the most

profi table steel companies in the world.

Consistent strategy powered by innovationSeverstal’s ongoing focus on cost discipline and effi ciency

enhancements once again delivered excellent results in 2017.

However, in an increasingly competitive industry we are constantly

looking for ways to differentiate ourselves from our peers and

stand out as leaders in the sector. Technology and innovation are

a key focus for Severstal. This is increasingly the most signifi cant

driver in enhancing our overall performance and customer service.

As presented at our 2017 annual Capital Markets Day, the Board

has identifi ed a digital innovation strategy that will support

Severstal’s committed long-term strategy of maintaining its

position as a leader in value creation for all stakeholders.

An innovation culture will help us to speed up product

development and further improve our processes. However, we

remain fi rmly committed as well to the already time-tested

optimisation initiatives to maintain our competitive low cost

position.

Returns to shareholdersIn 2017, maintaining a low level of debt and delivering

strong margins, Severstal was able to pay strong dividends

despite market pressures. In line with our progressive dividend

policy, the Company distributed almost all of its free cash

fl ow to shareholders, with total cash outfl ow for dividends in

2017 amounting to approximately $1.5 billion, which represents

a yield of around 11.5% on current market capitalisation. The

Board believes that Total Shareholder Return (TSR) is the most

effective metric against which to measure the Company’s

performance in value creation against its peers. In 2017 Severstal

was focused on establishing our TSR targets as part of the long-

term strategies driving our activities across the Group.

Health and SafetyWhilst delivering shareholder value is our primary fi nancial

objective, safety is the number one priority at all of Severstal’s

operations. Since the tragic accident at our Severnaya mine in

February 2016, everyone has been focused on learning the

lessons and implementing better practice. We are striving to be

an accident-free organisation and management is constantly

focused on reducing our lost injury time frequency rate (LTIFR).

Our management teams work around the clock to foster a strong

safety culture among all of our employees.

Environmental, social and governanceThrough ongoing innovation, steel is becoming cleaner, lighter

and more effi cient than ever before. On an industrial scale, steel is

the most recyclable material on earth that remains affordable

to customers. Severstal is committed to operating in a cleaner

environment and to improving the sustainability of its working

practices. This is an area the Company takes very seriously and

our assets have been transformed in recent years in line with our

environmental priorities. Our investors are becoming increasingly

focused on environmental, social and governance (ESG) as a

metric by which they evaluate responsible investment. The

Company is committed to operate responsibly and sustainably, in

the long-term. Accordingly, we aim to enhance our ESG reporting

to demonstrate our commitment and continued progress in this

area.

Governance and the BoardI believe strongly that good leadership makes a huge difference

to an organisation and accordingly I’m passionate about

ensuring that Severstal has the highest standards of governance

and leadership supported by a consistent culture, values and

behaviours throughout Severstal. In my role as Chairman, I am

responsible for ensuring the smooth operation of the Board

and also overseeing the Company’s strategy, corporate culture,

recruitment and the development of our senior executives.

PeopleAt Severstal, we recognise that our people are the heart of our

business. It is a testament to the hard work of all of our employees

that the Company continues to deliver strong results and industry-

leading performance despite market headwinds. In recognition

of this, and to support their ongoing progress, we are committed

to the professional development of every employee, providing

them access to our world class in-house and external training

programmes. In 2017, we launched a new programme, “Career

Restart”, aiming to identify and develop those employees at

Severstal with standout potential. We also launched Severstal’s

youth leadership programme which will enrich our talent pool for

Severstal’s 100 top managers in the coming years.

OutlookIn 2017, we saw growth in global steel production largely driven

by China. Meanwhile, capacity cuts in China drove utilisation up to

85% at the end of the year, supporting growth in steel margins. In

Russia, economic recovery supported a 5% improvement in steel

demand over 2017. In October 2017, the EU Commission imposed

defi nitive antidumping duties against steel exporters, however,

Severstal received the lowest duty rate of all of its peers, enabling

us to continue serving our European customers and remain

competitively positioned in those markets. We continue to believe

that effi cient, innovative and vertically integrated operators such

as Severstal will continue to deliver value to stakeholders. On

behalf of my fellow directors I would like to thank our hard-working

employees and our shareholders for their ongoing support.

Sincerely yours,

Alexey MordashovChairman of the Board of Directors

STRATEGIC REPORT

12Severstal

Annual Report 2017

Strategy and Business Review

Dear Shareholders,

I am pleased to report that in 2017 Severstal has

once again maintained its position as a global

leader in value creation. Severstal’s high quality assets

and vertically integrated business model continue to

underpin our performance, as our industry leading

margins are driven by a strategic focus on maximising

effi ciencies across our business.

As a company, we are constantly striving to do more,

better, and in June 2017 we were pleased that Severstal

was recognised by World Steel Dynamics as one of

the world’s most competitive steel companies, having

climbed four places since the previous year.

Our strategy is fully focused on driving total shareholder

returns (TSR) and once again this year we have

continued to deliver highly competitive returns through

the generation of strong free cash fl ow and earnings.

Severstal remains committed to paying high dividends

through the cycle. Operating responsibly to create value

for all of our stakeholders is our priority, and so alongside

our fi nancial performance we work to ever improve our

results in ESG (environment, social and governance),

including sustainability and our impact on the

communities in the regions where we operate.

Critical to our ongoing success is an unfaltering focus

on ideas and innovation. In a highly competitive industry

with many challenges, steel producers need to adapt

and innovate. Severstal aims to be a leader in this area

and for 2017 our CAPEX included 1.7 billion roubles in IT

and digital projects. These projects will drive increasing

effi ciencies across the business, enhance our customer

service and deliver new products to continue to support

our margins across the industry cycle. Severstal has

developed a strong digital team dedicated to trialing

and introducing the latest international technologies as

well as developing advanced digital solutions in-house.

Thank you for your continued trust!Sincerely yours,

Alexander ShevelevChief Executive Offi cer


13Severstal

Annual Report 2017

Severstal’s business modelSeverstal is a vertically integrated steel and steel-related mining company with its major assets located in Russia.

The Company is self-suffi cient in raw materials which are supplied by its Resources assets (coking coal and iron ore mines) located in close

proximity to Severstal’s steel production plants. Today, the Company has c. 60–65% self-suffi ciency in coal and more than 100% in iron

ore, selling high value-added pellets to the market. This model means that the Company has a hedge against volatile raw materials prices

throughout the year, to support our industry-leading margins.

Maintaining high margins through the cycle

0

50

100

150

200

250

300

350

400

Q4

15

Q3

15

Q2

15

Q1

15

Q4

14

Q3

14

Q3

16

Q2

16

Q1

16

Q4

16

Q2

17

Q1

17

Q3

17

Q4

17

Contribution of Severstal Resources division to the integrated costs

Cash cost of slab on an integrated basis

EDITDA, margin, %

share of HVA, %

280

47

203

52

169

45

212

47

176

30

164

39

153

24

179

42

180

33

194

56

240

83

237

97

241

61

243

78

53% 52%

46% 47% 47% 47%42% 43% 42% 40% 44% 44%

49%

28%

32% 38% 33%

32% 29%25%

33%37%

32% 33% 33% 31%

47%

35%

Whilst the Company is predominantly focused on supplying

steel products to the domestic market, Severstal also exports to

c. 70 countries. The Company’s steel assets are competitively

positioned near to the key steel consuming regions of Russia as well

as to Severstal’s export markets. This also provides the Company

with fl exibility to be able to shift sales volumes between domestic

and export markets depending on market dynamics and to benefi t

from pricing premiums resulting from currency fl uctuation.

The Company produces a broad portfolio of steel products and is

focused on expanding this further to deliver high value products that

meet the changing needs of its customers. Severstal builds long-term

customer partnerships and is therefore committed to constantly

improving product quality, supply discipline and service quality.

Severstal has a highly-disciplined approach to capital expenditure.

Company investment projects are planned over long-term periods and

each must meet the strict internal rate of return of 20%, or deliver

a predetermined level of quality or environmental enhancement.

Severstal’s robust business model enables the management team

to focus on maximising free cash fl ow and generating higher than

market average earnings throughout the economic cycle, which

is demonstrated in graphic form above. This in turn supports

the regular distribution of competitive dividends, in line with the

Company’s dividend policy.

STRATEGIC REPORT

14Severstal

Annual Report 2017

Severstal’s Business Model

Inputs Strategy and success factors Business Segments Value Creation

• Stakeholders (investors,

business partners, workforce,

society)

• High standards of

corporate culture and

Severstal’s values

• Unique production assets

and geographical location

• Vertical integration (60% in

coking coal, 115% in iron ore

and 80% in electricity)

• Effective and innovative

business processes

Severstal aims to maximise its value for all stakeholders by:

• Safe operations

• Providing sustainable

growth of the business and

dividend payout.

• Maintaining low cost

position (left bottom side

of the cost curve) and high

share of HVA in product

portfolio (46%)

• Smart CAPEX allocation

• Keeping the balance sheet

strong (low debt and

effective working capital

management)

• Commitment to best ESG

(environment, social and

governance) practices

Severstal Russian Steel (Crude Steel Production 11.7 mt => Steel Product sales 11.0 mt). refer to divisional performance (page 29)

• Cherepovets Steel Mill

• Izhora Pipe Mill

• Mini-Mill Balakovo

• Severstal-Metiz

• Downstream production

assets

• Trading companies

Severstal Resources (Coking Coal Concentrate sales 3.3 mt, Iron Ore Concentrate sales 4.3 mt, Iron Ore Pellets sales 11.1 mt) refer to divisional performance (page 26)

• Vorkutaugol

• Karelsky Okatysh

• Olkon

• Yakovlevskiy Mine

• Financial capital (refer to

Financial Highlights Section

and KPI) (page 8)

• Natural, Social and

Human capital (refer to

Sustainability Section)

(page 34)

• Business capital (refer

to CEO strategy update)

(page 12)

• Shareholder capital

(page 134)

Severstal’s strategy – focus on innovation and effi ciency leadership, prudent investments and customer careSeverstal’s strategy is focused on maximising shareholders’ value

by ensuring that the Company remains one of the most profi table

producers in the industry, generating sustainable higher than

average earnings throughout the economic cycle. The Company’s

ability to generate strong free cash fl ow allows it to return

attractive dividends to shareholders. In addition, Severstal is

committed to best in class governance, health and safety and

sustainability, including reducing our impact on the environment.

In 2017 the Company launched a major innovation programme

focused on delivering growth without signifi cantly increasing

production scale (the Company operates at consistently close to

100% capacity utilisation). The programme includes three key areas:

– Product innovation;

– Process innovation;

– Business model innovation.

We believe this will create an even better platform for future

business development and sustainable growth. For 2018,

Severstal plans to deliver up to an additional US$350 million

to its EBITDA as a result of its enhanced sales and marketing

strategy, selective production growth and operational effi ciency

programmes which include innovation, digital and smart

procurement initiatives.


15Severstal

Annual Report 2017

All initiatives, including innovations, potentially may deliver up to an additional

US$350 million to Severstal’s 2018 EBITDA

+ $8m

+ $1m

+ $30m

STEEL

STEEL

STEEL

IRON ORE &

PELLETS & COAL

PELLETS

PELLETS

COAL

IRON ORE

+ up to $63 mln

2) Volumesgrowth

+ up to $125 mln

+$37m + potential

$88m

3) Operationalefficiency

+ up to $162 mln

+$123m + potential

$39m

1) Sales &marketing

+ up to $33m

Market structure. Domestic demand

improvement. Keep market share

+ up to $7m

Product structure. HVA mix improvement

(excl. HDG & CC)

+ up to $79m

Price efficiency

+ up to $4m

Share of HVA pellets up

from 52% to 55% in total sales

Yakovlevksy Mine to increase its iron ore

concentrate output (current ~1mtpa)

+370KT of coking coal concentrate volumes

+40KT to the total pellet output

+75KT of crude steel due to new ladle furnace

+200KT New colour-coating line

+400KT New HDG line

Metalware product sales growth

– New ladle furnace: lower consumption

of raw materials

– Upgraded sinter machines reduce costs

– Self-sufficiency in energy increased to 78%

Smart procurement + Digital +

Process Innovations

Efficiency gains + CAPEX gains

+ $13m

+ $7m

+ $10m

+ up to $13m

Premium clients

programme

+ up to $20m

Back to EU HRC market

+ up to $20m

LDP, stripe and other tubes

marketing

+ up to $10m

Product innovations

+ up to $16m

Export & domestic

markets diversification

Effect being estimated

+ up to $36m

+ up to $4m

+ up to $2m

+ up to $11m

+ up to $10m

+ up to $14m

+ potential $88m

+ up to $23m

Adding up to$350* mln

to 2018 EBITDAUpside potential

* All fi gures are preliminary Сompany estimates. Actual results may vary signifi cantly.

Supported by our focus on digital and innovation, the Company

constantly works to progress fi ve key pillars of its strategy:

customer care, cost effi ciency leadership, smart capex, health and

safety and people and sustainability.

1. Health and Safety and People

Severstal is committed to eliminating 100% of fatalities across

the business and constantly improving the health and safety

standards at all of our assets. The Company’s health and safety

strategy is overseen by the Board of Directors’ Health and Safety

Committee who ensure the Company’s practices progress in line

with the highest global standards.

Loss Time Injury Frequency Rate (LTIFR) is a key metric against

which the management’s performance is measured and we invest

heavily every year in improving health and safety procedures and

upgrading equipment. Increasingly, we are automating operating

machinery to reduce the human factor and risks that are inevitably

associated with heavy industry.

The real key to Severstal’s success, at every level, is the corporate

culture that unites a talented and ambitious workforce. Our

business is founded on our people, whose commitment, skill

and new ideas constantly drive the Company to achieve more,

together. For this reason, we ensure that each individual is offered

the best professional training to take their careers at Severstal

to the highest level.

Key achievements in 2017 – Health and Safety and PeopleSince the tragic accident at the Severnaya mine in February 2016,

work on testing and optimising the safety processes at all of our

assets has been ongoing to ensure that all of our systems are

secure and such an incident is highly unlikely to occur again.

We did not have any fatalities in 2017 amongst Severstal

employees. Sadly three individuals working for Severstal’s

contractors lost their lives. We are helping to investigate these cases.

Severstal’s Young Resources programme continued to go from

strength to strength. The programme works with university and

high school students to develop future talent for the steel industry.

Read more about Severstal’s health and safety initiatives and

talent development on page 35.

2. Customer care

Severstal’s customer care initiatives fall into three key areas of

focus:

• Product quality;

• Supply discipline;

• Service quality.

Supply

Customer

care

QualityService

STRATEGIC REPORT

16Severstal

Annual Report 2017

Key achievements in 2017 – Customer

CareIn January, we announced the upgrade of Severstal’s online shop

targeting online sales of 3.5 million tonnes by 2018. Customers

can now order steel from storage facilities in 44 regions and

choose from a selection of delivery locations. A key benefi t of

the portal is that it has enabled us to considerably enhance our

customer outreach and feedback capabilities. As a result, we are

more alert to potential issues, can better anticipate changing

market demand and effi ciently deliver product innovations that

meet our clients’ changing requirements.

Severstal has continued to make signifi cant progress in its

customer quality satisfaction indicator since the end of 2015,

which is a measure of product and service quality, as well as

reliability.

47%

Quality

88%

46%

32%

79%

55%

Reliability Service

Q4 2015* Q3 2017**

* First available data

** Latest available data

For Severstal’s commodity products, which have a diversifi ed

customer base and numerous purchases every month, Severstal

employs simple forecasts in planning its production cycle

to improve lead-times without building up inventories. For clients in

the automotive segment, who demand considerably lower volumes

of specifi c higher value-added steel products, the Company’s

production planning method is more complex.

Severstal’s online shopping platform helps to support proactive

and regular engagement with customers, which is key to

ensuring Severstal continues to meet their evolving needs by

better understanding the balance between price and non-price

factors affecting customer decisions. Another aim is to make

communications between Severstal and its customers ever

easier and more transparent from product order to delivery and

aftersales service. Ongoing client feedback enables Severstal

to enhance and adapt its customer service tools to satisfy our

customers’ requirements.

3. Cost and effi ciency leadership

Severstal’s strategy is focused on enhancing product quality

rather than increasing scale of production, enabling us to

generate higher earnings per tonne of product. We are focused on

creating incremental value through ongoing effi ciency and cost

control improvements to offset industry risks and maintain our

competitive position in the market.

Key achievements in 2017 – cost and effi ciency leadershipInitiatives within Severstal’s Business System continued to drive

operational and organisational excellence along the business’

entire value chain, including improving customer satisfaction

and promoting a safety-conscious culture. The Business System

has primarily focused on a culture change within the Group’s

production departments in order to achieve cost reductions,

improve working conditions and industrial safety, and enhance

product quality.

The Company believes that the Business System has established a

working environment within Severstal that is both ambitious and

collegiate, and more receptive to change and the adoption of new

best-in-class business-processes.

By creating incremental value through further effi ciency

improvements and cost control projects, Severstal maintains a

leading competitive position against peers and offsets market

risks. Severstal has already achieved a position on the left of the

cost curve and aims to keep this favourable position by delivering

continuous improvement.

Severstal’s Business System ensures that the Company is

constantly innovating to achieve greater effi ciency across its

operations.

Leading cost position***

$350

$400

$450

$300

$250

$200

$650

$600

$550

$500

1000 200 300 400 500 600

Severstal

Mln tonnes

HR

C c

ost

S/t

*** World Steel Dynamics, 2016

In 2017 the Company continued to make progress on its

operational effi ciency programmes:

Iron ore – Tailings thickening at Karelsky Okatysh.

– Modernisation of mining transport and equipment.

– A new steeply inclined conveyor.

– Ideal shift programme (no idle time, no product losses).

– Improved quality of iron ore concentrate to 67.5% without

reducing volumes.

– Ongoing centralisation of managerial functions, with Karelsky

Okatysh bringing synergies, savings, growing the share of HVA

pellets in our sales portfolio.

– Energy cost control.

Coking coal – Stabilisation of mining volumes at Vorkutaugol. Severstal

will increase its vertical integration in iron ore from the current

level of 60% to 65% in 2018, refl ecting volume growth in

2018 and the completion of repositionings in 2017.

– Volumes to increase by 370 kt and stabilise in 2018.

– Vorkutaugol: new ventilation & degassing methods. Increase

output by ~50 kt/month (mines operating at Seam #4).

– Vorkutaugol: debottlenecking of the raw coal lifting

mechanism.

Steel – Launched second ladle furnace in 2017. Cost savings of

~700 million RUB/year.


17Severstal

Annual Report 2017

– Renovation of coke battery #4 at Cherepovets (2016–2018).

Effect: higher coke quality, more environmentally friendly

operations.

– Refurbishment of blast furnace #5 at Cherepovets (2017–

2020). Effect: less consumption of coke and sinter, higher

quality of pig iron, more environmentally friendly operations.

Severstal continued to develop its Expert Network programme

across all of the Company’s assets – 12 communities of

professionals (800 experts) are participating in operational

effi ciency and production process optimisation. In 2017,

2,500 initiatives were put forward by the Expert Network.

We believe that investing in machine learning and predictive

analytics today will deliver signifi cant and ongoing effi ciency

enhancements in the future. In 2017, Severstal was particularly

proud to announce the creation of the biggest data lake in

Russian industry, using technology supplied by Microsoft and

Lenovo. With two petabytes of capacity, the facility enables us

to collect, store and analyse operational statistics. The stored

data will support predictive analytics projects in areas including

predictive equipment maintenance and product quality

optimisation as well as other areas where artifi cial intelligence

can improve effi ciency.

In June 2017, we worked with Sberbank to develop blockchain

technology enabling Severstal to securely transfer international

letters of credit to suppliers and clients. The service is the fi rst of its

kind developed in Eastern Europe and signifi cantly reduces the

timeframe of each transaction, whilst improving transparency.

4. Smart capital expenditure

Our strategy is supported by a prudent approach to investments

which is fl exible to market conditions.

In 2018, Severstal will be more focused on hot-end projects

to improve product quality and support further operational

effi ciencies.

In 2017, Severstal successfully completed construction of the

Second ladle furnace and colour-coated and galvanized lines, and

launched the coking Battery #4 modernisation project.

Project Description/Effect Period Status CAPEX estimate, US$ mln

New HDG & coating line Capacity increase: HDG – 400,000 tonnes, coating – 200,000 tonnes 2016–2017 Finished 120

Second ladle furnace Cost & quality improvements 2017 Finished 50

Coking Battery #4 Scheduled reconstruction 2016–2018 In progress 100

BF#3 Construction 2021 In progress 500

New Coking Battery #11Replace batteries #8 & #9 before their scheduled reconstruction,

improve coke quality/cost2019–2022 Evaluation 500

5. Sustainability

As part of Severstal’s focus on operating sustainably and

maximising shareholders’ value, the Company is committed to

reducing its environmental footprint, conserving energy and

using natural resources in a responsible manner. In addition,

Severstal continues to support a positive social climate in the

regions where it operates and annually invests in the development

of infrastructure, education, culture and sport. To support

progress in its sustainability objectives, Severstal intends to

further enchance its reporting on ESG (environment, social and

governance).

Key achievements in 2017 – sustainabilityWe were pleased to note that in 2017 Severstal was named

the Russian industry leader for environmental transparency

by Interfax-ERA, the ecological and energy agency.

A number of further energy generator upgrades enabled the

Company to increase its energy generation self-suffi ciency to

c. 80%.

Severstal continued its work to actively rehabilitate the

environment and improve water recycling, fast-track soil

recultivation and plant new trees in the regions where it operates.

You can read more about our approach and what we have

delivered on page 34.

OutlookGlobal steel demand growth was approximately 2.8% for

2017 according to World Steel. Russian steel consumption exceeds

our expectations – we expect growth of 5–6% to about 40 million

tonnes which will be the fi rst year of growth after several years of

decline the domestic market. We hope that 2018 pricing will be

supported by global demand growth and further capacity cuts in

China, but we expect some softening of steel prices in 2018. Steel

demand in Russia will continue to grow 3–4% in 2018.

Prices remain extremely volatile however we are confi dent that

our integrated business model and high share of HVA will continue

to support our margins through the cycle, building on our track

record.

We are also confi dent that Severstal’s transformation programme,

including our enhanced sales and marketing strategy, selective

production growth, innovative operational effi ciency programmes,

digital and smart procurement initiatives will create a platform for

continued business growth in the future.

STRATEGIC REPORT

18Severstal

Annual Report 2017

CFO’s Review

Dear Shareholders,

In 2017 Severstal once again delivered a strong fi nancial

performance amid challenging industry conditions.

Severstal is a fully vertically integrated producer with

strict fi nancial discipline. We are focused on delivering

long-term shareholder value and industry-leading total

shareholder returns (TSR), and our success is driven by a

strategy committed to enhancing effi ciency, customer

care and long-term sustainability. In turn, progress in

these areas is underpinned by our commitment

to innovation and new technology and Severstal’s

fundamentally strong business model.

We are focused on achieving:

• Industry leading EBITDA margins through

effi ciency improvement and cost management;

• Positive free cash fl ow;

• Controlled, prudent and disciplined CAPEX;

• A strong balance sheet with low debt levels;

• Returning value to shareholders in the form of

dividends.


19Severstal

Annual Report 2017

Industry leading EBITDA marginsIn 2017, the Group achieved revenues of $7,848 mln,

benefi tting from the strengths of our growing product portfolio

and well positioned, high quality production assets. This

represented an increase of 33% compared with prior year and

refl ected industrywide challenges of rising and fl uctuating steel

prices, as well as improvement in demand. Meanwhile, Severstal

achieved capacity utilisation close to 100% across its assets

throughout the year. Severstal’s vertical integration enables us

to optimise our cost base irrespective of market conditions. In

2017 we were able to mitigate the impact of fl uctuating raw

material prices over the year, and our assets remain positioned

fi rmly on the left hand side of the industry cost curve. During

the year we delivered further effi ciency improvements across our

assets to further strengthen our margins. Although a substantial

share of the Group’s production and administrative costs are

rouble-denominated, short-term rouble fl uctuations have a

broadly neutral effect on our EBITDA as usually our rouble revenue

approximately matches our rouble-denominated costs. Full year

EBITDA was $2,577 million, an improvement of 35% compared

with the previous year. The Group targets a cycle-average EBITDA

margin of c.20% and in 2017 we once again exceeded this target,

achieving an EBITDA margin of 33%, which remains one of the

highest in the global industry.

Maintaining stable positive Free Cash FlowFree cash fl ow generation is one of the Group’s strategic

priorities for delivering value to its shareholders and maintaining

a strong balance sheet. In 2017 we achieved free cash fl ow

of $1,393 million, compared with $1,021 million in 2016. The

Group works proactively to offset steel and raw materials

price volatility throughout the year through focusing on working

capital management and cost optimisation. This is supported by

our vertically integrated model and broad product portfolio, which

enables us to consistently generate strong free cash fl ow.

Smart CAPEX – mid-term target not exceeding $1.0 billion per yearThe Group has a consistently prudent approach to all investments,

with all projects required to meet an internal ROI target of

20%, and CAPEX is covered by operating cash fl ow. In 2017,

the Group’s overall CAPEX was $591 million, covering a number

of internal investment projects (including a new ladle at furnance

#2 a galvanized and colour coated lines unit and modernisation of

coke batteries).

Strong balance sheet with low debt levelsThe Group is focused on maintaining a low level of debt, which it

has signifi cantly reduced over the last few years. The Group’s

Net debt/EBITDA ratio stood at 0.4x as at the end of 2017. Our

ongoing target is a Net debt/EBITDA ratio below 1.5x. Severstal’s

gross debt reduction strategy is largely maturity driven and almost

all of the Group’s gross debt at the end of 2017 was public debt.

Cash in hand and unused committed credit lines cover several

years of debt maturities. The Group continues to proactively

manage its debt profi le, and in 2017 it placed a $250 million

Senior Unsecured Convertible Bonds due in 2022 with a coupon

rate of nil% and $500 million Eurobonds due in 2021 with a

coupon rate of 3.85%. We were particularly pleased to have

been able to achieve such low interest rates refl ecting high

demand from investors and positive image of Severstal as a

trusted investment. Severstal continues its work with credit rating

agencies to enhance our position in the capital markets.

M&A activitySeverstal takes a prudent approach to M&A activity and evaluates

potentially value-enhancing opportunities on a case by case basis.

In 2017 the Group sold Redaelli Tecna S.p.A., a non-core asset, for

37 million euro ($40 million). The sale will allow Severstal-Metiz to

focus on its Russian assets and enhance its effi ciency.

In 2017, Severstal acquired rights to claim debt obligations of

Metal-Group LLC, worth 19.9 billion roubles (including principal,

interest and penalties). Severstal paid 6 billion roubles as part

of the transaction. The Yakovlevskiy mine produces very high

grade iron ore (Fe content is up to 61%) which will increase the

quality of the Company’s overall iron ore concentrate production

and strengthen its position in the domestic iron ore market.

DividendIn line with our commitment to delivering value to our

shareholders, Severstal targets dividend payments of 100%

of quarterly free cash fl ow, provided that net debt/EBITDA is

below 1.0x. For 2017 the total accumulated dividend returned

to shareholders was $1.5 bn (for 2016: $0.9 bn) refl ecting a

favourable pricing environment in 2017 and management’s

commitment to maximising shareholder value.

Sincerely yours,

Alexey KulichenkoChief Financial Offi cer

STRATEGIC REPORT

20Severstal

Annual Report 2017

2017 saw growth in global steel and raw materials markets driven by several fundamental improvements: synchronized global economic

growth, the devaluation of the USD, increasing steel demand both in China and globally, continuing steel capacity cuts in China and the

slow reaction of supply to higher prices due to production limitations.

In 2018, with global economic growth forecast to continue and support increasing steel demand, steel margins are expected to gradually

decline to more sustainable levels. Chinese steel consumption will be stable y-o-y, while China will maintain its environmental restrictions

on steel production. Analysts forecast an increase in supplies of raw materials.

The Russian economy is set to trend in line with 2017: gradual economic and steel demand recovery, low infl ation, decreasing interest

rates and marginal rouble depreciation. Meanwhile, developed economies will face bubble risks. Monetary tightening in the USA and a

stronger USD could present a challenge to the stability of developing countries.

Steel analysts believe that China’s programme to cut electric arc furnace and basic oxygen furnace capacity is progressing in line with

government targets, and all induction furnace capacity has now been shut down. China’s total carbon crude steelmaking capacity fell to

around 1,020 Mt.

China’s campaign to tackle air pollution by addressing overcapacity in the steel industry has benefi tted steel producers. It has boosted

margins, restoring hope that the era of cheap steel is drawing to a close. Further transformation of China’s steel industry, including further

capacity cuts over the winter, is likely to offset slowing demand. Reduced capacity will lead to higher levels of utilisation, this will increase

marginal costs and steel prices. Sberbank CIB, Sep 2017.

Hard coking coal, FOB Australia, $/tn• Coking coal prices currently exceed marginal costs for producers

• Steady demand for coal is being driven by high levels of steel production in China and a stronger steel margin

$50

$100

$150

$200

$250

$300

$350

Jan

16

Fe

b 1

6

Ma

r 1

6

Ap

r 1

6

Ma

y 1

6

Jun

e 1

6

July

16

Au

g 1

6

Se

p 1

6

Oct

16

No

v 1

6

De

c 1

6

Jan

17

Fe

b 1

7

Ma

r 1

7

Ap

r 1

7

Ma

y 1

7

Jun

e 1

7

July

17

Au

g 1

7

Se

p 1

7

Oct

17

No

v 1

7

De

c 1

7Chinese government announced reduction of working days for mines from 330 to 276 per year

Harsh weather conditions and accidents on mines in China and Australia resulted in a sharp coal deficit

China weakens policy of 276 working days for all mines

Australian Cyclone Debbie

Contract prices for 2Q were first determined on the basis of spot prices

Reconstruction of damaged railways after cyclone Steel prices growth and

short-term reductions of coal supply

Increased demand for high grade coking coal by Chinese steel mills ahead of heating season and support from port delays at Dalrymple Bay (Australia)

Source: Bloomberg

• HCC spot prices are expected to decline in 2018 refl ecting Chinese production cuts in Q4 2017 and Q1 2018 to curb emissions, as

well as signifi cant supply disruptions in 2017 (storm Debbie) and high prices in Q1 2017 (reaction to the Chinese 276 days policy). In

addition, stalled growth in Chinese steel demand in 2018, new capacity expansions (Mozambique, Australia) and seaborne marginal

costs at $110/tn will put pressure on prices.

• Meanwhile, prices will be supported by: growth in global steel production, increasing costs for Chinese coal producers, the restructuring

of the Chinese coal industry, voluntary supply restrictions and higher demand for coal following the closure of illegal induction

furnances in China.

Market Trends


21Severstal

Annual Report 2017

Iron ore, Fe 62% CFR China, USD/tn• Iron ore prices are supported by high levels of steel production in China

$40

$50

$60

$70

$80

$90

$100

Jan

16

Fe

b 1

6

Ma

r 1

6

Ap

r 1

6

Ma

y 1

6

Jun

e 1

6

July

16

Au

g 1

6

Se

p 1

6

Oct

16

No

v 1

6

De

c 1

6

Jan

17

Fe

b 1

7

Ma

r 1

7

Ap

r 1

7

Ma

y 1

7

Jun

e 1

7

July

17

Au

g 1

7

Se

p 1

7

Oct

17

No

v 1

7

De

c 1

7

Source: Bloomberg

The price of iron ore is expected to decline from an estimated $74/tn in 2017 to $57/tn in 2018 due to:

• Steel production restrictions in Q4 2017 and Q1 2018 in China for environmental reasons

• Increasing supply from Big-4 (Vale’s S11D, Australia) and other producers, with seaborne marginal costs estimated at $55/tn

• Possible tightening of credit conditions in China following the 19th CPC summit

• No growth in Chinese steel demand in 2018

• High iron ore inventories in China

Factors supporting prices are:

• Global steel production growth in 2017–2018

• Higher demand for iron ore following the closure of illegal induction furnaces in China

• Demand for high quality iron ore in China to satisfy environmental standards

Russian steel prices are expected to decline from an estimated $520/tn in 2017. Fundamental factors such as anticipated iron ore and

HCC price reductions, possible tightening of credit conditions in China following the 19th CPC summit and a forecast of no growth in

Chinese steel demand in 2018 will likely result in a decline in steel prices.

At the same time, several factors will provide some support to steel prices: production restrictions in Q4 2017 and Q1 2018 in China

to reduce environmental emissions, global steel demand growth, capacity cuts in China and lower supply following the closure

of illegal induction furnances in China.

Infl ation and CBR rates declineMonetary Policy Rate | in%

5%

7%

9%

11%

13%

15%

17%

19%

Jan

16

Fe

b 1

6

Ma

r 1

6

Ap

r 1

6

Ma

y 1

6

Jun

e 1

6

July

16

Au

g 1

6

Se

p 1

6

Oct

16

No

v 1

6

De

c 1

6

Jan

17

Fe

b 1

7

Ma

r 1

7

Ap

r 1

7

Ma

y 1

7

Jun

e 1

7

July

17

Au

g 1

7

Se

p 1

7

Oct

17

No

v 1

7

De

c 1

7

Jan

14

Fe

b 1

4

Ma

r 1

4

Ap

r 1

4

Ma

y 1

4

Jun

e 1

4

July

14

Au

g 1

4

Se

p 1

4

Oct

14

No

v 1

4

De

c 1

4

Se

p 1

3

Oct

13

No

v 1

3

De

c 1

3

Jan

15

Fe

b 1

5

Ma

r 1

5

Ap

r 1

5

Ma

y 1

5

Jun

e 1

5

July

15

Au

g 1

5

Se

p 1

5

Oct

15

No

v 1

5

De

c 1

5

Note: 1-Week Repo Rate in %

Source: Central Bank of the Russian Federation

Russia’s Central Bank (CBR) (the “Bank”) resumed its easing cycle on 18 December, cutting the key rate from 8.25% to 7.75%. The move

followed a pause in July, meeting the expectations of market analysts. The Bank’s decision was driven by favourable price dynamics

as infl ation had fallen notably in recent months, creating space to ease rates. However, volatility in food prices, fl uctuations in global

commodities prices and shifting infl ation expectations limited the size of the cut, and the Bank emphasised in its accompanying

statement that a moderately tight monetary policy is still required. Looking forward, the Bank signalled that it would likely cut the rate

again, stating that “it deems it possible to cut the key rate further”.

Economists see the Central Bank lowering the monetary policy rate further in 2018, with a Consensus of 7.03%. Focus Economics,

Consensus Forecast, CIS Countries, Oct 2017.

Infl ation in 2018 is expected to be broadly in line with 2017, refl ecting CBR’s infl ation target of 4%, weak consumer demand due to lower

household real incomes, restricted government spending and marginal rouble depreciation.

STRATEGIC REPORT

22Severstal

Annual Report 2017

Severstal’s operations are subject to certain risks. Effective risk

management is an essential element of our operations and

strategy. The accurate and timely identifi cation, assessment

and management of risks supports our decision making at all

management levels and ensures that we achieve our strategic

goals and meet our KPIs.

Risk Management FrameworkSeverstal’s risk management framework is designed to identify,

manage and mitigate the risk of any failure to achieve business

objectives. Executive management, managers and employees

at all levels participate in the process of managing risk on a

continuing basis, and perform duties assigned to them within

the risk management process. The Board of Directors and all

employees of Severstal are obliged to adhere to the company’s risk

policies and standards at all times during their work.

There is a formalised management structure in place, with

clear delineation of roles, responsibilities and accountabilities

for the Board, Audit Committee, Executive Committee and risk

management function.

The Board of Directors is ultimately responsible for maintaining

a sound risk management and internal control system. The

Risk management

Board discusses the risks facing the business on a regular basis.

The Audit Committee closely monitors the effectiveness of

the risk management system, obtains regular risk reports from

management and agrees with internal audit the areas on which it

requires assurance.

The risk management structure includes a Risk Management

Committee that is responsible for implementing the risk

management policy and monitoring the effectiveness of controls

that support Severstal’s business objectives. This committee

meets several times a year and can meet more frequently if

required. The committee comprises key management, the CEOs

of our production facilities and the head of the risk management

function. Risk reports are compiled and submitted at each Risk

Management Committee meeting, after which material risks are

reported for discussion at the Board.

The Risk Management function is responsible for coordinating

risk identifi cation and assessment processes, implementing risk

management best practice, internal and external reporting, and

organises and coordinates Severstal’s insurance programme

reporting directly to the Board.

Board Assures shareholders that the company has identifi ed key risks and is successfully managing them

Audit CommitteeMonitors the overall effectiveness of the risk management system and directs the activity

and obtains assurance from the internal audit function

Risk Management Committee

Monitors the performance of the risk management system and key risks;

Promotes communication between managers and between management and the Board;

Preliminarily approves risk management policies and procedures;

Reviews and approves external and internal risk reports

Risk Management functionCoordinates risk identifi cation, assessment and mitigation measures;

Accumulates and processes risk assessment data;

Generates consolidated risk reports

Risk owners Identify specifi c risks and initiate risk management measures

Risk identifi cation and assessmentSeverstal’s risk landscape covers all risks that could affect the

business, customers, supply chain and communities. There is a

formal risk identifi cation and management process to ensure that

risks from day-to-day operations and from the general economy

and the sector, are continually identifi ed, evaluated and where

possible mitigated throughout Severstal’s operations.

Risk appetiteOverall, Severstal has a balanced approach to risk taking, although

the Board seeks to minimise safety, health and reputational risks.

The Board recognises that it is not possible or necessarily desirable

to eliminate some of the risks inherent in Severstal’s activities.

Also, some of the risks facing the business are not capable of being

readily controlled, particularly as far as market risk is concerned.

Assessment of principal risksThe risk management system of the Group works effectively

and has supported a robust assessment by the Directors of the

principal risks facing the Group. The principal risks are reviewed

throughout the year and these are discussed formally at the Board

at least twice a year.

Principal risksSeverstal’s principal risk categories have been defi ned as: health,

safety and environmental; strategic; market; and legislative and

regulatory. The table below lists the principal risks as determined

by the Board that may affect the Group, an assessment of the

current status of the risk and how the Group mitigates the risk. The

contents of the table, however, is not intended to be an exhaustive

list of all the risks and uncertainties that may arise.


23Severstal

Annual Report 2017

Key

Relative severity Change during the yearSpeed at which the risk could impact

Included in longer-term Viability Statement

High

Medium

Low

Increasing risk

Decreasing risk

Stable

Within three months

Within a year

Over a yearVS

Principal risks Nature of the risk Mitigating activitiesOverall change during the year

Health, safety and

environmental risks – safety

Severstal operates in hazardous industries and the

potential danger of fi re, explosions, as well as risks

specifi c to individual operations such as high levels

of methane or rock falls in mines; and potential foot

traffi c accidents and higher risk of accidents during

maintenance in steel operations.

Rigorously enforced,

comprehensive health and safety

policies;

Regular polygraphic screening

of all employees for attitude to

health and safety risk;

Continuous training,

communication and behavioural

learning;

Enhanced control over contractors

No change

Constant management

focus on improving safety is

being refl ected in improved

behaviour, LTIFR and other

safety metrics.

Market risk – changes

in demand for steel

VS

Domestic demand depends on the state of the

national economy. Investments in fi xed capital,

construction and industrial production in Russia are

still exposed to the risks of contraction due to low oil

prices and a high degree of uncertainty. A potential

reduction in domestic demand would require Severstal

to increase its export sales, which are less profi table.

Demand in international markets is affected by China,

which is exposed to the risk of reduction in domestic

demand.

Focus on customer orientation;

Optimisation of sales geography;

Search for new sales markets;

Focus on the more stable,

higher value segments

Decreased risk

The Russian economy is

expected to grow in 2018,

but global steel demand

remains weak.

Market risk – fl uctuations

in price of steel

VS

Export prices and profi tability are at a risk of going

down due to existing overcapacity issues, introduction

of new protectionism measures and deterioration of

the global economic outlook.

Domestic prices are driven by the premium over export

prices, which may reduce if domestic demand shrinks.

Customer orientation;

Use of long-term contracts;

Engagement with anti-dumping

and tariff authorities

Increased risk

The risk of protectionism

has signifi cantly increased

because of issues in the

EU, and in the USA, which

may affect other countries’

attitudes to tariffs, although

during 2017 Severstal

received the lowest level of

anti-dumping duty on hot

rolled coil imports to the EU.

STRATEGIC REPORT

24Severstal

Annual Report 2017

Strategic risk – potential

government action

The level of uncertainty in the global political scene

could result in a signifi cant disruption in “normal”

economic activity.

There is also a risk of further sanctions against Russian

business, which could lead to reduced ability to deal

with a wide range of counterparties.

Business interruption and business

continuity plans;

Compliance procedures

Increased risk

Although largely outside

Severstal’s control,

procedures are in place to

ensure that Severstal is in

compliance with all sanction

requirements.

Market risk – competition

risks

VS

Low capacity utilisation across the world creates a

highly competitive environment.

The global market could also be positively affected

by a planned reduction in steelmaking capacity

by the Chinese Government, primarily driven by

environmental considerations.

Cost management and product

quality improvement initiatives

No change

The recent rise in steel prices

might encourage capacity

that was planning to exit the

market to carry on producing,

but there are indications that

the planned reductions in

capacity in China are actually

taking place.

However, global steel

capacity utilisation is still at

a relatively low level.

Market risk – fl uctuations in

the prices of raw materials,

energy and services

Global raw material prices typically fl uctuate in

line with stock replenishment cycles in China, but

are intensifi ed by seasonal peaks and troughs in

the construction industry. Severstal is not fully

self-suffi cient in coking coal and prices increased

signifi cantly during 2016, but stabilised at a higher

level during 2017.

Infl ation in Russia depends on the foreign exchange

rate and may grow if oil prices go down and the rouble

loses value. The rates for utilities are likely to show

steady increases as they are regulated by the state.

Streamlined planning and

purchasing of raw materials,

including scrap;

More effi cient use of raw

materials;

The consolidation of the

Yakovlevsky mine will

make Severstal more self-

suffi cient in iron ore in 2018

No change

Severstal has managed

the volatility in prices during

the year, however, the

pricing of and supply of raw

materials remains volatile.

Health, safety and

environmental risks –

environmental

Severstal operates industrial facilities that hold

heavy metals or hazardous substances which could

present signifi cant risks to the health or safety of local

communities and the environment.

The competent authorities have imposed, are imposing

and may in the future impose specifi c requirements for

Severstal to reduce our environmental footprint.

Severstal has a unifi ed Health,

Safety and Environment Policy.

Severstal’s environmental

commitments are integrated in

the Corporate Environmental

Protection Policy of Severstal;

Severstal has implemented several

mechanisms to try and ensure this

type of risk is below the average

level for the industry

No change

The amount of legislation

and the expectations

of society in Russia and

beyond in relation to this

type of risk have remained

relatively stable during the

year.

Legislative and regulatory

risks – tax

Legal risks associated with

changes in tax legislation

Despite an almost complete codifi cation, the

provisions of Russian tax laws constantly change. A

whole range of new tax provisions and amendments to

previous regulations is enacted every year. Some of the

changes are favourable to the taxpayer, while some

are unfavourable.

Severstal works in full compliance

with applicable tax, customs,

foreign currency and other

regulations, responding in a

timely manner to all changes and

trying to maintain a productive

discussion with regulatory

authorities on matters of

the interpretation of law

Decreased risk

During the year Severstal

clarifi ed a number

of issues with the Russian tax

authorities.


25Severstal

Annual Report 2017

Assessment of the Group’s prospectsSeverstal operates an annual planning process which includes

short term (one year) fi nancial forecasts and longer term (fi ve

year) fi nancial forecasts, based on inputs from each of the

businesses. These plans and risks to their achievement are

reviewed by the Board as part of its strategy review and budget

approval processes. The processes for identifying and managing

the Principal Risks are described above.

Going ConcernThe going concern assessment considers whether it is appropriate

to prepare the fi nancial statements on a going concern basis.

The Directors have reviewed the Group’s budgeted cash fl ows

and related assumptions including appropriate stress testing of

risks (being primarily steel demand and prices) and taken into

account undrawn credit facilities and debt maturities. As a result,

the Directors have a reasonable expectation that the Group

has adequate resources to continue its operational existence

for the foreseeable future. For this reason, they continue to

adopt the going concern basis in preparing the consolidated

fi nancial statements (in accordance with the ‘Guidance on Risk

Management, Internal Control and Related Financial and Business

Reporting’ issued by the UK Financial Reporting Council).

Viability statementThe viability assessment considers solvency and the liquidity

over a longer period than for the purposes of the going concern

assessment above. Inevitably the degree of certainty reduces over

this longer period.

The Board has assessed the viability of the Group over a three-

year period. This period is within the Group’s established business

planning and forecasting processes and is a cycle which is subject

to review and approval each year by the Board. It also considers

the capital expenditure planning cycle.

In making the assessment, severe, but plausible scenarios have

been considered that estimate the potential impact of each of

the principal risks that could arise in the assessment period, for

example, a prolonged downturn in the price and demand for steel;

a signifi cant rise in protectionism such that Severstal fi nds it more

diffi cult to export steel profi tably; and a period of instability in the

Russian economy, which results in a reduced demand for steel.

The principal risks with a direct link to the viability statement have

been indicated in the table of Principal Risks above. The scenarios

assume an appropriate management response. The impacts

of these scenarios were overlain on the longer term fi nancial

forecasts to assess how the Group’s liquidity and solvency would

be affected. The assessment took account of the Group’s current

funding, forecast requirements and existing committed borrowing

facilities.

Based on the above, the Board confi rms that it has a reasonable

expectation that the Group will be able to continue in operation

and meet its liabilities as they fall due in the period to 31 December

2020.

In making this statement the Directors have made the following

assumptions:

• the Group currently has access to global debt markets and

expects to be able to fi nance facilities as necessary. The Group’s

fi ve-year forecasts are not designed to allow for a prolonged

period of limited access to global debt markets or a sustained

period of adverse conditions in these markets.

• that in the event of multiple risks occurring and having a

particularly severe effect on the Group, all actions such as

constraining capital expenditure and reducing or suspending

payments to shareholders would be taken on a timely basis.

The business believes it has the processes to identify the need

for such actions, as necessary.

• that implausible scenarios, such as multiple risks occurring at

the same time, or the impact of individual risks occurring that

cannot be mitigated by management actions to the degree

assumed do not occur, for example, Severstal being barred from

all export markets.

STRATEGIC REPORT

26Severstal

Annual Report 2017

Severstal Resources divisionSeverstal Resources comprises Severstal’s mining assets, are

a fundamental part of the Severstal’s vertically integrated

business model. The division supplies almost all of the iron ore

and approximately 60% of the hard coking coal consumed by

Severstal’s Russian Steel division, while also selling iron ore pellets

to third parties. Severstal Resources mines all of its iron ore and

coking coal in Russia.

Vorkuta

Olenegorsk

Yakovlevskiy Mine

Kostomuksha

Key assets

1. Karelsky OkatyshLocated in Karelia, north-western Russia, Karelsky Okatysh is one of

the country’s leading and most modern iron ore mining complexes.

It mines magnetite quartzite ores and produces high-quality iron

ore pellets with an iron concentration of 64% to 66%. The two

major deposits, Kostomuksha and Korpanga, have an estimated

life of 30 years.

2. OlconLocated in the Murmansk region, Olcon is Russia’s most

northerly iron ore complex. Olcon mines magnetite-hematite

quartzite ores from fi ve open pits, and produces high-quality iron

ore concentrate, crushed stones and ferrite strontium powder.

Olcon’s deposits have an estimated life to 2026.

In 2017, the Karelsky Okatysh and Olcon management teams

were merged to improve governance of the assets. With both of

the assets focused on iron ore, this collaboration creates synergies

ensuring that both benefi t from best practices in mining and

concentrate production.

3. VorkutaugolLocated in the Komi Republic (near Vorkuta), north-east European

Russia. Vorkutaugol mines coking and steam coal, and is one

of Russia’s largest producers of hard coking coal. Coking coal

produces coke which is used for steel production. Steam coal is

used in the energy and chemical industries. The two deposits

operated, the Vorkutinskoye and Vorgashorskoye coal deposits,

Divisional review

have an estimated life of 25 and 17 years, respectively. The

business consists of fi ve underground mines, one open-pit mine

and three washing plants.

4. Yakovlevskiy MineLocated 40 km north of the city of Belgorod, the total resource

base of the Yakovlevsky deposit exceeds 9.6 bn tonnes with

a high Fe content (61.4%). No benefi ciation of the ore is required

due to its high Fe content. Production capacity is 1.0–1.2 mtpa

with the potential to increase to 4.5 mtpa in the medium-term.

The mine has a diversifi ed customer base – selling iron ore to

all major Russian steel producers. Severstal has historically

been the key customer, purchasing c. 30–40% of overall

production volumes. The asset will increase Severstal’s existing

total vertical integration in iron ore (concentrate + pellets) from

c.110% to c.115%

Performance overview

The market environment for steel-related commodities in

2017 remained challenging, both for coking coal and iron ore

products. In 2017, the average headcount at Severstal Resources

was 12,444, compared with 12,914 in the prior year.

Vorkutaugol

Coking coal concentrate (Vorkutaugol)

20172016

3.2

0.9

3.2

0.1 Third party sales (million tonnes)

Internal consumption (million tonnes)

2017

81

2016

Cost per tonne (US$/t)

Average selling price (US$/t)60

79

131

• Average selling price increased 66% year-on-year driven by

growth of the global benchmark

• The 35% increase in cash cost per tonne year-on-year refl ects

the fi nancial impact of the Severnaya mine incident in February

2016 as well as repositionings at Vorkutaugol mines during

2017


27Severstal

Annual Report 2017

Olcon

Iron ore concentrate (Olcon)

20172016

4.1

0.1 Third party sales (million tonnes)


0.1

4.0

2017

31

2016

31

51



• Average selling price increased $20/tonn as a result of global

iron ore prices uptick year-on-year

• Severstal managed to maintain a low cash cost despite

moderate cost infl ation in 2017

• Sales volumes are expected to stay fl at in 2018

Karelsky Okatysh

Iron ore pellets (Karelsky Okatysh)

20172016

6.0 6.5

4.6

Third party sales (million tonnes)


4.9

2017

27

2016

49

79



• Average selling prices for iron ore pellets increased $30/tonn

following global trends

• Сost dynamics refl ects the operational effi ciency programme

and cost-saving initiatives despite cost infl ation year-on-year.

Dynamics of revenue by products

20162015

Iron ore concentrateShipping and handling and other

2017

Coking coal concentrateSteam coal

Pellets

12%

25%

10%

51%

2%

11%

33%

12%

41%

3%

11%

28%

46%

3%

12%

Although the majority of the Company’s sales are internal,

Severstal is a well-established commodity supplier both in Russia

and abroad. Pellets and coking coal concentrate are the main

products sold to third parties. Severstal also has a number of third

party customers for its mining products in Russia, including major

domestic steelmakers. Sales and cost of sales fi gures in the charts

below are presented in US dollars as a percentage of the total

sales or cost of sales of the Severstal Resources division.

Geographical diversifi cation of sales

Russia

Export

31%

69%

At Severstal Resources, labour costs are one of the main

contributors to the total cost of production. In 2017, labour

costs accounted for 29% of the total cost base whilst materials

and energy costs respectively accounted for 33% and 26%. Cost

reduction and effi ciency improvements, in conjunction with high

safety standards, are key priorities for Severstal’s mining business.

Global market dynamics enabled the Company to offset the

drop in coking coal sales volumes, with EBITDA growing 105%

year-on-year.

Cost of sales structure

12%

26%

33%

29%Materials

Energy

Labour costs

Other costs

Key developments in 2017:

In 2017, Severstal Resources continued to improve safety across its

assets alongside capacity development and ongoing maintenance.

OlconThe Company purchased new large dump trucks at an overall cost

of more than $6.5 million. This will improve performance, reliability

of equipment and reduce environmental impact.

A new crushing and sorting unit was installed at the asset. The

unit produces high quality gravel for internal usage and supplies to

third parties.

Karelsky OkatyshInvestment at Karelsry Okatysh totaled $145 million in 2017, and

was focused on enhancing quality, decreasing costs and renewing

machinery and equipment.

New excavators, dump trucks and large dumpcarts were obtained

to improve operating performance.

STRATEGIC REPORT

28Severstal

Annual Report 2017

Dry and wet magnetic separation units were upgraded to increase

the volume of processed ore and reduce energy consumption.

VorkutaugolCapital works at the Vorgashorskaya mine’s belt slope were

completed. The project will enable the Company to access and

start developing an additional 23 mln tonnes of coking coal in

2019, increasing the mine life to 2030.

Strategic priorities for 2018

In 2018, Severstal will continue to invest in

production improvements, maintenance and safety.

VorkutaAt the central processing plant the Company will launch a project

to reduce energy transmission losses (total cost of $4 mln).

Over $20 mln will be invested in machinery at drifting and long

faces to support the sustainability of the production level.

Over $20 mln will be invested in mining equipment to access new

coal blocks.

Over $17 mln will be invested in building two new up-casts

and relocating the coalmine methane thermoelectric plant

to Vorkutinskaya mine.

A multifunction alerting and positioning system will be installed at

the mines. This monitors air quality continuously in the mines.

Karelsky OkatyshWork on the second line of the tailings thickening complex

continues, with completion scheduled for 2019. This will use a

closed water cycle to feed the asset with technical water without

taking in water from tailings.

A number of projects will be implemented to upgrade the fl eet,

such as re-equipping dump trucks with lightweight bodies and

acquiring new drilling rigs. The Company also plans to upgrade

conveyor belts and feeders.

One of the goals for 2018 will be to reduce the cost of crushed ore.


29Severstal

Annual Report 2017

Severstal Russian Steel

divisionSeverstal Russian Steel is a leading Russian steel producer, with

a broad product mix, self-suffi ciency in raw materials and an

extensive distribution network. The division focuses on high value-

added fl at steel products and the production of long products for

construction and downstream sales.

Severstal’s downstream assets include producers of large diameter

pipes and metalware for machinery, as well as service centres and

stamping facilities for exposed automotive parts. The division

has the highest share of high value-added products among its

domestic peers, while Severstal’s fl agship Cherepovets Steel Mill is

one of the lowest-cost steel mills in the world.

Located in north-west Russia, the division’s steel operations

enjoy convenient rail access to the Company’s mining operations

and low-cost direct river access to the Baltic ports. It is also well

positioned to serve the industrial hubs around St.Petersburg and

Moscow.

In 2017, the average headcount at Severstal Russian Steel was

37,018, compared with 37,115 in the prior year.

Key assets

1. Cherepovets Steel MillOne of the world’s largest stand-alone integrated steelworks by

capacity as well as an excellently located, low-cost steel producer.

It produces a wide range of fl at and long-rolled products, including

hot and cold-rolled fl at products, galvanized and colour-coated

products and long-steel applications. Rolling Mill 5000, located in

Kolpino, near Saint-Petersburg, produces thick plate for large

diameter pipes, ship and bridge building and other industries.

2. Izhora Pipe MillThe mill in Kolpino specialises in manufacturing large diameter

pipes from plate, which are produced at the nearby Kolpino

Mill-5000. It has a production capacity of 600,000 tonnes of pipes

per year, most of which is used in oil and gas pipeline projects.

3. Mini-Mill BalakovoA mini-mill focused on the production of long products for the

construction industry. Annual design production is one million

tonnes of rolled products.

4. Severstal-MetizManufacturer of more than 55,000 product types, including

cold-drawn steel, steel shapes, railway fasteners, low carbon and

high carbon wire, nails, steel fi ber, steel wire ropes, wire strands,

steel meshes and fasteners. Severstal-Metiz comprises several

subsidiaries: the Cherepovets site in north-west Russia, the Orel

site in central Russia, the Volgograd site in the Povolzhie region.

In 2017, the Group sold to a third party 100% of the shares in

Redaelli Tecna S. p.A., аn Italian steel company, included in the

Severstal Russian Steel reporting segment. Also in October 2017,

the Group sold its 98.7% stake in PJSC Dneprometiz to a third

party.

5. Downstream production assets• Severstal-Gonvarri-Kaluga Steel Centre is a Russian-Spanish

joint venture of two global leaders in steel manufacture and

processing. It has a design capacity of 170,000 tonnes of rolled

metal products per year, produced for the automotive and

electrical industries.

• Gestamp-Severstal-Kaluga Stamping Facility is a joint venture

between Severstal and Gestamp. It is equipped with a number

of press lines and produces the full range of rolled steel

products, from coils to car components for international car

manufacturers. It has an annual output of 13 million stamped

parts and has the potential to expand production.

• Severstal-SMC–Vsevolozhsk service centre is a joint venture

with Japanese company Mitsui. This centre prepares high-

quality CRC and galvanized steel (‘blanks’), which will be

further stamped at our joint venture with Gestamp in

Vsevolozhsk, and Gestamp Kaluga. Tier 1 supplier for: Nissan,

Toyota, Tier-2 Supplier for: VW, Ford, Hyundai. The production

facility includes unique for Russia machine called TWB which

produce tailor welded blanks, this technology used purely for

automotive. The service centre’s capacity is 150,000 tonnes.

• Gestamp-Severstal-Vsevolozhsk is a joint venture of Severstal

and Gestamp group. It is equipped with a press line and

welding assembly equipment and produces car components

for international car manufacturers. Annual output is 600k

parts – press and assembly – and the potential to increase up

to 2,000k parts.

• Ruetgers Severtar, a joint project with Ruetgers (RAIN), based

at the Cherepovets Steel Mill plant, produces vacuum pitch,

technical oils and naphthalene.

• TPZ-Sheksna was launched in 2010, and is designed to produce

up to 250,000 tonnes of electric-welded pipes of various

diameters, thicknesses and lengths for the construction industry,

as well as square and rectangular sections with different cross-

sections. The plant uses semi-fi nished steel products made at

the Cherepovets Steel Mill.

6. Trading companiesSeverstal Russian Steel sells its products domestically to regional

and national distributors, directly to end-users, and through

AO Severstal Distribution. AO Severstal Distribution has a wide

network of metal centres throughout the country. Severstal

Russian Steel conducts export sales principally through the

subsidiary Severstal Export GmbH, as well as through SIA Severstal

Distribution, Severstal Distribution LLC and ZAO Severstal

Distribution.

St. Petersburg

Vsevolozhsk MoscowKaluga

Orel

CherepovetsSheksna

Balakovo

Volgograd

Kolpino

STRATEGIC REPORT

30Severstal

Annual Report 2017

Production volumes (million tonnes)

2015

11.7

9.29.2

11.5

9.3

11.6

2016 2017

Crude Steel Hot Metal

Against a backdrop of capacity cuts in China and growth in

Russian steel consumption y/y in 2017, the Russian Steel division

was able maintain relatively high sales volumes in 2017, at

11 million tonnes, despite market headwinds. Due to the location

of its main producing asset, the division was able to promptly

reallocate sales volumes between domestic and export markets.

Ongoing global steel overcapacity cuts and improved consumption

supported steel prices in 2017. Refl ecting this, Severstal’s average

steel prices raised 38% for hot-rolled strip and plate, 26% for cold-

rolled fl at products and 26% for long products.

Average selling price (US$/t)

2015

517

591

431

Hot-rolled strip

and plate

Cold-rolled flat

products

2016

383

446

346

2017

374

468

343

Long products

Severstal’s key domestic customers include construction

companies and pipe mills, machinery and automotive clients. The

Company’s product portfolio therefore includes a wide range of

products of various specifi cations. Severstal Russian Steel benefi ts

from its proximity to export routes. The share of exports in the

division’s sales portfolio varies depending on the health of the

Russian market and the attractiveness of international sales

options as an alternative. In 2017, export volumes comprised 40%

of the division’s total sales. Sales and cost of sales fi gures in the

charts below are presented in USD as a percentage of the total

sales or cost of sales of the Severstal Russian Steel division.

Sales by regions 2017

Other

CIS

Asia

Europe

Russia

Middle East

64%16%

7%

1%

5%7%

Sales by regions 2016

Other

CIS

Asia

Europe

Russia

Middle East

68%

17%

5%

2%5%

3%

Sales by industries 2017

Tube and Pipe

Auto

Other

Construction and

service processing

44%

36%

7%

4%

5%4%

Oil and Gas

Machinery

Sales by industries 2016

Machinery

Tube and Pipe

Auto

Other

Construction and

service processing

Oil and Gas48%

31%

7%

3%

6%5%


31Severstal

Annual Report 2017

Severstal works consistently to maintain its leading cost position

through labour and energy productivity and operational

enhancements. In 2017, raw materials accounted for 72% of total

costs. Labour and energy costs ranked second and third with a

share of 11% and 9%, respectively.

Cost of sales structure 2017

8%

72%

Materials

Energy

Labour

Other

11%

9%

Cost of sales structure 2016

8%

69% Materials

Energy

Labour

Other

13%

10%

Key developments in 2017

• 120,000 tonnes of iron was produced by CherMK ‘Severyanka’,

one of the largest blast furnaces in the world.

• A second ladle furnace was installed to improve cost and

quality.

• A new HDG & coating line was completed to increase

capacity of HDG by 400,000 tonnes and coating steel by

200,000 tonnes.

Strategic priorities for 2018 and beyond

• Coking Battery #4 is scheduled for reconstruction to improve

capacity. This is due for completion in 2017–2018. Estimated

CAPEX is US$100 million.

• More than US$17 million will be invested in a technical upgrade

of metal fi nishing shop #2 at CherMK.

• New cooling towers #2 and #4 will be constructed to improve

water cooling process.

2RESPONSIBILITY

Responsibility 32Our commitment to sustainable development 34Health and Safety 35Ecology 36Social investment 37Talent development 39

RESPONSIBILITY

RESPONSIBILITY

34Severstal

Annual Report 2017

Our philosophy and values

At Severstal, we are resolutely committed to developing our

operations in a sustainable way that delivers lasting benefi ts for

the communities and environments around us. We also understand

that the success of our business is absolutely reliant on our people.

Steel products are essential to the development of the modern

world. However, we recognise our responsibility as an operator in

a world where issues such as climate change, health and

sustainability present both risks and opportunities for our industry.

Severstal’s Social Responsibility Policy is consistent with our

mission, strategy and corporate values. We are committed to

being a high-performance and socially responsible company

and a leader in both economic and social value creation for all

stakeholders. This means viewing sustainability as an opportunity

to continuously improve our operations.

Leadership though innovation and Environmental,

social and governance (ESG)

Severstal is committed to working in a cleaner environment

and implementing ever more sustainable working practices. This is

Our commitment to sustainable

development

an area that the Board takes very seriously and we have delivered

a signifi cant transformation of our assets in recent years.

We are also constantly upgrading our facilities to reduce our

environmental footprint. Safety will always be a top priority for

Severstal. We aim to be an accident free company and are always

reviewing our safety processes, ensuring that they are up to date

and in line with best practiсe.

Our aim is to continually enhance our ESG reporting, setting

the bar for other companies both domestically and globally. For

example, we are currently developing our climate change policy,

recognising that whilst we are a global low-cost producer and steel

is a recyclable product that we need to ensure that we are well-

positioned for a lower carbon future. We also recognise that it is

our responsibility to manage our social and environmental impact

at every stage of the production process in the regions where we

operate. We have various initiatives in place supporting the local

community through education, culture and sport.


35Severstal

Annual Report 2017

1. Vision, policy, goals

Progress in Health and Safety is one of Severstal’s key

performance indicators.

The Company’s Health and Safety policy, approved by the Board

of Directors, sets the guidelines for safe operations across the

business. The policy has six fundamental principles:

• Safe working conditions

• Health and Safety management

• Systems for monitoring and reporting hazards

• Safe and responsible employee conduct

• Compliance with best practices in Health and Safety

• Health and Safety information must be clear and

straightforward

Severstal’s Health and Safety policy is set and constantly reviewed

by a designated Board Committee which sets the Company’s

Health and Safety strategy. Severstal is committed to ensuring its

operations are safe and aims to constantly reduce the number of

employee accidents and eliminate fatalities. In order to achieve

this goal, the Company continuously invests in improving safety

across its operations, in line with global best practice.

2. Results of work

In 2017, the lost time injury frequency rate (LTIFR*) was 0.96.

0.99

2010 2015 2016

1.77

2011 2012 2013 2014

1.11

1.381.271.331.35

1.21**

2017

0.96

* LTIFR stands for Lost Time Injury Frequency Rate. All fi gures exclude Severstal North America

and PBS Coals.

** Excluding the mine accident in February 2016.

3. Health and Safety initiatives

Since the launch of Severstal’s Labour Safety project in 2011

and its incorporation into the business system, the Company has

achieved a signifi cant reduction in injuries in Russian Steel (which

represents 60% of the Company’s employees). Since 2016, the

Company’s labour Safety tools have been consolidated under

the safety Framework and extended to the activities of the entire

Severstal group.

Area of focus Tools

Hazard

identifi cation

Studying and improving problem areas

Behavioural safety audit

Production operations safety audit

Investigating microtraumas and dangerous events

Health and Safety

Involvement Testing and training programmes

Live demonstrations

Safe behaviour training

Organisation of Safety Days (multistage competition)

Best practice

Safety

violations

Unifi ed approach to safety violations

Labour Safety committee

Psychiatric testing

Overall

assessment

Accident prevention system (audit)

Personal safety control

The Labour Safety tools have been developed to identify hazards

and educate workers, to ensure they operate safely and respond

effectively to dangerous situations, including security breaches.

The project is structured around three areas: providing safer

working conditions, training and engaging employees. An essential

element of the Labour Safety project is a comprehensive audit and

analysis, which allows Severstal to monitor and compare standards

and practices across the business and continuously improve the

Company’s Health and Safety performance.

Part of the safety training involves live demonstrations aimed

at improving safety awareness among employees and supporting

a culture of safety across the workforce.

One aspect of the Labour Safety project involves psychometric

testing, incorporating the use of polygraph testing. By running

psychometric tests the Company is able to identify the level of

risk posed by individual employees and anticipate any potentially

dangerous behavioural tendencies. The testing is carried out

consistently across all of the Company’s departments to address

risks at every level.

In order to assess and monitor the effectiveness of the Labour

Safety systems at our sites, Severstal runs audits for the Accident

Prevention System (APS) arranged by specialists from the

Labour Protection Service. Production managers are incentivised

to improve safety levels in line with the APS system objectives.

Every division within the Company has a system which

monitors information received from employees. This ensures

that incidents are effi ciently registered and analysed.

4. Key safety investments in 2017

The company invested about 1,651 million rubles to ensure labour

safety. Among the largest investments:

– The programme to reduce the injuries while walking by foot

(SRS – 22.8 million rubles.);

– Programme to improve the level of protection in emergencies

(SRS, Metiz – 25.1 million rubles.);

– The acquisition of safety equipment (Karelsky Okatysh –

222.4 million rubles, Olkon – 565.0 million rubles);

– Industrial safety systems in the Vorkutaugol mines –

785.2 million rubles.

RESPONSIBILITY

36Severstal

Annual Report 2017

2017 was declared the Year of Ecology in Russia and Severstal

reiterated its commitment to reducing the environmental impact

of its assets.

Karelsky OkatyshAn automated gas-monitoring system was installed to control and

reduce air pollution from sulphur dioxide. The construction of the

desulphurisation unit is in its pre-project phase.

Severstal’s environmental department continued to study the

mine’s impact on surrounding water bodies to develop initiatives

that will reduce its impact.

OlconThe installation of a natural biological treatment system at the

mine’s waste water storage plant is ongoing. Different species

of plants are cultivated to reduce the concentration of harmful

substances in the water as well and reduce dust on land. This has

already reduced the concentration of polluting substances by

15–25%.

VorkutaugolThe thermoelectric plant utilises coalmine methane from

the Vorkutinskaya mine, helping to minimise waste.

Environmental Protection

CherMKThe new blast furnace #2 uses a combined gas cleaning system

that reduces emissions to the atmosphere. The gas treatment

line is being reconstructed to improve waste water treatment. The

construction of a new waste dump is planned to start following a

period of public consultation.

PlansKarelsky OkatyshOngoing research into ways to reduce the mine’s

environmental impact on nearby water bodies.

OlconThe installation of a natural biological treatment system at the

waste water storage will be ongoing.

CherMKThe reconstruction of #4 coke battery will be completed in 2018.

The aim of the project is to improve the quality of coke and reduce

emissions of coke dust.

A number of energy projects are planned to increase the plant’s

self-suffi ciency and reduce power consumption.

Ongoing commitment to environmental improvements: top six projects

2011-2015

Installation of a fugitive emission control system in the converter plant of Cherepovets Steel MillThe largest environmental project in

the history of Cherepovets Steel Mill,

it used state-of-the-art technology

to achieve a fundamental reduction

of emissions from steelmaking. It

received a national award as the

best environmental project. 2016

Launch of Rutgers SevertarThis plant meets the latest

environmental standards. It processes

tar into high-quality raw materials

for non-ferrous metallurgy and

chemical industry, including vacuum

pitch, naphthalene and technical oils,

and will sell them to domestic and

international customers.

2016-2018

Refurbishment of coke battery #4 The mill’s #4 coke battery will be

refurbished and auxiliary facilities

modernised to ensure fi xed assets

are maintained and reduce the

purchase cost of coke.

2017

Construction of a united gas fi ltering system for ladle furnace #2 and a ladle treatment standThe new gas fi ltering system

at Cherepovets will reduce the

dust content of the exhaust air

to a concentration of less than

10 mg / m3.

2017-2020

Refurbishment of blast furnace #5 Industry leading technology will

ensure that the refurbished blast

furnace consistently performs at a

high level, conserving resources and

employing a fully automated and

environmentally friendly process for

the smelting of cast iron.

2017

New iron ore drying complex at OlconSignifi cant reduction of sulphuric acid

emissions (by c.285 tonnes less per

year). The fi lters installed inside the

drying complex allow to collect up to

99.994% of the harmful substance.


37Severstal

Annual Report 2017

Social investment

Severstal is committed to improving the quality of life for its

employees and supporting the local communities where it

operates. This includes supporting local infrastructure

development, environmental protection, education, culture and

sports.

In 2017, the Group invested 2.3 billion roubles in social and

charitable programmes including volunteering, child welfare and

education programmes, investment in culture and sport and

community outreach.

Investment in the local economy

Severstal participates in and develops innovative projects to

support small and medium-sized businesses, as well as social

development in the regions where it operates.

In Cherepovets, Severstal has established joint projects with local

authorities including the NP Urban Development Agency (AGR)

and ANO Cherepovets Investment Agency. These are aimed at

promoting the growth of small and medium-sized businesses

(SME) and providing comprehensive support to entrepreneurs at

every stage of their careers.

A key area of support is provided through business partnerships.

In 2017, more than 25,000 advertisements were placed as a result

of the Electronic Business Cooperation project. In September

2017, more than 6.3 billion roubles-worth of contracts were signed

between large enterprises and SMEs in the Vologda region. Since

2017, AGR has been working to improve business skills and develop

partnerships promoting small and medium-sized businesses in

Kostomuksha (the Republic of Karelia). With the Company’s

support, AGR organises training events focused on sales, effective

management, marketing, and business networking.

Through AGR, Severstal has helped establish a Social Innovation

Centre. The Centre has become a hub for social entrepreneurs in

the region and a starting point for new projects, providing over

6,000 business development consultations every year.

The agency supports industrial, food production, infrastructure,

tourism and hotel industry, medicine, sports and services projects.

The largest projects include the Cherepovets Industrial Park, the

Central City Embankment Tourist and Recreational Cluster, the

Noviy Greenhouse Complex and the cheese and dairy production

plant.

Future Investments

In 2017 Severstal assisted in the development and transformation

of the public gardens in Cherepovets and the opening of the

Quantorium children’s technopark which is part of a new

nationwide network of children’s technoparks.

One of our key successes has been the Way Home programme,

supported by a successful trilateral partnership between the

government authorities, businesses and local communities.

Partners include the Russian Ministry of Economic Development,

the Vologda Regional Government, the Foundation for Support of

Children in Hardship, the National Charity Fund, the Lukoil Charity

Fund, as well as social institutions, businesses and non-profi t

organisations from regions where the programme is available.

Way Home is a comprehensive child neglect, juvenile delinquency

and social orphanhood prevention programme launched in 2006.

It unites representatives from social groups interested in helping

to address these issues. Alexey Mordashov, Severstal’s Chairman,

launched the programme and continues to personally oversee its

progress.

In 2017, 568 children were supported and kept safe in their own

home, with their birth families, 484 minors were protected from

abusive environments, and 48 children kept in the safe care of

foster families.

Over the last three years, the programme has helped

2,314 children by reducing the risk of loss of parental support and

keeping these children and their families together. In addition,

more than 10,000 parents received parental training.

In 2017, in Cherepovets Severstal employees took part in a

number of major charity events, including the Festival of National

Culture in aid of those who suffer from substance abuse, the

family city festival From Heart to Heart, and the Lifestyle Charity

Quest.

In the Balakovo district, Severstal continues to support social

projects such as Way Home: Together with Mom; Our kind home is

a family school, and Step towards. In 2017 in Cherepovets,

Severstal continued the Children of Cherepovets: Way to success

programme, which engages a community of highly respected

teachers to support and develop talented school students.

The Way Home charity and the Trajectory fund for scientifi c,

educational and cultural initiatives were established with

the help of the education department of the Cherepovets

city administration. Lecturers from Russia’s leading

educational institutions have helped develop special natural

sciences programmes, including mathematics, chemistry, physics

and biology, for teachers and school students. Experts from the

Sirius educational centre have also contributed through the

charitable foundation Talent and Success. The centre was created

as part of the redevelopment of the Sochi Olympic village, on

the initiative of the President of the Russian Federation, Vladimir

Putin. It is a tribute to Russian masters of science, sports and

art, and was established to identify, develop and provide future

professional support to gifted children.

Support of culture and art

Severstal has partnered Russia’s leading museums and theatres

for many years. Today the Severstal brand is aligned with many

cultural organisations.

In 2017 Severstal continued its partnership with the Bolshoi

Theatre (Moscow), the Russian Museum (St. Petersburg), the

Mariinsky Theatre (St. Petersburg), the State Tretyakov Gallery

(Moscow), the Pushkin State Museum of Fine Arts (Moscow), the

State Historical Museum (Moscow), the Cherepovets Museum

Association (Cherepovets), the Kirillo-Belozersky Museum-Preserve

(Kirillov), the Museum of Dionisy Frescoes (Ferapontovo, Kirillovsky

District), the Vologda Open Air Museum of Architecture and

Ethnography (Vologda, Semenkovo), the Radishchev Arts Museum

(Saratov), the Balakovo Art Gallery (Balakovo), the Valaam

RESPONSIBILITY

38Severstal

Annual Report 2017

Monastery, Sergey Andriyaka’s Watercolor School (Moscow) and

others.

Severstal continues to support the Golden Mask, Russia’s largest

theatre festival, hosted in Moscow, Latvia and Cherepovets. In

2017, Severstal supported the inaugural visits of the Golden Mask

to Petrozavodsk and Kostomuksha.

Severstal’s Museums of the Russian North is a major cultural grant

programme dedicated to supporting the development of arts

museums in the north of Russia.

In 2017, 116 applications were received for participation in events

for museum professionals from four key regions in which Severstal

operates: the Republics of Karelia and Komi, the Vologda and

Murmansk regions. 65 representatives from different museums

received grants for trips to participate in conferences, round

table events, seminars, forums and professional internships.

56 project ideas from 11 northern regions of Russia: the Republics

of Karelia and the Komi Republic, the Nenets Autonomous

Okrug, the Arkhangelsk, Vologda, Kirov, Leningrad, Murmansk,

Novgorod, Pskov Regions and the Perm Region were submitted in

the fi rst stage of the 8th open grant competition for Museums

of the Russian North project. In October, the Project Laboratory

was held in Cherepovets, where the staff of 39 regional

museums (approximately 70 people, including experts in cultural

management, education and tourism) took part in the training,

before applying for the 8th open grant competition.

Sports and recreation support

Severstal encourages all of its employees and their families to lead

healthy and active lifestyles. The Company sponsors sports events

popular among its employees and local communities. Severstal

also invests in professional sports and the Severstal Sports Club

trains athletes to participate in both national and international

events.

Severstal is also a proud sponsor of the Dynamo Moscow

women’s volleyball club. In Cherepovets, Severstal supports the

Cherepovets professional hockey club, the Almaz junior team, and

the youth hockey school that trains over 1,000 children.

In 2017, Severstal continued its Hockey Without Borders project

for people with disabilities. Through this project the Company

organises transport and support for disabled sports fans so they

can attend hockey matches. The project became an honoree of

the Civic Initiative regional award.

In 2017, Karelsky Okatysh (Kostomuksha) invested around 66 mln

roubles in social and charitable programmes. Approximately the

same amount of funding will be allocated for this purpose in 2018.

The enterprise supports social facilities (educational institutions,

sports clubs, veteran organisations, an orphanage, a rehabilitation

centre for disabled people), in particular the Friendship cultural

and sports complex, which is visited by more than 90,000 people

every year. It also supports the Kanteletar international folklore

festival, the festival of chamber music, the Sergei Ozhigov Art Song

Festival and the international Nord Session and Rhythms of Spring

festivals.

Corporate Volunteering

Severstal encourages its employees to engage with corporate

charitable programmes, including those focused on preventing

child neglect and social orphanhood, mentoring, preservation of

regional cultural heritage, environmental protection, and support

for retirees, veterans and people with disabilities. In 2017 Severstal

organised approximately 80 corporate volunteering events.

In 2017 Severstal once again took part in the international charity

event Generous Tuesday. In addition, the Company traditionally

supports Heartful Bazar, a major Russian charity project which

takes place on New Year’s Eve.

Public initiatives

Severstal shares the principles of the Social Charter of the

Russian Union of Industrialists and Entrepreneurs (RSPP) and the

World Steel Association’s (Worldsteel) Sustainable Development

Policy, refl ecting the best practices of Russian and international

businesses in collaborating successfully with communities.

When developing operational strategies, Severstal works with

local stakeholders to ensure that due consideration is given to the

priorities of individual regions and local communities. This involves

a complex system of stakeholder communications:

1. Informing the public about the Company’s initiatives.

2. Feedback: regular interviews with employees and consumers;

research into public opinion and hot lines for employees and

consumers.

3. Interaction with business partners, regional administrations,

trade unions, public and expert organizations.

4. Exchange of case studies, studying best practices


39Severstal

Annual Report 2017

Talent development

Severstal’s people are key to its success and the Company

continues to invest in developing the skills and careers of all of its

teams.

Talent development is focused on a number of areas:

1. Support for students, young professionals and partnerships with

educational institutions;

2. Career orientation;

3. Universities;

4. Career in the Company

1. Supporting students and graduates, cooperating with educational institutions

The recruitment and training of promising students and

graduates is important to Severstal. Annually, around 300 colleges

and university graduates are offered roles within the Company.

Severstal partners with 20 vocational universities and six schools

to develop and train graduates in Russia. The main objective of

this cooperation is to ensure that graduates joining Severstal have

the necessary qualifi cations, and that their knowledge and skills

meet the evolving requirements of the Company and the industry

as a whole.

In August 2017 an agreement was signed between Severstal and

the government of the Vologda region to cooperate on improving

professional education and personnel support for the metallurgy

and machine building sectors. Similar agreements are in place

between AO Olkon and the State Autonomous Professional

Educational Institution of the Murmansk Region Olenegorsky

Mining College, between GBOU SPO of the RK Kostomuksha

Polytechnic College and AO Karelsky Okatysh and OOO UKC

Perspective.

In 2017 Severstal’s unique leadership programme continued

to train up graduates and young professionals with the aim

of developing Severstal’s future leaders. During the two-year

programme, participants gain work experience at Severstal’s

Centre of business system development, in production and two

functional divisions. They also work on four projects of their own.

Within fi ve to seven years the programme’s participants are

expected to enter the talent pool of Severstal’s 100 top managers.

In 2017, the progamme enrolled 22 graduates from leading

Russian and international universities. The programme received a

total of 1,600 applications.

For its second year, Severstal participated in Metal CUP, the

Metallurgy and Engineering case studies World Championship. In

October 2017 Severstal’s team presented in the fi nals hosted at

the Polytechnic University of St. Petersburg.

In October 2017, Severstal prepared students of the metallurgical

college for participation in the international welding and

electrical installation competition World Skills Russia.

2. Career orientationSeverstal has been running Company-specifi c courses in high

schools since 2008. These courses are taught by university

professors and students are given access to Severstal’s

management team and experts throughout the course. They also

have an opportunity to take a tour of the university, Severstal’s

headquarters and its core steelmaking facility, Cherepovets Steel

Mill, during the spring break.

3. UniversitiesSeverstal has run vocational classes in the cities where it operates

since 2005. Professors from vocational universities run lectures for

school students, who also have the opportunity to spend time with

Severstal managers and specialists. During the Spring holidays

they also have an opportunity to visit the university, Severstal’s

head offi ce and the Cherepovets steel mill.

At the end of 2017 Severstal signed an agreement with

Quantorium children’s technopark to improve training for school

students preparing for a career in industry. Students at the

technopark work on projects which emulate the real day-to-day

activity of Severstal employees. In 2017, the Company invested

84 mln roubles in the development and repair of the building.

In September 2017, the School of future engineers vocational

training programme was launched at the Severstal school in

Cherepovets. A number of school fi eld trips to the Company’s

divisions have taken place since October.

In addition, the Cherepovets Metallurgical Museum runs

educational activities. At the museum visitors can see the full cycle

of steel production, learn about the core professions in mining and

metallurgy, try on overalls and attempt to weld steel.

4. Careers in the CompanyCareer opportunities at Severstal are not limited to a specifi c

department or site. Severstal supports every employee in building

not only a vertical, but also an expert and cross-functional career.

In August 2017 Severstal launched its new Career. Restart

programme, which aims to identify and develop employees with

particularly high potential. 2,335 Severstal employees have

already taken part.

The majority of applications were received from operational staff

(1,169 applications). Each programme participant will be given a

detailed personal development plan.

RESPONSIBILITY

40Severstal

Annual Report 2017

1) Career orientation

2) High-level training in trade-

specifi c courses (setting

students up for metallurgical

universities)

– Specialised training

– Professional curriculum

– Youth Perspective Festival

(Vorkutaugol, Olkon, Karelsky

Okatysh)

– School Olympics

Developing college applicants

for professional training

programmes (Major programme

aimed at broad target audience)

– Specialised training in skilled

trades

– Professional Development

Centre (Severstal Russian

Steel)

– Communications events

– Trainer development

Generation of applicant fl ow

for foreman and specialist

openings (Future talent pool for

management positions)

– Specialised training

– Scholarships

– Business School (Severstal

Russian Steel)

– Communications events

– Trainer development

COLLEGES

UNIVERSITIES

SCHOOLS

OBJECTIVE PROJECTS

OBJECTIVE PROJECTS

OBJECTIVE PROJECTS


41Severstal

Annual Report 2017

3 CORPORATE GOVERNANCE

CORPORATE GOVERNANCE

Corporate Governance 42Board of Directors composition 44Corporate Governance Report 50Board committees and reports from their chairs 56


44Severstal

Annual Report 2017

Alexey Mordashov

Board of Directors composition

Role: Chairman of the Board of Directors, Member of the Health,

Safety and Environmental Committee

Experience: Born in 1965. Alexey Mordashov has been working for

Severstal since 1988. He started his career as a Senior Economist,

becoming Chief Financial Offi cer in 1992. In December 1996, he

was appointed as Severstal’s Chief Executive Offi cer. Between

2002 and 2006 he served as CEO of Severstal Group and was

Chairman of Severstal’s Board of Directors. From December

2006 to December 2014 Alexey was CEO of Severstal. From

December 2014 until May 2015 Alexey Mordashov served as

CEO of AO Severstal Management – managing company of PAO

Severstal. Alexey was elected Chairman of the Board of Directors

of PAO Severstal in May 2015.

External appointments:

• Member of the Supervisory Board (since June 2010) of the

Non-Profi t Partnership Consortium “Russian Steel”, prior to that

President of the Consortium (from 2013 to 2015), since 2016 –

Chairman of the Supervisory Board;

• Member of the Supervisory Board of World Steel Association

headquartered in Brussels, Belgium. Prior to that Chairman

(from 2012 to 2013) and Vice-Chairman from 2016 to 2017 –

Chairman of the Supervisory Board;

• Head of the Russian Union of Industrialists and Entrepreneurs’

(RSPP) Committee on Integration, Trade and Customs Policy

and WTO;

• Serves on the Entrepreneurial Council of the Government of

Russian Federation;

• Co-Chairman of the “Trade as a Global Driver” Taskforce of the

“Business 20” (B20) of “Group of Twenty” (G20);

• Co-Chairman of the Northern Dimension Business Council;

• Vice-President of Russian-German chamber of commerce,

member of the Russian-German workgroup responsible for

strategic economic and fi nance issues;

• Member of the EU-Russia Business Cooperation Council;

• Chairman of the Board of PAO Power Machines;

• Member of the Board of Nordgold S. E.;

• Member of the Board of Directors of TUI AG.

Education: Alexey earned his undergraduate degree from the

Leningrad Institute of Engineering and Economics. He also holds

an MBA degree from Business School of Northumbria University

(Newcastle, UK). Alexey was granted an honorary doctorate

from the Saint-Petersburg State University of Engineering and

Economics in 2001 and from the University of Northumbria, UK in

2003.


45Severstal

Annual Report 2017

Alexey Kulichenko

Role: Chief Financial Offi cer

Experience: Born in 1974. Between 1996 and 2003 Alexey

worked for Sun Interbrew, starting his career there as a cash fl ow

economist at the Rosar plant in Omsk and ending it as Effi ciency

Planning and Managing Director of Sun Interbrew. Between

2003 and 2005 Alexey worked as CFO at Unimilk. From December

2005 to July 2009 he worked as CFO of CJSC Severstal Resource.

In July 2009 Alexey Kulichenko was appointed CFO of OAO

Severstal. From 8 November 2016 till 11 December 2016 he was

CEO of AO Severstal Management.

External appointments: none.

Education: Alexey graduated from the Omsk Institute of World

Economy with a degree in Economics.

Alexander Shevelev

Role: CEO of AO Severstal Management, Member of the Health,


Experience: Born in 1974. Alexander started his career at

Cherepovets Steel Mill as a repairman in repair-tool shop in 1997.

Later he worked as a shift foreman, lead economist and deputy

head of strategic planning department, head of production

development department in OAO “Cherepovets Steel Mill”. From

2002 to 2004 he worked as Technical Support Director of OAO

“Cherepovets Steel Mill”. In 2012 Alexander Shevelev became

executive director of OAO “Cherepovets Steel Mill” (currently

Cherepovets mill “Severstal-metiz”). From 1 July 2012 he

was appointed First Deputy Mayor of Cherepovets, in June

2013 – Deputy Governor of the Vologda region. From 2013 to

2016 he was CEO OAO “Severstal-metiz”. From April 2016 to

December 2016 he has been CEO of SVEZA Group. In December

2016 Alexander was appointed CEO of AO Severstal Management.


Education: Alexander Shevelev graduated from the Vologda

National Economic Academy with a degree in Mechanical

Engineering and from the National Technical University in St.

Petersburg where he mastered economics and management.

Alexander also holds an MBA degree from the Northumbria

Business School, Newcastle, UK.


46Severstal

Annual Report 2017

Vladimir Lukin

Role: Senior Vice President, Legal Affairs and General Counsel,

Member of the Health, Safety and Environmental Committee

Experience: Born in 1978. Vladimir Lukin joined Severstal Group in

2004 as Senior Legal Advisor. In 2007 he became Senior Legal

Advisor of OAO Severstal. In January 2008 Vladimir was appointed

as Head of the International Project Department. In 2009 he was

appointed as Senior Vice President, Legal Affairs and General

Counsel. Prior to joining Severstal, Vladimir worked for law fi rm

Freshfi elds Bruckhaus Deringer. Since 25 May 2015 till 1 December

2017 Vladimir Lukin was a member of the Board of Directors of

AO Severstal Management – managing company of PAO Severstal.


• Member of the Board of Directors of PAO Power Machines;

• Member of the Board of Directors of OOO T2 RTK Holding;

• Member of the Board of Directors of “BANK “ROSSIYA”;

• Member of the Board of Directors of ZAO

GK Video International;

• Member of the Board of Directors of ZAO National Media

Group.

Education: Vladimir graduated in Law from the Moscow State

University.

Andrey Mityukov

Role: Senior Vice President of Human Resources and Business

System of LLC “Severgroup”

Experience: Born in 1967. Andrey Mityukov has held various

HR management positions in Henkel-Russia plant from 1997 to

2000. In 2000 he worked at Sun Interbrew as Human Resources

Director at the Povolzhye plant and from 2001 as Regional Human

Resources Director. In 2003 Andrey joined Severstal Group as

Human Resources Director of “Sveza”. From 2005 to 2015 he

held the role of Senior Vice President of Human Resources of PAO

Severstal.


Education: In 1988 Andrey Mityukov graduated from the

Leningrad PVO Military Political Academy. In 2001–2002 Andrey

studied Human Resources Management under a joint programme

run by the Higher School of Economics (Moscow) and Harvard

University. In 2012 he studied in the INSEAD Business School

under the “Strategy for HR leaders” programme.


47Severstal

Annual Report 2017

Mikhail Noskov(stepped down the Board of Directors on 9 June 2017)

Role: Non-Executive Director

Experience: Born in 1963. Mikhail worked at the International

Moscow Bank between 1989 and 1993. From 1994 until 1997,

he was Trade Finance Director of Credit Suisse (Moscow). He

has worked for Severstal since February 1997, fi rst as Head of

Corporate Finance and from 1998 as Finance and Economics

Director. From June 2002 until December 2013, he worked as

Deputy CEO for Finance and Economics of the Severstal Group.

From 2007 to 2008 he was Deputy CEO for Finance and Economics

of Severstal. From March 2014 until February 2016 Mikhail Noskov

was CEO of telecommunication company Tele2 (Russia).


Education: Mikhail graduated from the Moscow Institute of

Finance.

Sakari Tamminen

Role: Senior Independent Director, Chairman of the Remuneration

and Nomination Committee

Experience: Born in 1953. Sakari Tamminen has extensive relevant

experience at Board level within steel and metals companies,

including being the President and CEO of the Finnish steel and

metal construction company Rautaruukki Corporation from

2003 to 2014. Sakari is currently a member of the Board at steel

company Ovako Ab, and has been the Vice Chairman of the

Board of Sanoma Corporation since 2002 to 2013. He also holds

a directorship of Danske Bank Plc and is Chairman of the Board of

Directors of Versowood Oy and M. J. Paasikivi Oy. He has also held

roles as Executive Vice President and CFO of Metso Corporation

(1999–2003) and Rauma Corporation Plc (1991–1999).


• Member of the Board of Directors of Ovako Ab;

• Member of the Board of Directors of Danske Bank Plc;

• Chairman of the Board of Directors of Versowood Oy;

• Chairman of the Board of Directors of M. J. Paasikivi Oy.

Education: Sakari Tamminen studied in Tampere University. He

holds a degree of Master of Science (Economics).


48Severstal

Annual Report 2017

Philip Dayer

Role: Independent Non-Executive Director, Chairman of the

Health, Safety and Environmental Committee, Member of the

Remuneration and Nomination Committee

Experience: Born in 1951. Philip Dayer has extensive experience of

advising international companies, including in the CIS. Philip sits

on the Boards of several listed companies in the energy, software

and fi nancial services sectors. Philip qualifi ed as a Chartered

Accountant and pursued a corporate fi nance career in investment

banking providing capital markets advice, including on M&A

transactions and fl otations. Over the past fi ve years he has also

held Non-Executive Directorships at Hurricane Exploration plc,

Cadogan Petroleum plc, Dana Petroleum plc, Arden Partners plc,

Navigators Underwriting Agency Limited and IP Plus plc.


• Non-Executive Director, member of the Audit Committee and

member of the Remuneration Committee of JSC VTB Capital

Holding;

• Senior Independent Director, member of the Audit Committee

and Chairman of the Remuneration Committee of AVEVA

Group plc;

• Non-Executive Director and Chairman of the Audit Committee

of JSC KazMunaiGas EP;

• Non-Executive Director and Chairman of the Audit Committee

of The Parkmead Group plc.

Education: Philip graduated from King’s College (London) in Law.

Alun Bowen

Role: Independent Non-Executive Director, Chairman of the

Audit Committee, member of the Remuneration and Nomination

Committee

Experience: Born in 1955. Alun Bowen spent almost 37 years

working for KPMG in London, Sydney, Cardiff, Hong Kong and

Kazakhstan. He has extensive relevant experience both at

Board level and in advisory roles. Having joined Peat, Marwick &

Mitchell & Co (subsequently KPMG) in 1976, he was appointed a

partner in 1988, and subsequently managed a number of practice

areas including being Managing Partner of KPMG Kazakhstan

from 2008 to 2013. He was a member of the audit committees

of The Institute of Chartered Accountants in England and Wales

(2004 to 2007), Business in the Community (2003 to 2005) and

The Prince’s Trust (2001 to 2007). From 2014 till 2017 Alun was a

member of the Supervisory Board of JSC Eurasian Bank.


• Non-Executive Director, Chairman of the Risk and Conduct

Committee and member of the Audit Committee of Julian

Hodge Bank Limited;


Committee and member of the Audit Committee of Hodge Life

Assurance Company Limited;


Committee and member of the Audit Committee of Hodge

Limited;

• Trustee and Director of Hodge Foundation.

Education: Alun Bowen holds a Master of Arts degree from

Trinity College, Cambridge, where he studied Metallurgy and

Materials Science, and he is a Fellow of the Institute of Chartered

Accountants in England and Wales.


49Severstal

Annual Report 2017

Alexander Auzan

Role: Independent Non-Executive Director, Member of the Health,


Experience: Born in 1954. Alexander Auzan is Dean of the Faculty of

Economics in Lomonosov Moscow State University, professor, founder

of the National Projects Institute, he is one of Russia’s leading

economists. In late 1980s, he has taken part in the establishment

of consumer protection associations and has been a Member of

the Executive Bureau of the Council of Consumers International

(worldwide consumers association). In 2005–2011 he was a

President of Association of Russian Economic Think Tanks (ARETT).

Mr. Auzan was also a member of the President’s Commission for

Modernization and Technological Development of Russian Economy

and President’s Council for Development of Civil Society and Human

Rights. He is currently a member of the Presidential Economic

Council. He has written numerous papers on the modernisation

of Russia, national values, and the dynamics of a social contract.

His applied work involves economic and development consulting

for national and regional governments, including participation in

development of “Strategy-2020” for Russia in 2011–2012. In

2015 he headed the working group on preparation of proposals for

structure, directions, resource’s provision and plan for the social and

economic development strategy of Russia up to 2030.


• Independent Director and member of the Strategic Planning

Committee of AO RVK;

• Senior Independent Director of PAO Rostelecom.

Education: Alexander Auzan graduated from Moscow State

University and holds a PhD in Economics.

Vladimir Mau

Role: Independent Non-Executive Director, Member of the Audit

Committee

Experience: Born in 1959. Vladimir Mau is an honoured Russian

economist. Since 1991 he participated in the economic reforms in

Russia, including working as Advisor to the Chairman of the

Russian Government from 1992 to 1993. From 1997 through

2002 Vladimir was the Head of the Working Center for Economic

Reforms of the Russian Government. In 2002 he became the

Rector of the Academy of National Economy of the Russian

Government (ANE), and since September 2010 the Rector of the

Russian Presidential Academy of National Economy and Public

Administration (RANEPA).


• Independent member of the Supervisory Board, Chairman

of the Audit Committee, member of the Nomination and

Remuneration Committee of PAO Sberbank of Russia;

• Chairman of the Trustees Board of the Fund for Bureau of

Economic Analysis;

• Member of the Trustees Board of Yegor Gaidar Foundation;

• Member of the Board of Directors of PAO Gazprom;

• Member of the Board of Directors, member of the Committee

for Corporate Governance, nominations and remunerations of

PAO TRANSCAPITALBANK.

Education: Vladimir Mau is a Doctor of Economics, Professor,

PhD (Université Pierre Mendès France), Honored Economist of the

Russian Federation. Vladimir graduated from the Moscow Institute

of National Economy in 1981.


50Severstal

Annual Report 2017

Corporate Governance StatementThis section sets out how Severstal has applied the principles of

good governance during the year.

Corporate governance modelSeverstal is listed on the “First Level” on MICEX and has a

“standard listing” for its depository receipts on the London Stock

Exchange. Accordingly, Severstal follows the provisions of the:

1. Recommendations from the Corporate Governance Code (2014)

approved by the Central Bank of Russia and recommended for

application by the joint stock companies with listed securities –

available on www.cbr.ru, and

2. UK Corporate Governance Code (2016) – available on www.frc.

org.uk.

Severstal’s Corporate Governance Code has been prepared

following recommendations of the codes above and is based on

the following main principles:

• A solid commitment to full alignment with shareholders’

interests;

• A unifi ed, well-shaped business structure supported by a

focused corporate strategy;

• A disciplined merger and acquisition strategy supported by a

qualifi ed majority of Board members;

• A reliance on a stable, deep-rooted and incentivised

management team;

• Industry-leading disclosure practices and transparent corporate

reporting; and,

• A solid platform for delivering superior, long-term returns for all

our shareholders.

Along with Severstal’s Corporate Governance Code and the

Charter of the Company (both available at www.severstal.com)

the activities of Severstal’s management and supervisory bodies,

as well as internal activities, are also governed by a set of internal

corporate documents, which are also available online at

www.severstal.com.

Severstal is a member of the Russian Institute of Directors, the

leading expert and resource centre for corporate governance,

established by the largest Russian companies to develop, incorporate

and monitor standards of corporate governance in Russia.

Severstal is committed to continue developing and evolving its

corporate governance practices. For example, although the

minimum requirements for compliance for a “standard listing”

for its depository receipts on the London Stock Exchange are

relatively limited, Severstal continually monitors the requirements

for those companies that have a “premium listing” and where it

believes that these requirements will enhance transparency, they

are adopted. For example, the publication in December 2017 of

the UK’s proposed revisions to the UK corporate Governance Code

will be actively considered during 2018 and debated by the Board.

Compliance StatementThroughout the year Severstal complied with the requirements of

a listing on the “First Level” on MICEX and a ‘standard listing’ for

depository receipts on the London Stock Exchange, apart from the

fact that Severstal has not entered into a relationship agreement

with Alexey Mordashov, its majority shareholder.

The Board seeks to ensure that the interests of the minority

shareholders in the Company are properly respected by and

aligned with those of the majority shareholder. The Board has

carefully considered whether there would be any benefi t to the

minority shareholders of the Company entering into a relationship

agreement with the majority shareholder, however, the Board

has decided that the existing arrangements and regulations that

are in place, which endeavour to ensure that Severstal is capable

of conducting its business independently of the major shareholder

and his related companies, are satisfactory and that transactions

with the controlling shareholder and his related companies are

at arm’s length and on fair commercial terms. The principal

safeguards may be summarised as follows:

– Half of the Board consists of Independent Non-Executive

Directors and the Audit Committee and the Remuneration

and Nomination Committee consist of and are chaired

by Independent Non-Executive Directors.

– The majority shareholder exercises his voting rights, including

those related to amending Severstal’s Charter, in a way

which would not be prejudicial to the interests of minority

shareholders.

– The majority shareholder does not vote on any resolution to

approve a “related party transaction”. Severstal has established

a process whereby, whenever required, and at least monthly,

individual related party transactions are voted on by the other

members of the Board, who have no involvement with those

transactions, having been reviewed by the internal audit

function to ensure that they have been recorded and valued

appropriately. All related party transactions are also reviewed

by the Audit Committee and by the external auditors and

disclosed in the quarterly and annual fi nancial statements in

accordance with the requirements of IFRS.

– Shareholders have direct access to members of the Board and

executive management at Severstal’s Annual Capital Markets

Day and Annual General Meetings of Shareholders, which are

held in person. The majority shareholder, as the Chairman

of Severstal, will ensure that the interests of all shareholders

continue to be aligned.

Responsibility StatementsEach of the directors who is a director at the date of the approval

of this Annual Report confi rms that to the best of his knowledge:

1. The Group fi nancial statements are prepared in accordance

with IFRS, give a true fair view of the assets, liabilities, fi nancial

position and profi t of the Group;

2. The Strategic Report includes a fair view of the development

of the business and the position of the Group, together with a

description of the principal risks and uncertainties that it faces;

3. The Annual Report, taken as a whole is fair, balanced and

understandable and provides the information necessary for

shareholders to assess the Group’s position and performance,

business model and strategy.

The Annual Report was approved by the Board of Directors on

1 February 2018.


51Severstal

Annual Report 2017

Governance structure

ShareholderLevel

External Auditor

Internal AuditCommission

ManagementLevel

Board Level

General Meeting of Shareholders

Audit Committee

Remuneration andNomination Committee

Health, Safety and Environmental

Committee

Internal Audit

Company Secretary Board of Directors

Sole Executive BodyJSC «Severstal Management»

(managing company)

Auditor’s name Joint Stock Company KPMG

Legal address:16 Olimpiyskiy prospect bld. 5, fl oor 3,

premises I, room 24e, Moscow 129110

Postal address:10, Presnenskaya Naberezhnaya, Block C, fl oor

31, Moscow 123112.

State registration:

Registered by the Moscow Registration

Chamber on 25 May 1992, Registration No.

011.585.

Included in the Unifi ed State Register of

Legal Entities on 13 August 2002 by the

Moscow Inter-Regional Tax Inspectorate

No.39 of the Ministry for Taxes and Duties

of the Russian Federation, Registration No.

1027700125628, Certifi cate series 77 No.

005721432.

Membership of self-

regulating auditors’

organisation:

Member of the Self-regulated organisation

of auditors “Russian Union of auditors”

(Association).

The Principal Registration Number of the

Entry in the Register of Auditors and Audit

Organisations: No. 11603053203.

Taxpayer

Identifi cation

Number

7702019950

The Board of DirectorsSeverstal’s Board of Directors is responsible for the review

and approval of its strategy and business model, and closely

monitoring its fi nancial and business operations both by segment

and as a whole. The Board is also responsible for approval of

annual, half-year and quarterly results, the issue of any securities,

establishing dividend policy and recommendation of dividends.

It is also responsible for establishing Severstal’s risk appetite,

system of internal control, governance, monitoring executive

performance and succession planning. The Board reviews

standards of ethics and policy in relation to health, safety,

General Meeting of Shareholders and supervisory bodiesThe General Meeting of Shareholders (“GMS”) sits at the top

of Severstal’s governance structure. Full information on the

responsibilities of the GMS is available online at www.severstal.com,

together with details of when the GMS is held and how shareholders

are informed of an upcoming GMS and information on resolutions

at GMS, including those resolutions of the GMS that were taken

during 2017.

Severstal’s supervisory bodies are its Internal Audit Commission

and its External Auditor.

Severstal’s Internal Audit Commission is a full-time internal

control body that supervises the Company’s fi nancial and business

operations, to obtain adequate assurance that the Company’s

operations are in full compliance with Russian law, to make sure

the rights of the Company’s shareholders are observed, and the

Company’s reports and accounts have no material misstatements.

The Internal Audit Commission acts in the best interests of

shareholders and reports to the GMS.

Our Internal Audit Commission comprises three persons who

were re-elected by the AGM on 9 June 2017: Nikolay Lavrov

(Chief Internal Audit Executive); Roman Antonov (Deputy

Chief Internal Audit Executive); and Svetlana Guseva (Manager

of Internal Audit). They are elected for a period until the next

AGM. Members of the Internal Audit Commission cannot

be members of the Company’s Board and occupy any other

position in the Company’s management structure at the same

time.

The activity of the Company’s Internal Audit Commission is

regulated by Severstal’s Regulations for the Internal Audit

Commission. These regulations are available at www.severstal.com.

An external auditor is appointed annually by the GMS. Its fee is

subject approval by the Board.


52Severstal

Annual Report 2017

environment, social and community obligations. Full information

on the responsibilities of the Board of Directors is available online

at www.severstal.com.

The Board’s activity is regulated under Russian law, the Company’s

Charter (2016) and Regulations for the Board of Directors (2014).

The BoardAccording to the Company’s Charter, Severstal’s Board comprises

ten members. Severstal believes that maintaining a balance

on the Board is a prerequisite for good decision-making and

corporate governance and ensuring equal regard for the interests

of all shareholders. Details of our Directors can be found in their

biographies.

Board composition

Executives and Non-Executives 50 %

Independent Non-Executives 50 %

Male 100 %

Female 0 %

Board diversity

Nationality

Russia (7)

UK (2)

Finland (1)

Professional experience Number of Board members

Steel 7

Mining 7

Finance 6

Oil & Gas 2

Academia 2

Governance calendar for 2017Overall calendar of General Meetings of Shareholders, in-person Board and its committees’ meetings are shown below:

Severstal governing bodies Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

AGM V

EGM V V

In-person Board V V V V

Audit Committee V V V V

Remuneration and Nomination Committee V V V

Health, Safety and Environmental Committee V V V

The Board reviews the independence of all Independent Non-

Executive Directors annually, and has determined that all

such directors are independent, in line with the UK Corporate

Governance Code and have no cross-directorships or signifi cant

links, which could materially interfere with them exercising

their independent judgment. The Company’s Independent Non-

Executive Directors play a leading role in corporate accountability

and governance through their membership and participation in

the Board’s committees.

New directors to the Board participate in an induction

programme when they take offi ce. This includes details of the

Company’s operations and procedures, as well as information

on what is required from them in their role according to the

Company’s internal corporate documents. This includes Severstal’s

Corporate Governance Code, applicable corporate governance

law, and descriptions of best practice to help ensure their early

effective contribution to the Company.

Separation of the roles of Chairman and CEOThe roles of the Company’s Chairman and CEO are separate

and their responsibilities are clearly defi ned in the Company’s

organisational documents and are regulated by law.

Alexey Mordashov is the Chairman of the Board of Directors.

The Board Chairman is elected from among its members by a

majority vote.

The Board Chairman’s role is to:

– Lead the Board and with other members of the Remuneration

and Nomination Committee lead the recruitment of new

directors;

– Ensure constructive relations between Executive

and Independent Non-Executive Directors;

– Ensure that all Board members can maximise their contribution

to the Board;

– Provide strategic insight from his wide-ranging business

experience and contacts built up over many years;

– Provide a sounding Board for the CEO on key business decisions

and challenge proposals where appropriate;

– Preside over the GMS, and,

– Meet with shareholders on governance matters and be an

alternative point of contact to the CEO for shareholders on

other matters.


53Severstal

Annual Report 2017

The CEO’s role is to:

– Lead the business and the rest of the management team;

– Lead the development of the Company’s strategy with input

from the rest of the Board;

– Lead the management team in company acquisitions and new

build decisions;

– Ensure organisation, status and accuracy of the company’s

accounting practices and the timely provision of appropriate

authorities with fi nancial reports;

– Bring matters of particular signifi cance or risk for discussion and

consideration by the Board, if appropriate;

– Be the principal public face of the company with shareholders,

customers, suppliers and the industry in general; and

– Cooperate with the company’s trade unions to protect

the interests of the company’s employees and communicate

with state and municipal authorities.

Sole Executive BodyThe authority of the Company’s Sole Executive Body is exercised

by the CEO of the Company.

Following the resolution of the Company’s shareholders dated

10 September 2014, the powers of Severstal’s CEO were

transferred to the managing company, Severstal Management,

with effect from 1 January 2015. This change was in line with the

Company’s stated strategic focus of optimising its management

structure and further enhancing management effi ciency and

transparency. Severstal Management achieved this by reducing

management layers, centralising certain administrative functions

and removing duplication.

The managing company has authority for managing all issues in

the Company’s current operations, except for those issues

specifi cally reserved for the Company’s GMS and the Board of

Directors.

Alexander Shevelev was appointed CEO of Severstal Management

with effect from 12 December 2016.

More details are available on www.severstal.com.

Board activity in 2017In 2017, Severstal’s Board of Directors held four (4) meetings in

person and eighteen (18) meetings in absentia.

The Board spent a considerable amount of time during

2017 discussing safety. In particular, the Board has reviewed

safety throughout the business and its continuing initiatives

to improve Severstal’s safety performance. It also discussed

regularly the changing dynamics of raw material prices and

the impact of the increasing rise in protectionism on Severstal’s

business.

In addition to the matters described above, the Board also

reviewed the following key matters:

– Health, safety and environmental issues;

– Severstal’s fi nancial plan, fi nancial performance and reporting;

– Issues relating to the strategic options facing Severstal;

– Risk and risk mitigation matters;

– Results of the external assessment for the Board and its

committees performance;

– The composition of the Board and its committees and

succession planning;

– External Auditor’s fee;

– Budget for 2018;

– Employee Code of Conduct, Anticorruption Policy, Code of

Business Conduct, Terms of reference of the Ethics Committee

of Severstal Group of Companies;

– Acquisitions and disposals;

– Transactions with related parties, etc.

The attendance of the Company’s directors at in-person meetings of the Board and its

committees during 2017

Member of the Board of Directors

Number of in-person Board meetings possible

Number of Board meetings attended

Audit Committee meetings attended (out of 4 meetings)

Remuneration and Nomination Committee meetings attended (out of 3 meetings)

Health, Safety and Environmental Committee meetings attended (out of 3 meetings)

Alexey Mordashov 4 4 – 31 –

Alexander Shevelev 2 2 – – 2

Vladimir Lukin 4 4 31 – 3

Alexey Kulichenko 4 4 41 – –

Andrey Mityukov 2 2 – 21 –

Mikhail Noskov 2 2 – – –

Alun Bowen 4 4 4 3 31

Philip Dayer 4 4 42 3 3

Sakari Tamminen 4 4 4 3 31

Alexander Auzan 4 3 11 – 1

Vladimir Mau 4 3 – – –

1 means that the specifi ed Director is not a member of the Committee, although he attended the meeting at the invitation of the Chairman of the Committee2 Philip Dayer stepped down the Audit Committee on 9 June 2017 and Sakari Tamminen was elected as a new member of the Audit Committee on the same date


54Severstal

Annual Report 2017

Moreover, Independent Non-Executive Directors meet separately

as a group during the year. There were four such meetings in 2017.

Board self-evaluation results for 2017The Board carries out an annual self-evaluation of its performance

based on the individual contribution of each Board member, and

has an external evaluation once every three years in accordance

with the best corporate governance practice.

In 2017 the Board conducted its own self-evaluation. The self-

evaluation process was based on a series of confi dential and wide-

ranging questionnaires with each Board member. Questionnaires

were focused on evaluating the effi ciency and performance

of the Board and its Committees. The evaluation tested key

areas of the Board’s operations including its participation in the

formation of the Company’s strategy, succession and composition,

boardroom interaction, culture, and the way the Board supervises

business performance, risk, governance and operations in

the interests of the Company as a whole.

The results of the Board self-evaluation were collectively discussed

by the Board at its meeting in February 2018.

Firstly, the Board reviewed the progress on the implementation

of the recommendations of the independent evaluation carried

out in late 2016. The Board is satisfi ed that signifi cant progress is

being made on: learning the lessons from the Severnaya accident;

developing Severstal’s longer-term strategy for value creation; the

communication of Severstal’s values and principles throughout the

organisation; ensuring that directors have suffi cient information

to support their decision-making activities; ensuring that

the independent non-executive directors expand their programme

of site visits; and increasing engagement with shareholders.

The progress on a number of these issues is included in this

Annual Report. It also agreed that the independent directors’

involvement in the top-talent programme had increased both the

quality of debate on succession planning and also increased their

knowledge of the day-to-day issues facing Severstal’s businesses.

In its self-evaluation carried out from December 2017 to

January 2018 the Board agreed actions in relation to continuing

the evolution of the Board’s processes and discussions of the

continuing journey towards best-in-class governance.

The Board underlined some areas for improvement for 2018, those

are:

– the succession of Board members, CEO and key executives

should be considered in even greater depth than currently;

– the Board should continue considering the company’s

strategy in detail and explore a wider range of alternative

strategic options and scenarios;

– the Board should continue working on ensuring that its internal

control and risk management systems are as robust and

effective as possible.

Alexey Mordashov, Chairman of the Board of Directors has

been named the Best 2017 Chairman of the Board of Directors:

development of corporate governance at the Director of the Year

Awards.

The Director of the Year awards are presented by the Association

of Independent Directors and the Russian Union of Industrialists

and Entrepreneurs, in partnership with the Moscow Exchange, PwC

and Sberbank. The awards recognise the personal contribution

of Board Directors to ensuring that Russian companies meet the

highest standards of corporate governance. The award ceremony

was held in Moscow on 28 November.

The winners are selected by a council of experts, comprising

22 representatives from national/international regulators, leading

Russian corporations, the investment community, professional

associations, and previous award winners. At the fi rst stage, the

lists for the 50 best independent directors, 25 best chairmen of

directors and 25 best corporate secretaries are drawn up, from

which the Expert Council shortlists candidates. When evaluating

candidates for the Chairman of the Board of Directors award,

the Expert Council looks at the nominees’ role on the board of

directors, their company’s progress in corporate governance,

the effectiveness of the organisation and their company’s

transparency.

The Expert Council noted that in the role of the Chairman of the

Board of Directors, Alexei Mordashov “established an effective

working environment, ensured regular strategic discussions

and introduced a client-oriented corporate culture. The Board

of Directors is formed on the principles of independence and

professionalism, and regular and effective communication of the

Council and the company with investors.”

Alongside Alexey Mordashov, members of the Board of Directors,

Alexander Auzan, Alun Bowen, Philip Dayer and Vladimir Mau,

were also recognised. They were included in the list of Top 50

Independent Directors. Artem Bobulich, corporate secretary

of Severstal, was included in the 25 best corporate secretaries.

Senior Independent DirectorSakari Tamminen is Severstal’s Senior independent director and

Chairman of the Remuneration and Nomination Committee.

The Senior Independent Director’s role is to:

– coordinate communication of Independent Directors;

– liaise with the Chairman of the Board;

– act as an advisor for the Chairman to ensure effi cient activity of

the Board;

– ensure that appropriate succession planning procedures are in

place in relation to the Chairman’s succession;

– meet annually with independent directors to appraise the

Chairman’s performance, taking into account the views of

Executive Directors, and on other occasions as are deemed

appropriate; and,

– be available to shareholders if they have concerns which have

not or cannot be resolved through contact with the Chairman

or the Company’s executive body.

Investor relationsThe Board makes considerable efforts to establish and maintain

good relationships with shareholders and the wider investment


55Severstal

Annual Report 2017

community. There is regular dialogue with institutional investors

during the year, primarily though the Head of Communications

and Investor Relations and his team.

In November 2017, Sakari Tamminen led Severstal’s senior

management team in London at the Company’s seventh

annual Capital Markets Day. The meeting was also attended by

certain Independent Non-Executive Directors in order that they

could develop their own understanding of the views of institutional

shareholders.

Corporate SecretaryThe Corporate Secretary ensures Severstal’s compliance with

the requirements of applicable law, the Company’s Charter

and internal documents regulating the needs and interests of the

Company’s shareholders. The Corporate Secretary is responsible

for safeguarding the rights and interests of shareholders, as well

as establishing transparent and effective regulations to secure the

rights of shareholders. Full information on the responsibilities of

the Corporate Secretary is available online at www.severstal.com.

Artem Bobulich has been the Corporate Secretary of Severstal

since 20 January 2014. Artem Bobulich (born in 1983) has

worked in the Company’s Corporate Secretary Team of the Legal

Affairs Directorate since 2007. He graduated from the Cherepovets

State University with foreign philology specialisation and from the

Moscow State Law Academy.

Share capitalSeverstal share capital comprises ordinary shares with a

nominal value of RUB 0.01 each. The authorised share capital of

Severstal as at 31 December 2017 comprises 837,718,660 issued

and fully paid shares.

All Severstal shares carry equal voting and distribution rights.

There are no restrictions or limitations on voting rights for holders

of Severstal shares and GDRs.

Equity capital structure

as at 31 December 2017Share, % Shareholders’ equity capital

A. Mordashov* 77.03%

Free fl oat 20.15%

Treasury shares 2.82%

Total 100 %

* Through participating in Severstal’s privatisation auctions and other purchases, Alexey Mordashov

had purchased shares in Severstal such that as at 31 December 2017 he controlled indirectly

77.03% of Severstal’s share capital.

Whistleblowing proceduresSeverstal operates a whistleblowing policy for employees to

confi dentially report concerns about any unethical business

practices to senior management in strict confi dence and without

fear of recrimination through several routes. Severstal’s Ethics

Committee is the executive body which oversees the fi rm’s

whistleblowing activities and the Audit Committee receives details

of whistleblowing reports.

Anti-bribery and anti-corruption measuresSeverstal’s anti-corruption policy, which is available at

www.severstal.com and supported by the Severstal Employee Code

of Conduct and Severstal Code of Business Conduct, incorporates

appropriate provisions to meet Severstal’s obligations under

Russian legislation and the UK Bribery Act.

All individuals applying for employment with Severstal are

screened for their attitude to corruption and risk. The applications

of those employees who do not meet the expected standard

are not proceeded with. A training and communication

programme is in place for all employees to ensure that they

understand Severstal’s requirements and related reporting

procedures. Regular screening checks are also carried out for

existing employees.

Arrangements with contractors and suppliers have been and

continue to be reviewed to ensure full compliance with Severstal’s

anti-corruption policy.

Oversight of the programme is the responsibility of the Ethics

Committee, which reports regularly to the Audit Committee.

Payments to GovernmentsSeverstal’s payments to Governments disclosure in the year ended

31 December 2017 can be found in the Investor Relations section

of www.severstal.com.


56Severstal

Annual Report 2017

Severstal’s Board of Directors has the following committees:

– Audit Committee;

– Remuneration and Nomination Committee;

– Health, Safety and Environmental Committee.

The Board Committees serve as consultative and advisory bodies

that deal with issues raised by the Board of Directors. Committees

may not act on behalf of the Board and are not considered to be

management bodies of the Company. They have no powers in

relation to managing the Company.

Committee meetings are held as and when necessary, but at

least three times a year (except for the Health, Safety and

Environmental Committee, which meets at least twice a year).

They are held separately from Board meetings so that extra

attention can be given to discussing issues, which require

preliminary Board consideration prior to approval by the Board of

Directors members, and determine the necessity of the Board’s

approval for a specifi c issue.

Decisions of each Committee are taken by a majority vote of all

Committee members taking part in the meeting. Each member has

one vote and the Committee Chairman has no casting vote in the

event of a tie.

The activity of Severstal’s Committees is regulated

by the Regulations for Board Committees. Please refer

to www.severstal.com for more information.

The Audit CommitteeThe Audit Committee consists of three Independent Non-Executive

Directors. Currently they are:

1. Alun Bowen (Chairman);

2. Sakari Tamminen;

3. Vladimir Mau.

Sakari Tamminen replaced Philip Dayer as a member of the Audit

Commitee during the year to ensure compliance with MICEX’s

independence rules.

Role

The Audit Committee assists the Board of Directors in monitoring

the Company’s risk management processes and control

environment, and in reviewing the Company’s annual and

quarterly fi nancial statements and overseeing its internal and

external audit arrangements.

Composition

The Board considers that each member of the Audit Committee

has appropriate knowledge and understanding of fi nancial matters

and commercial expertise, suffi cient to enable them to consider

effectively the fi nancial and accounting issues that are presented to

the Audit Committee. Sakari Tamminen has extensive experience of

the steel industry. The Board considers Alun Bowen, the Chairman

of the Audit Committee to have specifi c recent and relevant

fi nancial experience, further details are available in his biography.

Report by Alun Bowen, Chair of the Audit CommitteeI am pleased to report on the work of the Audit Committee.

A key responsibility is to ensure that the fi nancial information

presented by Severstal is fair, balanced and understandable.

To do this we focus on the quality of fi nancial information,

the independence of our external auditors and the assurance

provided by internal audit. The Audit Committee also continues

to debate and challenge the assumptions and estimates made by

management in producing the fi nancial statements.

Financial reporting

The most signifi cant issues regarding the 2017 Annual Report and

fi nancial statements and how the Audit Committee dealt with

them are set out below:

Area of focus Work undertaken Conclusion/Action taken

Tax claims and provisions: revised interpretations

of tax legislation by the Russian tax authorities

resulted in signifi cant claims being issued during

2016.

Extensive discussions took place between Severstal

management and the Russian tax authorities in

relation to the claims, and a number of matters

were clarifi ed, which resulted in a reduction in the

claims outstanding during 2017.

The Audit Committee discussed the issues with

the members of the management responsible

for taxation affairs. It also discussed with them

the status and nature of the discussions with the

taxation authorities.

The Audit Committee also discussed the issues

with KPMG’s tax specialists in relation to the

specifi c issues and also with respect to their wider

knowledge of activity in relation to taxation claims.

The Audit Committee agreed that the reduction in

the claims outstanding with the Russian tax

authorities was appropriately refl ected in the

fi nancial statements and the related disclosures

were fair and balanced.

Accounting for the Yakovlevskiy mine: the

Yakovlevsky mine transaction, although not a

particularly signifi cant transaction, as a result of

the initial arrangement to buy the debt from a

bank followed, after an interval, by taking control

of the asset and the ongoing process to secure full

legal ownership, involved the Audit Committee in

discussing the appropriate treatment of the

transaction at various times during the year.

The Audit Committee discussed the status

of the transaction with fi nancial and legal

management and also the Head of Security

to establish initially whether Severstal had

control of the asset. It was agreed that this

eventually took place in November 2017. The

Audit Committee also discussed the assumptions

made by the external valuers, commissioned

to determine the fair value of the asset, with

executive management to ensure that they were

appropriate in the circumstances.

The Audit Committee was satisfi ed that the

Yakovlevskiy consolidation has been accounted

for appropriately and that the related

disclosures in the fi nancial statements are fair

and balanced.

Board Committees and reports from

their chairs


57Severstal

Annual Report 2017

Non-GAAP measures: they aid understanding of

Severstal’s fi nancial performance

Severstal uses the following non-GAAP measures:

• EBITDA;

• EBITDA margin;

• Free Cash Flow;

• Net debt; and

• Net debt/EBITDA.

We discussed the use of non-GAAP measures and

reviewed their consistency with prior years.

We are satisfi ed that the non-GAAP measures,

which are widely used in our industry, can

provide better insight into Severstal’s fi nancial

performance. We reviewed the non-GAAP

measures and were satisfi ed that they did not

detract from the GAAP measures.

Annual Report: taken as a whole the Annual Report

needs to be fair, balanced and understandable so

that it is relevant to readers.

We held preparatory meetings with management

to determine the format of the Annual Report

and reviewed the allocated responsibilities and its

content, overall cohesion and understandability.

We considered judgemental matters such as the

principal risks in the Risk Management section,

estimates and the period covered by the viability

statement.

We received confi rmation that individuals’

responsibilities had been fulfi lled and confi rmed

that the overall report was consistent with the

directors’ knowledge. This allowed the Audit

Committee and the Board to be satisfi ed that the

Annual Report taken as a whole is fair, balanced

and understandable. We were satisfi ed that

the information presented in the Strategic Report

was consistent with the performance of the

business reported in the fi nancial statements. We

were satisfi ed that the viability statement should

consider a three-year time horizon refl ecting

our internal planning cycle.

External audit

The Audit Committee places great importance on the quality

and effectiveness of the external audit. In assessing quality and

effectiveness, the Audit Committee looks to the audit team’s

objectivity, professional scepticism, continuing professional

education and its relationship with management.

The Audit Committee carries out an annual evaluation of

the independence and objectivity of the external auditor and

the effectiveness of the audit process, taking into consideration

relevant professional and regulatory requirements. This

assessment is based on a specifi c discussion between the members

of the Audit Committee with the input of the Executive Directors

and other relevant senior management.

This year KPMG carried out its own client service interview

held by a senior member of the fi rm not involved in the

engagement interviewing me after discussion on their views with

the other members of the Audit Committee.

The output of the Audit Committee’s assessment and KPMG’s

client service review were discussed with the Lead Audit

Engagement Partner who developed a plan to implement the

review’s recommendations.

In addition to the annual evaluation, the Audit Committee

undertakes an ongoing assessment of external audit quality and

effectiveness in the following ways:

• The Audit Committee debates and agrees the key areas of

focus for the external audit.

• The Audit Committee negotiates and agrees the scope of the

audit prior to its commencement.

• The Audit Committee discusses the accuracy of fi nancial

reporting (materiality) with KPMG both for accounting errors

that will be brought to the Audit Committee’s attention and

amounts that would need to be adjusted so that the fi nancial

statements give a true and fair view.

• I discussed with KPMG the output of reviews carried out by

Russian and international regulators on its work. No issues

arose from these reviews.

• I meet with Larisa Kiseleva, the audit partner from KPMG who

has been the Lead Audit Engagement Partner for the IFRS

fi nancial statements since the fi rst quarter of 2015, in her offi ce

once a quarter and we communicate regularly by email and

telephone between these meetings.

• The Committee receives at every Audit Committee meeting

an update of KPMG’s work, compliance with independence

and its fi ndings. There is a detailed discussion of KPMG’s audit

fi ndings including audit differences, the work undertaken to

support their audit opinion on the fi nancial statements and the

consistency of the Annual Report with their work, prior to the

approval of the fi nancial statements and Annual Report.

• Audit differences are also discussed. No uncorrected audit

difference was qualitatively or quantitatively material to

any line item in either the income statement or the balance

sheet. Accordingly, the Audit Committee did not require any

adjustment to be made to the fi nancial statements as a result

of the audit differences reported by KPMG.

The Board has established a policy setting out what audit services

can be purchased from the fi rm appointed as external auditors.

Generally, only assurance services are purchased where it is

sensible to use the external auditor from a cost-effi ciency

or regulatory perspective. The audit fee for the year ended

31 December 2017 was $1.1 million (2016: $1.0 million) and

non-audit fees in connection with assurance on bond offerings was

$0.1 million (2016: $0.2 million).

During 2017 the Audit Committee commenced preparatory

work in relation to the audit tender which will be held in 2018. The

Audit Committee reviewed the Russian audit market and discussed

the capability and quality of the fi rms in the market. Deloitte, EY

and PwC were asked to participate in the audit tender as they were

considered to be the fi rms having the necessary scale, capability

and reputation for audit quality to act as Severstal’s external

auditors. Although KPMG has been Severstal’s auditors since 1997,

the Audit Committee decided that KPMG would also be asked to

participate in the tender process as under the audit rotation rules

recently introduced in the EU they would not be required to rotate

for a further three-year period.


58Severstal

Annual Report 2017

The Audit Committee members met with prospective lead audit

engagement partners from Deloitte, EY and PwC in October to

establish whether the individuals had the necessary personal

qualities to act in that role. The Audit Committee also met the

prospective KPMG audit partner for the year ending 31 December

2020 as Larisa Kiseleva would have to rotate after the year ending

31 December 2019.

The Audit Committee has determined and agreed an appropriate

process, timetable and the critical success factors for the process.

Internal Audit

The annual Internal Audit Plan is developed from a consideration

of the principal risks facing Severstal, a cycle of audit testing and

management requests. The Audit Committee provides its input in

advance of approving the plan at an off-site meeting with Nikolay

Lavrov, the Chief Audit Executive, attended by members of the

Audit Committee. The Audit Committee meets on its own with

Nikolay Lavrov, in addition to the off-site session, at least three

times a year.

I led the Audit Committee’s formal review of the effectiveness

of internal audit this year, which involved the completion of a

detailed questionnaire by members of the Audit Committee

and Internal Audit’s principal “customers” being the heads of

Severstal’s operating businesses and Alexander Shevelev.

The major areas for discussion were:

• Ensuring management has a better understanding of

the internal audit process and has better “buy-in” to the internal

audit plan, whilst ensuring the plan is still “owned” by the Audit

Committee.

• Communicating (and clarifying if necessary) the distinction

between the roles and responsibilities of the Security

Department and that of Internal Audit.

• Developing a plan to strengthen the relationship between the

Head of Internal Audit and business heads.

Management continues to demonstrate increasing willingness

to implement internal audit’s recommendations and there

has been a reduction again this year in the number of agreed

recommendations which have not yet been implemented.

Control environment

The Audit Committee has supported management’s efforts

to improve the control environment during the year. In particular

ensuring that plans exist to close vulnerabilities in the information

technology system from both external and internal actions.

The external penetration test carried out during the year was

encouraging, but also provided a number of recommendations

for improvement.

In addition to the work carried out by Internal Audit, the Audit

Committee receives reports from the Head of Security who briefs

the Audit Committee on the Security Department’s efforts through

psychophysiological screening and other methods to ensure that the

risk culture within the organisation is the best it can be. The sharply

reducing trends in inventory theft (particularly ferro-additives),

drug and alcohol abuse, disclosure of trade secrets and the number

of criminal corruption cases are encouraging. As is the number of

employees who are compliant with anti-corruption standards and

the continuing vigilance through testing of prospective employees

for their attitude to safety, risk and corruption. The Head of Security

also briefs the Audit Committee on issues of physical and cyber

security, his plans and actions to minimise the risk in these areas

and his cooperation with Internal Audit.

Whistleblowing and ethics

The Audit Committee carried out a comprehensive review of

Severstal’s whistleblowing procedures and other communication

channels during the year, which involved changes in the terms

of reference of Severstal’s Ethics Committee, Employee Code of

Conduct, Code of Business Conduct and Anti-Corruption Policy to

ensure this activity remains in line with global best practice.

Audit Committee effectiveness

The Audit Committee reviews its terms of reference and

effectiveness annually. An external effectiveness review carried

out in December 2016 concluded that there was no signifi cant

area for concern in respect of the performance of the Audit

Committee or any of its members, accordingly no formal review

was carried out this year, although the membership of the Audit

Committee changed during the year as commented on earlier.

Looking ahead

In 2018, in addition to its regular work, the Audit Committee will

be focusing on:

• Ensuring a thorough and effective external audit tender

process;

• Overseeing continuing improvements in the Annual Report, the

Sustainability Report and Severstal’s website to ensure that

stakeholders receive the information they require in the most

effective manner;

• Ensuring that Severstal’s increasing use of “big data” is

managed appropriately and does not increase Severstal’s

exposure to risk.

The Remuneration and Nomination CommitteeThe Remuneration and Nomination Committee consists of

three Independent Non-Executive Directors. Currently they are:

1. Sakari Tamminen (Chairman);

2. Philip Dayer;

3. Alun Bowen.

Role

The Remuneration and Nomination Committee’s role is to assist

the Company engage qualifi ed professionals to manage the

Company, create the incentives necessary to ensure they are

successful within the Company and ensure there is an appropriate

talent pool and oversee succession planning within Severstal.

It also reviews the remuneration and compensation for the

Company’s senior managers and Board members.

Report by Sakari Tamminen, Chair of the Remuneration and Nomination CommitteeThe Remuneration and Nomination Committee has focused on

three principal areas this year:

• Corporate culture and employee engagement;

• Succession planning and Severstal’s talent pool;

• Executive remuneration structure and the long-term incentive

plan (LTIP).

A winning corporate culture and talent retention

Severstal pays a lot of attention to developing a unique corporate

culture of innovation and continuous improvement. We fi rmly

believe that a strong corporate culture is our unique advantage,

with a long-lasting and growing value. It is hard to replicate by

peers and helps to promote change faster.


59Severstal

Annual Report 2017

The cornerstone of our corporate culture is the Business System of

Severstal which is the logical development of more than ten years

of ongoing efforts to optimise production and standardise internal

processes, through many projects striving to achieve maximum

effi ciency of labour, equipment and energy, improve customer

service and ensure employee safety. Among industry players, the

system is unrivalled in the extent of its integration and EBITDA

contribution potential.

It also includes a set of projects for cultural change. We believe

this gives us a key competitive advantage, and is crucial for

success in the steel and mining industry. Ultimately, its intention is

to make Severstal a global effi ciency leader in the steel industry.

There are four main lines of development in the Business System:

• Safety;

• Customer care;

• People engagement;

• Continuous improvement of operational performance;

As a result of our Business System initiatives, we see an increased

level of engagement of our employees and higher satisfaction

levels of our clients, a trend that we are confi dent will continue.

The improvement in employee engagement has been refl ected in

the outcome of the fi fth annual independent employee

engagement survey which, using the AON Hewitt engagement

model, gave an engagement percentage of 75%, which is

nine percentage points ahead of manufacturing in Russia and

13 percentage points ahead of employees in global metallurgical

companies.

Safety has a major focus and signifi cant activity takes place to

ensure that only employees with an appropriate attitude to safety

are recruited and retained.

We do not tolerate bullying behaviour or corruption regardless of

the executive level. Severstal has an Anti-Corruption Policy focused

on ensuring our compliance with both Russian and international

anti-corruption laws. This policy sets standardised anti-corruption

requirements for all Severstal businesses and regulates activities

associated with high corruption risks, such as cooperation with

partners, acquisition of corporate securities, establishment of

joint ventures, mergers and acquisitions, confl ict of interest

evaluation procedures, sponsorships and charities, gifts and

entertainment, and so on under this programme, we developed

and adopted the Severstal Employee Code of Conduct and

Severstal Code of Business Partnership propagating our anti-

corruption requirements into our supply chain. There is also an

Ethics Committee in place and a phone/SMS hotline for our staff

to anonymously report any wrongdoing.

Continuous demonstration of corporate values is a task going

far beyond the responsibility of just the HR function; it is a

fundamental requirement for any manager of employees

across the organisation. In addition to the Business System we

have internal policies in place to observe any violation of our

corporate values.

The recruitment of high-potential students and graduates is

a priority of Severstal’s HR policy. We work hard to meet our

long-term need for young professionals, to improve the quality

of training of our future employees and to make the metals and

mining industry more attractive for job seekers. Our aim is to make

the steelmaking industry and the science behind it exciting for

younger generations. I had the pleasure this year of visiting with

other Committee member colleagues the Metallurgy Museum in

Cherepovets – a great twenty-fi rst century experience and a big

attraction for future employees of Severstal.

An ambition to become a global leader in value creation also

helps to attract and retain career-oriented professionals seeking

challenges and interesting tasks. We intend to achieve this

leadership through sustained improvements in operational facilities

and lean production, and use of best available technologies. We

have a set of ongoing schemes for employee development and

training, from induction programmes through to senior professional

development. This helps us to create a culture where employees

share similar values and work towards achieving similar goals.

Succession planning and Severstal’s talent pool

Part of our effort to create a motivating corporate culture is

a focus on growth of a talent pool, establishing remuneration

policies which motivate management for long-term performance

and are clearly aligned with the business KPIs and objectives, as

well as the interests of Severstal’s shareholders. This also includes

annual 360-degree feedback, half-year (annual) assessment of

top managers by the CEO and the Board of Directors, semi-annual

Staff Committees’ reviews and development of a succession pool.

As a result, since Severstal’s IPO all executive director positions

at the Company’s Board of Directors have been placed with

top managers from Severstal’s internal talent pool. Undesirable

executive talent outfl ow has been minimal and much below the

average industry level.

At each meeting, the Committee discusses and reviews Severstal’s

existing and emerging talent pool for senior positions and the

Company’s plans for development of the individuals and the

potential succession plans for each senior position.

As a result of members of the Remuneration and Nomination

Committee’s active involvement in Severstal’s Second Opinion

programme, where the fi rm’s talent participates in an interview

with a person not known to them and independent of executive

management, I am pleased to say that the Committee has a far

better collective knowledge of the capabilities of its senior talent

pool.

Executive remuneration structure

The executive remuneration structure seeks to strike the right

balance between engaging and retaining highly qualifi ed

managers and the interests of the shareholders. Though the

established remuneration policy has long-term variable pillars

like LTIP and KPIs, the fi xed salary element undergoes annual

revision involving benchmarking using external data to ensure

that the Company management’s compensation is fair and is in

line with the market trends. We seek to reward our executives in

the range between the 50th and 75th percentile of the market

average, as defi ned by external benchmarks. We regularly review

these external benchmarks, which are currently provided by

members of the Big 4 accounting fi rms, to ensure that they are

relevant and appropriate to our business. In 2017, we adopted

Total Shareholder Return as an additional KPI for management to

align more closely their reward with those of shareholders.

Annual Remuneration consists of the following two parts: a fi xed

salary mentioned above and a variable part known as a bonus.

The bonus’ percentage of an individual’s annual salary varies

for various executive levels. However, in general the bonus consists

of two parts – an individual element and a corporate one:


60Severstal

Annual Report 2017

• The fi rst 50% is based on performance against individual

targets. The individual targets for executive Board members are

set by the Company CEO; targets for the CEO are determined

by the Remuneration and Nomination Committee and

recommended to the Board;

• The other 50% of the bonus is performance compared with

the Company’s fi nancial and operational KPIs set by the CEO

at the start of the year and approved by the Remuneration

and Nomination Committee. The set of KPIs includes fi nancial

targets such as operating cash fl ow, EBITDA and Total

Shareholder Return.

Board of Directors’ remuneration and compensation policy

By the decision of the General Meeting of Shareholders (GMS),

Board members may be paid a remuneration during the execution

of their duties, and be reimbursed for expenses incurred in

connection with their functions as Board members. The amount

of such remuneration or compensation is subject to approval by

the GMS only. Should any Board member decide to resign before

their term of his/her offi ce expires, such a Board member is paid

pro rata in proportion to the term of offi ce that expired prior to

resignation.

If incurred, Severstal reimburses its Board members’ expenses in

connection with the performance of their duties as Board

members, including transport, accommodation and mailing costs,

as well as costs relating to the translation of company documents

or materials that they are provided with.

Long-term incentive programme (LTIP)

For long-term retention of top management and alignment of

their interests with those of the shareholders, Severstal has a LTIP

programme in place.

The LTIP covers a period of three years and is based on a

“phantom” stock plan. This type of stock plan pays a cash award

to an employee that equals a set number of Severstal shares

multiplied by the current share price. Phantom stock plans

contain vesting schedules that are based on tenure. The vesting

period for the whole LTIP starts only after the end of the third year

of the executive’s participation in the programme. The number

of phantom shares attributed to an executive is determined

by a proportion of the executive’s salary in the fi rst year of the

programme.

The Committee reviews on an annual basis the awards made

under the LTIP programme and the individuals who are eligible to

receive awards.

Compensation of Senior Managers, Executive Officers and Directors

Key management’s remuneration for the year ended 31 December

2017, consisting of salaries and bonuses, totalled US$11 million

(2016: US$10 million; 2015: US$10 million). Additionally, in

2017, a provision for key management’s long-term cash-settled

share-based incentive programmes of US$1 million was accrued

(2016: US$3 million, 2015: US$2 million). This provision is subject

to further adjustments, dependent on a range of the Group’s

fi nancial indicators.

Health, Safety and Environmental CommitteeThe Health, Safety and Environmental Committee currently

consists of:

1. Philip Dayer (Chairman),

2. Alexey Mordashov,

3. Alexander Shevelev,

4. Vladimir Lukin,

5. Alexander Auzan.

Role

The Health, Safety and Environmental Committee assists the

Board in obtaining assurance that appropriate systems are in

place to deal with the management of health, safety and

environmental risks.

Report of the Chairman of the Committee Philip Dayer on Work Safety, Industrial Safety and Environmental Protection Committee and its work in 2017Health and safety is the main priority of Severstal. The Company’s

goal is to eliminate completely fatal accidents

To achieve this goal, the Company is working on a programme of

continuous improvement of safety in all aspects of its activities,

strives to follow best practices in the fi eld of work safety, as well as

to become the leading Russian company in this sphere.

We are open for cooperation. Senior management of the

Company takes part in the meetings of the RUIE Committee on

Environmental and Industrial Safety under the auspices of the

Russian Steel Consortium, the national professional association of

metallurgists. Severstal is an active participant in the World Steel

Producers Association, which regularly publishes reports in the

sphere of work and industrial safety.

The system of work and industrial safety of fi ve enterprises of the

Russian Steel Division (Cherepovets Iron and Steel Works, Izhora

Tube Rolling Plant, Severstal Distribution Company, Severstal

Project, Severstal-SMC–Vsevolozhsk), and Karelsky Okatysh and

Olkon enterprises are certifi ed for compliance OHSAS 18001:

2007 standards.

For the year ended 31 December 2017, the company showed a

47% reduction in injuries compared with 2016.

Projects involving work and industrial safety are integrated into

the Severstal Business System, which is a long-term programme

for transforming culture and increasing the Company’s effi ciency.

The main safety initiatives in 2017 were:

1. Hazard identifi cation:

• Search for hazards by interviewing and questioning workers;

development and implementation of measures aimed at

eliminating hazards;

• Investigation of micro-traumas and dangerous events

with analysis of root causes to prevent the recurrence of

similar incidents.

2. Involvement of personnel in work safety issues:

• Testing and training of production managers;

• Conducting “live” briefi ngs with workers;

• Teaching the basics of safe behaviour, including security in

everyday life;

• Identifying and disseminating best practices in work safety;

• Organisation of a multi-stage contest “Safety Formula”.

A survey of employees conducted by internal audit in 2017 showed

that the involvement of staff has grown: all employees know the

basic rules of work safety, that they must use in their work; 95%

of employees confi rm the availability of the necessary means of


61Severstal

Annual Report 2017

protection and the timely conduct of safety briefi ngs. However,

the review also demonstrated that although a signifi cant amount

of progress has been made, there is some way to go before the

employees and the Committee can be fully satisfi ed.

We moved from supervision to partnership. According to the

results of the Corporate survey “Severstal Pulse”, 79% of employees

believe that safety requirements are justifi ed, understandable and

feasible in their departments, and 84% of employees noted that

their immediate supervisor explains how to do the job safely.

3. Work with employees who violate safety rules:

• Establishment of common principles for dealing with violators;

• The active support of safety committees in conjunction with

labour unions;

• Identifying employees who are prone to risk, through carrying

out psychological testing and working with them.

4. Active work with contractors:

• Organisation of training, communication;

• Implementation of Severstal’s corporate instruments in

contractor organisations;

• Implementation of a system of contractors’ corporate

certifi cation of motivating contractors’ managers to ensure

labour safety.

5. Accident prevention system (APS): conducting audits at all

production sites of the company with the aim of assessing

and improving the safety system:

• Introduction of uniform approaches in the application of work

safety tools in all business units;

• Establishment of proactive targets for managers on APS.

The company invested about 1,651 million rubles to ensure labour

safety. The largest investments included:

– The programme to reduce the injuries while walking (SRS –

22.8 million rubles);

– Programme to improve the level of protection in emergencies

(SRS, Metiz – 25.1 million rubles);

– The acquisition of safety equipment (Karelsky Okatysh –

222.4 million rubles, Olkon – 565.0 million rubles);

– Industrial safety systems in the Vorkutaugol mines –

785.2 million rubles.

Investments in Vorkutaugol include the implementation of

technical solutions aimed at creating a new industrial safety

system in mines:

• Explosion-proofi ng systems – triggered barrier;

• Introduction of a multifunctional security system;

• Monitoring and control system for explosion protection in

degassing pipelines;

• The system of explosion-localisation and for monitoring and

controlling explosion protection in mines;

• Provision of an emergency alert system with automatic

(delivery control) and manual (awareness control) confi rmation

of receiving a notifi cation signal by each miner;

• Improvement of regional and local forecast systems.

In 2017 Vorkutaugol implemented a number of activities aimed

at reducing the level of injuries and involving staff in work

safety issues:

• The levels of production control and the division of

responsibility of managers for occupational safety has been

revised;

• An assessment of the effectiveness and measures of the

results of the investigation of accidents has been performed;

correcting activities have been made;

• A programme to ensure the safety of traffi c has been

implemented;

• Competitions: “Work without injuries”, competition of the

best idea for the safe installation of arch support have been

organised;

• Implementation of the “Three Steps to Security” methodology.

Severstal is also actively working on environmental protection and

promotes social programmes in the regions where we work.

Year of ecology. Lead the charge.The ecological protection activity of Severstal is based on the

belief that improving environmental performance contributes

to improving the life quality of people and increases the

competitiveness of the Company. Environmental guidelines are

taken into account in the construction and modernisation of

production. The company purposefully develops programmes to

reduce the environmental impact of man-made work, involving all

employees in this work.

The Company’s expenses for implementation of environmental

measures during 2017 amounted to 2.65 billion rubles.

The most signifi cant events were at Cherepovets:

In July 2017, ahead of schedule, the construction of the combined

gas cleaning of the second ladle and the metal fi nishing unit

was completed. The emission of dust from the metal fi nishing

units is directed to a new bag fi lter, which cleans dusty air from

the ladle furnace. By September, the dust concentration at the

discharge was less than 10 mg/m3, which corresponds to the best

world practice. The expected reduction of dust emissions is some

500 tons/year.

In the framework of accomplishing our long-term obligations

on reduction of discharge of pollutants into water sources,

during 2017 erection works on technical re-equipment of the

section for processing sludge from gas cleaning of blast furnaces

were fi nished. Start-up works are in progress. The new installation

will be brought on line in 2018.

In 2017, work began on the construction of an open waste storage

site for steelmaking and blast-furnace slurry:

– Project documentation has been completed;

– Public hearings on the environmental impact and project

documentation have been organised.

4 FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

Financial statements 62

Auditor's Report 64

Consolidated income statements 68

Consolidated statements of comprehensive income 69

Consolidated statements of fi nancial position 70

Consolidated statements of cash fl ows 71

Consolidated statements of changes in equity 72

Notes to the consolidated fi nancial statements 73


64Severstal

Annual Report 2017


65Severstal

Annual Report 2017


66Severstal

Annual Report 2017


67Severstal

Annual Report 2017


68Severstal

Annual Report 2017

(Amounts expressed in millions of US dollars, except as otherwise stated)


69Severstal

Annual Report 2017



70Severstal

Annual Report 2017



71Severstal

Annual Report 2017



72Severstal

Annual Report 2017

(Am

ount

s ex

pres

sed

in m

illio

ns o

f US

dolla

rs, e

xcep

t as

othe

rwis

e st

ated

)


73Severstal

Annual Report 2017


Severstal Resources

Severstal Russian Steel

Economic environment


74Severstal

Annual Report 2017


Statement of compliance


75Severstal

Annual Report 2017


Basis of measurement

Critical accounting judgments, estimates and assumptions

Useful lives of property, plant and equipment

Impairment of assets

Taxation

Allowance for doubtful debts


76Severstal

Annual Report 2017


Allowance for obsolete and slow-moving inventories

Decommissioning liabilities

Retirement benefit liabilities

Litigation

Deferred tax assets


77Severstal

Annual Report 2017


Consolidation

The acquisition method

Functional currency determination

Functional and presentation currency


78Severstal

Annual Report 2017


Adoption of amended Standards

New accounting pronouncements

IFRS 9 Financial Instruments IAS 39 Financial instrumentsRecognition and Measurement

IFRS 15 Revenue from contracts with customers IAS 11 Construction Contracts IAS 18 Revenue IFRIC


79Severstal

Annual Report 2017


IFRS 16 Leases IAS 17 Leases

Subsidiaries

Business combinations


80Severstal

Annual Report 2017


Investments in associates

Joint arrangements

Goodwill


81Severstal

Annual Report 2017



82Severstal

Annual Report 2017



83Severstal

Annual Report 2017



84Severstal

Annual Report 2017


Calculation of recoverable amount

Loans and receivables

AFS financial assets


85Severstal

Annual Report 2017



86Severstal

Annual Report 2017


Employee benefits


87Severstal

Annual Report 2017



Ordinary shares

Repurchase of issued shares


88Severstal

Annual Report 2017


Sale of goods

Rendering of services

Interest income

Interest expense

Gain/(loss) on remeasurement and disposal of financial investments

Other finance costs


89Severstal

Annual Report 2017



90Severstal

Annual Report 2017



91Severstal

Annual Report 2017



92Severstal

Annual Report 2017



93Severstal

Annual Report 2017


Severstal Resources segment

Severstal Liberia Iron Ore Ltd

2015

AO Olcon

2015

AO Vorkutaugol

2016


94Severstal

Annual Report 2017


Other units

2015

2017

Severstal Russian Steel segment

Redaelli Tecna S.p.A.

2015


95Severstal

Annual Report 2017


2016

Other units

2015

2016


96Severstal

Annual Report 2017



97Severstal

Annual Report 2017



98Severstal

Annual Report 2017



99Severstal

Annual Report 2017



100Severstal

Annual Report 2017



101Severstal

Annual Report 2017



102Severstal

Annual Report 2017



103Severstal

Annual Report 2017



104Severstal

Annual Report 2017



105Severstal

Annual Report 2017



106Severstal

Annual Report 2017


Bonds issued


107Severstal

Annual Report 2017


Bank financing security

Compliance with covenants


108Severstal

Annual Report 2017



109Severstal

Annual Report 2017



110Severstal

Annual Report 2017




111Severstal

Annual Report 2017


Provisions

Share Capital


112Severstal

Annual Report 2017


Earnings per share


113Severstal

Annual Report 2017


Capital management

Dividends


114Severstal

Annual Report 2017




115Severstal

Annual Report 2017



116Severstal

Annual Report 2017


Subsidiaries:

Associates:

Joint ventures:


117Severstal

Annual Report 2017


Subsidiaries:

Disposal of subsidiary (other than discontinued operation)

PBS Coals Ltd


PJSC Dneprometiz


118Severstal

Annual Report 2017


Acquisitions of rights


119Severstal

Annual Report 2017



120Severstal

Annual Report 2017


Adjustments to reconcile profit from operations to EBITDA:




121Severstal

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122Severstal

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Credit risk


123Severstal

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124Severstal

Annual Report 2017


Impairment losses

Concentration of credit risk

2017

2016


125Severstal

Annual Report 2017


2015

Liquidity risk


126Severstal

Annual Report 2017


Covenant compliance risk

Currency risk


127Severstal

Annual Report 2017


Sensitivity analysis


128Severstal

Annual Report 2017


Commodity price risk

Interest rate risk

Fair value sensitivity analysis for fixed rate instruments

Cash flow sensitivity analysis for variable rate instruments


129Severstal

Annual Report 2017


Fair value hierarchy


130Severstal

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131Severstal

Annual Report 2017


5 ADDITIONAL INFORMATION

ADDITIONAL INFORMATION



ADDITIONAL INFORMATION

134Severstal

Annual Report 2017

Additional information

Shareholder Information

Severstal’s shares are traded on the largest Russian exchange – MICEX Stock exchange, which is a part of Moscow Exchange Group.

Moreover, Severstal’s shares are circulated in the form of depositary receipts on the London Stock Exchange and through the PORTAL

trading system in the US.

Listing and tickers

Moscow Exchange (MICEX) – CHMF GDRs on the London Stock Exchange (LSE) – SVST

Severstal’s stocks traditionally contribute to the capitalisation of key indices on the stock exchanges on which the company is listed.

Severstal makes a sizeable contribution to the MICEX and RTS indices in Russia. Additionally, Severstal is a solid constituent of MSCI

Russia and FTSE Russia IOB at LSE.

Indexes

Index Weight*

RTS 1.38 %

MICEX 1.38 %

MSCI Russia 1.78 %

FTSE Russia IOB 2.10 %

Russian Depositary Index 1.54 %

Bloomberg World Iron/Steel Index 2.64 %

* as at 11 December 2017

Credit ratings

Standard&Poor’s Moody’s Fitch Ratings

PAO Severstal Credit Rating/Outlook BBB-/Stable Baa3/Positive BBB-/Stable

Date of Rating** 20 September 2016 29 January 2018 20 October 2016

** “Date of Rating” does not refl ect subsequent confi rmations

Share price at MICEX in 2017, RUB

400

200

600

800

1000

1200

0

Apr

17

May

17

Jun

17

Jul

17

Aug

17

Sep

17

Oct

17

Nov

17

Dec

17

Mar

17

Feb

17

Jan

17

CHMF RX Equity

GDR Price at LSE in 2017, USD

10

8

6

4

2

12

14

16

18

0

Apr

17

May

17

Jun

17

Jul

17

Aug

17

Sep

17

Oct

17

Nov

17

Dec

17

Mar

17

Feb

17

Jan

17

SVST LI Equity


135Severstal

Annual Report 2017

During 2017 Severstal continued to be a leader in terms of

effi ciency improvement implementation which enabled the

Company to maintain a relatively high share price premium in

Russian steel sector.

In such a volatile market environment the Company’s ability

to generate substantial free cash fl ow level throughout the

cycle as well as its clear intention to realise signifi cant value for

shareholders via generous dividend payments balanced with an

aim to retain strong fi nancial position makes it the best in class

protective asset.

In 2017 Severstal hosted its annual Capital Markets Day in London

on the 2nd of November. During the event top management

highlighted TSR (Total Shareholder Return) as a key indicator of

assessing the Company’s performance. Severstal believes that

TSR will be a more comprehensive indicator allowing to assess

fi nancial and non-fi nancial performance of the Company in order

to maximise shareholder value.

Dividends

Severstal resumed paying dividends in 2010. The Severstal Board

of Directors has modifi ed the Company’s dividend policy to return

50% of the net profi t for a given reporting period to shareholders

provided that Net debt/EBITDA is below 1.0x, refl ecting Severstal’s

mission to maximise shareholder returns.

In 2017 at the Capital Markets Day the top management of

Severstal confi rmed that the target for dividend payout will be Free

Cash Flow for the period, given that Net Debt is below 1.0x. Should

Net Debt/EBITDA ratio go below 0.5x the Company may allocate

to dividends more than full free cash fl ow generated.

Dividends per share/GDR announced for the periods ended in

2017, RUB:

Q1 2017 24.44

Q2 2017 22.28

Q3 2017 35.61

Q4 2017 27.72

2018 fi nancial calendar

Q1 Operational results April 2018

Q1 IFRS fi nancial results April 2018

Shareholders’ AGM June 2018

Q2 Operational results July 2018

Q2 IFRS fi nancial results July 2018

Q3 Operational results October 2018

Q3 IFRS fi nancial results October 2018

Capital Markets Day Oct-Nov 2018

6 APPENDIX

APPENDIX

Appendix 136

Appendix 138

APPENDIX

138Severstal

Annual Report 2017

Appendix

ALTERNATIVE PERFORMANCE MEASURES (Amounts expressed in million of US dollars, except as otherwise stated)

Year ended 31 December

2017 2016

EBITDA1 2,577 1,911

Free Cash Flow 1,393 1,021

1. The Group defi nes EBITDA as profi t from operations plus depreciation and amortisation of productive assets (including the Group’s share in depreciation and amortisation of associates and joint ventures)

adjusted for gain/(loss) on disposals of property, plant and equipment and intangible assets and for share in associates’ and joint ventures’ non-operating income/(expenses). EBITDA has limitations as an

analytical tool, and investors should not consider it in isolation, or as a substitute for analysis of the Group’s operating results as reported under IFRS.

EBITDA Reconciliation


2017 2016

Profi t from Operations 2,162 1,517

Add:

Depreciation and amortisation of productive assets 403 342

Loss on disposal of property, plant and equipment and intangible assets 3 52

Share in associates’ and joint-ventures’ depreciation and amortisation and non-operating (income)/expenses 9 –

EBITDA 2,577 1,911

Free Cash Flow reconciliation


2017 2016

Net cash from operating activities 1,914 1,477

CAPEX (591) (525)

Other 70 69

Free cash fl ow 1,393 1,021

Severstal Russian Steel Division

Summary of Severstal Russian Steel’s selected fi nancial indicators


Key performance indicators 2017 2016 Change, %

Revenue (US$ million) 7,182 5,426 32.4%

Gross profi t (US$ million) 2,230 1,939 15.0%

Profi t from operations (US$ million) 1,482 1,311 13.0%

Operating margin (%) 20.6% 24.2% n/a

EBITDA (US$ million) 1,761 1,543 14.1%

EBITDA per tonne (US$/t) 161 144 11.8%

EBITDA margin (%) 24.5% 28.4% n/a

Average steel product price (US$/t)* 593 456 30.0%

* All steel products, incl. pipes, etc.; Ex Works price terms

Dynamics of Severstal Russian Steel’s average steel price


Product 2017 2016 Change, %

Hot-rolled strip and plate (US$/t) 517 374 38.2%

Large diameter pipes (US$/t) 1,373 1,179 16.5%

Cold-rolled fl at products (US$/t) 591 468 26.3%

Metalware products (US$/t) 893 764 16.9%


139Severstal

Annual Report 2017

Galvanized and other metallic coated sheet (US$/t) 718 575 24.9%

Long products (US$/t) 431 343 25.7%

Semi-fi nished products (US$/t) 422 289 46.0%

Other tubes and pipes, formed shapes (US$/t) 571 444 28.6%

Colour-coated sheet (US$/t) 876 771 13.6%

Scrap (US$/t) 257 201 27.9%



2017 2016

US$ million % of total US$ million % of total Change, %

Materials

Scrap metal 673.0 13.6% 467.2 13.4% 44.0%

Coal 870.6 17.6% 545.4 15.6% 59.6%

Iron ore 542.6 11.0% 336.1 9.6% 61.4%

Ferroalloys and nonferrous metals 415.7 8.4% 274.2 7.9% 51.6%

Pellets 434.3 8.8% 269.0 7.7% 61.4%

Other materials 623.5 12.5% 514.0 14.8% 21.3%

Total materials 3,559.7 71.9% 2,405.9 69.0% 48.0%

Energy

Electric power 133.0 2.7% 107.9 3.1% 23.3%

Gas 232.4 4.7% 194.2 5.6% 19.7%

Other energy resources 57.3 1.1% 44.9 1.2% 27.6%

Total energy 422.7 8.5% 347.0 9.9% 21.8%

Labour costs 535.9 10.8% 452.5 13.0% 18.4%

Depreciation and amortisation 241.8 4.9% 204.2 5.9% 18.4%

Services 125.9 2.5% 100.9 2.9% 24.8%

Change in inventories (71.9) (1.5%) (121.4) (3.5%) (40.8%)

Other 138.2 2.9% 98.4 2.8% 40.4%

Total 4,952.3 100.0% 3,487.5 100.0% 42.0%

Sales by products


Product2017 2016 Change, %

Thousand tonnes

US$ millionThousand

tonnesUS$ million

Thousand tonnes

US$ million

Hot-rolled strip and plate 4,755 2,458.7 4,772 1,784.8 (0.4%) 37.8%

Large diameter pipes 416 570.4 389 459.2 6.9% 24.2%

Cold-rolled sheet 1,324 782.6 964 450.6 37.3% 73.7%

Metalware products 615 549.7 641 489.7 (4.1%) 12.3%

Galvanized and other metallic coated

sheet654 469.5 560 322.3 16.8% 45.7%

Long products 1,443 621.2 1,439 493.4 0.3% 25.9%

Semi-fi nished products 519 219.0 724 209.6 (28.3%) 4.5%

Other tubes and pipes, formed shapes 831 474.3 840 373.2 (1.1%) 27.1%

Colour-coated sheet 403 353.0 386 297.7 4.4% 18.6%

Scrap 24 6.2 41 8.2 (41.5%) (24.4%)

Total steel products 10,984 6,504.6 10,756 4,888.7 2.1% 33.1%

Shipping and handling and other – 677.8 – 537.3 n/a 26.1%

Total sales by products 10,984 7,182.4 10,756 5,426.0 2.1% 32.4%

Inter-segment transaction (40) (66.2) (43) (54.6) (7.0%) 21.2%

APPENDIX

140Severstal

Annual Report 2017

Domestic sales by product



Thousand tonnes

US$ millionThousand

tonnesUS$ million

Thousand tonnes

US$ million

Hot-rolled strip and plate 2,243 1,262.8 2,179 919.2 2.9% 37.4%

Large diameter pipes 304 430.0 380 453.5 (20.0%) (5.2%)

Cold-rolled sheet 851 503.0 784 365.8 8.5% 37.5%

Metalware products 413 385.6 401 290.5 3.0% 32.7%


sheet365 257.0 459 265.5 (20.5%) (3.2%)

Long products 1,375 589.4 1,332 457.4 3.2% 28.9%

Semi-fi nished products 36 19.0 34 8.5 5.9% 123.5%



Scrap 24 6.2 41 8.2 (41.5%) (24.4%)

Total steel products 6,631 4,137.9 6,628 3,328.7 – 24.3%


Total sales by products 6,631 4,569.8 6,628 3,679.7 – 24.2%

Inter-segment transaction (40) (66.2) (43) (54.6) (7.0%) 21.2%

Export sales by product



Thousand tonnes

US$ millionThousand

tonnesUS$ million

Thousand tonnes

US$ million

Hot-rolled strip and plate 2,512 1,195.9 2,593 865.6 (3.1%) 38.2%

Large diameter pipes 112 140.4 9 5.7 n/a n/a

Cold-rolled sheet 473 279.6 180 84.8 162.8% 229.7%

Metalware products 202 164.1 240 199.2 (15.8%) (17.6%)


sheet289 212.5 101 56.8 186.1% 274.1%

Long products 68 31.8 107 36.0 (36.4%) (11.7%)

Semi-fi nished products 483 200.0 690 201.1 (30.0%) (0.5%)



Total steel products 4,353 2,366.7 4,128 1,560.0 5.5% 51.7%


Total sales by products 4,353 2,612.6 4,128 1,746.3 5.5% 49.6%

Severstal Resources Division

Summary of Severstal Resources’ selected fi nancial indicators


Key performance indicators (US$ million) 2017 2016 Change, %

Revenue 1,727 1,154 49.7%

COS (808) (689) 17.3%

Gross profi t 919 465 97.6%

General and administration expenses (61) (47) 29.8%

Distribution expenses (144) (114) 26.3%

EBITDA 812 397 104.5%


141Severstal

Annual Report 2017

Profi t from operations 677 235 188.1%

EBITDA margin 47.0% 34.4% n/a

Operating margin 39.2% 20.4% n/a



2017 2016

US$ million % of total US$ million % of total Change, %

Materials

Grinding balls and rods 20.3 2.5% 15.9 2.3% 27.7%

Explosives 26.6 3.3% 22.0 3.2% 20.9%

Metal – roll 18.2 2.3% 10.8 1.6% 68.5%

Other materials 74.1 9.1% 61.9 8.9% 19.7%

Raw materials 139.2 17.2% 110.6 16.0% 25.9%

Integral implements and spares 130.1 16.1% 116.1 16.9% 12.1%

Total materials 269.3 33.3% 226.7 32.9% 18.8%

Energy

Electric power 108.6 13.4% 86.7 12.6% 25.3%

Gasoline 63.8 7.9% 47.5 6.9% 34.3%

Other energy resources 38.2 4.8% 22.7 3.3% 68.3%

Total energy 210.6 26.1% 156.9 22.8% 34.2%

Labour costs 234.9 29.1% 200.3 29.1% 17.3%

Depreciation and amortisation 131.7 16.3% 113.1 16.4% 16.4%

Services 53.5 6.6% 46.2 6.7% 15.8%

Change in inventories (6.0) (0.7%) 11.1 1.6% –

Other (85.9) (10.7%) (65.2) (9.5%) 31.7%

Total 808.1 100.0% 689.1 100.0% 17.3%

Sales by products



Thousand tonnes

US$ million Thousand

tonnes US$ million

Thousand tonnes

US$ million

Coking coal concentrate 3,280 430.4 4,147 326.4 (20.9%) 31.9%

Steam coal 1,574 40.2 2,040 37.7 (22.8%) 6.6%

Pellets 11,133 884.6 10,842 534.5 2.7% 65.5%

Iron ore concentrate 4,251 215.6 4,103 128.7 3.6% 67.5%

Total sales by products 20,238 1,570.8 21,132 1,027.3 (4.2%) 52.9%


Total sales revenue 20,238 1,726.7 21,132 1,153.8 (4.2%) 49.7%

Inter-segment transactions (11,899) (995.0) (12,095) (609.2) (1.6%) 63.3%

APPENDIX

142Severstal

Annual Report 2017

Domestic sales by products



Thousand tonnes

US$ millionThousand

tonnes US$ million

Thousand tonnes

US$ million

Coking coal concentrate 3,280 430.4 3,928 314.8 (16.5%) 36.7%

Steam coal 1,543 39.5 1,747 35.7 (11.7%) 10.6%

Pellets 5,526 451.5 5,955 279.1 (7.2%) 61.8%

Iron ore concentrate 4,251 215.6 4,103 128.7 3.6% 67.5%

Total sales by products 14,600 1,137 15,733 758.3 (7.2%) 49.9%


Total domestic sales revenue 14,600 1,183.3 15,733 789.4 (7.2%) 49.9%

Inter-segment transactions (11,899) (995.0) (12,095) (609.2) (1.6%) 63.3%

Export sales by products



Thousand tonnes

US$ millionThousand

tonnes US$ million

Thousand tonnes

US$ million

Coking coal concentrate – – 219 11.6 (100.0%) (100.0%)

Steam coal 31 0.7 293 2.0 (89.4%) (65.0%)

Pellets 5,607 433.1 4,887 255.4 14.7% 69.6%

Total sales by products 5,638 433.8 5,399 269.0 4.4% 61.3%


Total export sales revenue 5,638 543.4 5,399 364.4 4.4% 49.1%


143Severstal

Annual Report 2017

PAO Severstal

Legal address:

30 Mira Street,

Cherepovets, Vologda Region, 162608, Russia

Postal address:

2 K. Tsetkin Street

Moscow, 127299, Russia

Tel: +7 (495) 926 7766

Fax: +7 (495) 926 7761

www.severstal.com

Corporate Secretary

Artem Bobulich

Tel: +7 (8202) 53 0900

Fax: +7 (8202) 53 2159

Email: [email protected]

Public Relations

Vladimir Zaluzhsky

Tel/Fax: +7 (495) 926 77 66


Anastasia Mishanina

Tel/Fax: +7 (495) 926 77 66


Investor Relations

Vladimir Zaluzhsky

Tel/Fax: +7 (495) 926 77 66


Evgeny Belov

Tel/Fax: +7 (495) 926 77 66


Human Resources

Alexandr Chigarkov

Tel: +7 (495) 926 77 61


Corporate Social Responsibility

Natalia Poppel

Tel/Fax: +7 (495) 926 77 66


Auditor

JSC KPMG

10, Presnenskaya Naberezhnaya,

Block C, fl oor 31, Moscow, 123112, Russia

Tel: +7 (495) 937 4477

Fax: +7 (495) 937 4499

Contacts

Registrar

ZAO Partnyor

Address: 22, Pobedy Avenue, Cherepovets

162606, Vologda Region, Russia

Tel: +7 (8202) 53 6021

Fax: +7 (8202) 55 3335

Licence no.: 10–000–1–00287

Date of issue: 04.04.2003 r.

Expiry date: no expiry date

Issued by: FSFM of Russia

Documents

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