Severstal reports Q1 2016 operational results

PAO Severstal (MICEX-RTS: CHMF; LSE: SVST), one of the world’s leading vertically integrated steel and steel-related mining companies, today announces its operational results for Q1 2016.

PAO Severstal (MICEX-RTS: CHMF; LSE: SVST), one of the world’s leading vertically integrated steel and steel-related mining companies, today announces its operational results for Q1 2016.


• Hot metal output remained largely unchanged q/q at 2.35 mln tonnes (Q4 2015: 2.34 mln tonnes).

• As operations of converter #1, continuous casters #4 and #5 and the billet caster at Cherepovets Steel Mill were recommenced following maintenance works, crude steel production increased 6% q/q to 2.91 mln tonnes (Q4 2015: 2.75 mln tonnes). Improving production run-rates at Balakovo positively affected crude steel output as well.

• Consolidated sales of steel products decreased 7% q/qto 2.45 mln tonnes (Q4 2015: 2.62 mln), which reflects further contractionin domestic consumption, partially on the back of seasonal factors.

• Moreover, refurbishment of the four-stand cold rolling mill at Cherepovets Steel Mill started in January 2016, which resulted in lower output of high value-added products, which was somewhat offset by an increase in hot rolled coil. This refurbishment, which is expected to be completed in Q2 2016, will increase mill capacity to 200,000tonnes per annum and significantly improve product quality, enabling the company to expand its product line and enter new markets.

• In the meantime, share of high value-added (HVA) products in the sales portfolio temporarily decreased to 42% (Q4 2015: 47%).

• The abovementioned factors resulted in lower availability of high value-added products for domestic deliveries. That said, the share of domestic steel products sales volumes in the sales mix declined to 60% (Q4 2015: 64%).

• Coking coal concentrate output was negatively affected as a result of the tragic incident at Vorkutaugol’s Severnaya mine on 26 February 2016. Whilst the investigation continues, Government Committee has provisionally determined that the main reasons behind the rock burst and subsequent methane blast was geological factors. Mining operations at Severnaya remain suspended. All of Vorkutaugol's other four mines and one open pit are operating as usual. In 2015 the Severnaya mine produced approximately 1.5 mln tonnes of coking coal concentrate, which is approximately 26% of Vorkutaugol’s overall production of coking coal concentrate in 2015 (5.7mln tonnes).

• By the end of 2015 global steel prices had reached the lowest level in the last ten years. Ongoing concerns regarding the prospects of the Chinese economy as well as the lack of growth in steel demand globally continue to putpressure on the steel market. Nevertheless, this subdued picture changed significantlyin March 2016 with globalhot rolled coil prices rallying more than 40% compared with the previous month. In the domestic market, USD-denominated prices started to increase as well, reflecting both RUB appreciation and proactive initiatives by Russian steel producers to increase local prices in order to catch up with export USD-nominated parity. The domestic market, which usually offers higher sales margins, remains a priority for the Company.


● Coal mining at Vorkutaugol has been negatively impacted due to the tragic incident at the Severnaya mine. The Company is still considering different options for the mine’s recovery. Meanwhile, the decision on handling the underground fire in the mine via flooding with water had been taken. The operation will take approximately 60 to 80 days. The mine might be reopened in due course. However, the timeframe is unclear at the moment. The Company will provide further updates as soon as information becomes available. All of Vorkutaugol's other four mines and one open pit are operating as usual.
● Reflecting the abovementioned as well as taking into account coking coal inventories levels onsite, coking coal concentrate sales at Vorkutaugol decreased 8% q/q to 1.36 mln tonnes (Q4 2015: 1.48 mln tonnes).
● Meanwhile, steam coal sales at Vorkutaugol increased 6% q/q reflecting seasonally strong domestic demand.
● While internal procurement of iron ore pellets improved as a result of the completion of maintenance works at the blast furnace shop, seasonally weaker demand both in the domestic and export markets resulted in a 11% q/q decline in iron ore pellets sales to 2.41 mln tonnes (Q4 2015: 2.70 mln tonnes).
● Due to reducedprofitability of third party iron ore concentrate sales, Olcon did not make any external shipments in Q1 2016, which is the key reason behind 2% q/q decline in iron ore concentrate sales volumes.
● Average coking coal concentrate selling prices decreased 13% q/q partially reflectinga 9% q/q declinein hard coking coal benchmark contract prices (Australia, FOB) in Q1. A decline in the share of hard coking coal within the sales mix as a result of the incident at Severnaya mine impacted the average selling price as well. Nevertheless, the moderate recovery of global coking coal spot prices throughout the Q1 2016, as well as the RUB appreciation provide Russian coal producers with an ability to start positively revising domestic coal prices.
● Despite a 4% q/q improvement in the global iron ore benchmark (China, CFR) average USD-denominated selling prices of iron ore concentrate at Olcon declined26% q/q. While average USD-denominated selling prices of iron ore pellets at Karelsky Okatysh declined 16% q/q. Prices for iron ore pellets at Karelsky Okatysh were more resilient due to the geographical structure of sales and structural changes inthe global iron ore pellets seaborne market. The USD-denominated prices of domestic iron ore products are expected to increase in Q2 2016 following global raw material markets trends.