Severstal Joint Stock Company

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Severstal Joint Stock Company

Mira Street 30
Cherepovets
Vologda 162600
Russia
Telephone: +7 (8202) 568009
Fax: +7 (8202) 571276
Web site: http://www.severstal.ru

Public Company
Incorporated: 1993
Employees: 53,000
Sales: $2.8 billion (2003)
Stock Exchanges: RTS (Moscow)
Ticker Symbol: CHMF
NAIC: 331111 Iron and Steel Mills

Severstal Joint Stock Company, also known as OAO Severstal, is one of Russia's largest steel mills and the center of the steel industry in the northwest of the country. The company's facilities in the centrally located city of Cherepovets encompass all stages of the metallurgical process, including production of coke, production of pig iron in blast furnaces, the manufacture of raw iron into steel, and the production of finished steel products using both hot-rolled and cold-rolled methods. The company also has electric arc furnaces for the processing of steel scrap. Severstal's annual output is around 9.6 million metric tons of steel. Its major customers include both foreign and domestic automobile companies and oil and gas concerns. The first steel producing facilities were built in Cherepovets after World War II, and the mill grew to be one of the more technically advanced facilities in the Soviet steel industry. In the 1990s, General Director Aleksey Mordashov guided Severstal through the transition to a market economy and won the company a reputation as one of the bettermanaged firms in Russian industry.

Developing Steel Capacity Under Soviet Leadership

The raw materials for the steel industry in northwest Russia were first discovered between 1930 and 1933. Iron ore deposits were found above the Arctic Circle on the Kola Peninsula and coal was discovered in the Pechora River region of the far north. Traditionally, steel mills were built either close to iron or close to coal, but since these new deposits were located in such remote and inhospitable territory, Soviet planners decided to construct the mill in a central area near the intersection of trade routes for ore, coal, and finished products. The chosen site was near the small town of Cherepovets, equidistant from Moscow and St. Petersburg and 1,500 to 2,000 kilometers away from iron and coal sources.

On June 20, 1940, the government of the U.S.S.R. approved the resolution "On the Organization of a Metallurgical Base in the Northwest of the USSR," calling for the construction of a steel mill near Cherepovets. Dozens of scientific institutes began testing the raw material deposits and drawing up plans for the mill, but the USSR's involvement in World War II temporarily halted progress. Construction was resumed in early 1948. In 1951 a metal prefabrication shop was finished, followed by a heating and electrical power center in 1954. On August 24, 1955, the blast furnace—which transforms iron oxide ore into molten iron—was ready for operation. Blast furnace operator F.E. Drozdov drilled a tap hole at 3:25 p.m. and the first molten iron ran out of the furnace. This date was considered the birthday of the Cherepovets Steel Mill.

Additional components were added to the mill over the next five years. In February 1956 an oven began processing coal into coke, a source of pure carbon used to reduce iron ore in the blast furnace. The first steel ingot was cast on May 1, 1958. In 1959 rolling mills began processing semi-finished steel into finished sheets. The Cherepovets mill now had all the pieces of a full metallurgical cycle. Skilled steel workers were recruited from other regions to train Cherepovets residents, and their training mixed with onsite experience to produce a distinctive smelting process. In particular, the Cherepovets mill prided itself on its ability to optimize payload volumes in the blast furnace and on the high output of the blooming mill.

In the 1960s the Cherepovets mill became a leader in domestic steel production, implementing more advanced technology than the nation's much older steel mills in the Ural Mountains region. In 1963 the mill produced its first cold-rolled steel, allowing for secondary finishing after the hot-rolling mill. The first twin-hearth furnace in the USSR was put into operation in 1965. The following year the mill was awarded the Order of Lenin. In 1969 the Cherepovets mill began operating an electric arc furnace, which uses electric power to efficiently produce steel from scrap rather than from molten iron. A section bending mill began operation in 1972. In 1975 a Model 2000 continuous hot-rolling mill began producing extra-thin strip to meet domestic demand for more sheet steel. The 100 millionth metric ton of steel was produced at Cherepovets in 1979. The Cherepovets mill also took on many social responsibilities in addition to steel production since it was the only major employer in town. Under the socialist system the steel mill provided for the needs of its workers by maintaining city apartments, operating public transportation, supporting schools, and building an airport.

Nationwide steel production was growing steadily from the 1950s to the 1980s, but it was not enough to keep up with the demands of the domestic machine building industry. According to Boris Rumer, the steel industry in the USSR was characterized by quantitative rather than qualitative improvements; consumption of raw materials and electricity per ton of steel produced was high by international standards. The Cherepovets mill was a major producer of thin sheet steel, which was chronically in short supply. But Cherepovets was not able to produce enough semi-finished steel slabs on its own to keep its rolling mills operating at full capacity, so millions of tons of raw steel had to be brought in from other sites every year. In November 1980 the commissioning of a new oxygen converter helped remedy some of this imbalance. Oxygen converters transformed iron into steel more efficiently than the traditional open-hearth furnaces already in use at Cherepovets. Smaller oxygen converters had been tested at other sites in the USSR starting in the 1960s; the converter now built at Cherepovets was a larger and more efficient version of those.

In 1983 the Cherepovets Steel Mill was reorganized into the Cherepovets Iron and Steel Complex in recognition of the complex nature of its operations. In April 1986 the "Severyanka" blast furnace No. 5 cast its first iron. With a capacity of 5,580 cubic meters, this furnace could produce 20 times as much pig iron as the furnaces built at the start of the century in the Ural Mountains.

The national shortage of steel was a central concern at the 27th Congress of the Communist Party in 1986. Iron and steel production had leveled off after 1980 and was holding back production in the oil, gas, and automotive machine building industries. Cherepovets began testing a continuous casting machine near the end of the decade that was expected to eliminate the need to ship raw slabs from other enterprises. But in late 1989 a month-long strike at the Vorkuta coal mine, which had been established to exploit the Pechora coal, nearly depleted the steel mill's coal reserves and held back production. In 1991 the Soviet Union fell apart, bringing an end to the usual way of operating at the Cherepovets mill.

Making the Transition to a Private Enterprise: 1992–95

The sudden collapse of the Communist system created chaos in Russian industry. Formerly, all payments bypassed individual companies and were processed at the state bank; now companies began billing each other directly, but they had no infrastructure to manage payments. Aleksey Mordashov became finance director at the Cherepovets mill in 1992 and set about trying to develop an efficient cash flow system. Mordashov was a native of Cherepovets who had studied at the Leningrad Institute of Economics & Engineering and was then hired as an economist at the steel mill. He was sent to Austria for training, where he experienced a radically different way of doing business—responding to customer demands rather than to the production targets of central planners. He was only 26 years old when Cherepovets General Director Yuri Lipukhin, prizing youthful flexibility over Soviet-era experience, appointed him to the finance director position.

On September 24, 1993, a presidential decree transformed the Cherepovets mill into the joint stock company OAO Severstal ("Northern Steel"). Early in 1994 shares in the firm were distributed to workers and Lipukhin was elected general director. The exact details of transfer of ownership during this tumultuous period are unclear. Mordashov apparently began buying shares personally and through the holding company Severstal-Invest. In the end he controlled 16 percent of the company directly and up to one-half indirectly, making him one of the richest men in Russia by the end of the decade.

Company Perspectives:

Severstal aims at being a world steelmaking leader and an attractive place of work. The Company's Mission: To be the best partner for all interested parties; to create competitive advantages for its customers; to generate growing and sustainable demand for suppliers; to guarantee an attractive income to shareholders and a decent level of salaries to Company employees; to contribute to the development of employees' creative potential.

Severstal's first few years as a private company were full of turmoil. In the spring of 1994 workers held a strike demanding cost-of-living wage increases as well as the resignation of the Russian government. Management begged the workers to be patient as the company waited for payments. Many of the payments Severstal did receive were barter rather than cash. The union that led the strike was working with the semi-fascist organization Russian National Unity; many workers were sympathetic with their nationalistic ideas of giving precedence to ethnic Russians. The union also contacted the Vorkuta coal miners, who threatened to strike if they were not paid for shipments. In the end, Severstal made payments to the coal miners and managed to get its own facilities running again after a short stoppage. In the fall of 1995 the Soviet press reported that President Boris Yeltsin had signed a decree including the Cherepovets facility in a new state-controlled metallurgical enterprise, but the decree was not signed by other government officials and did not take effect. Severstal's output fell more than 20 percent from 1989 levels during this period. Meanwhile, the Severstal group was expanding vertically to include longtime iron ore suppliers such as the Karelsky Okatysh mine and the Olenogorsky mining and processing plant in the Karelia region.

Reform and Expansion Under Mordashov: 1996–2004

Severstal's operations improved after 1996, when Mordashov was elected general director. He was more of a marketwise manager than many Russian oligarchs and pulled together a team to reform the company's operations. Mordashov brought in international consultants, cut thousands of jobs, and established cost and profit centers to make managers more accountable. At the same time, he tried to motivate Severstal's demoralized workforce by offering respectable wages and incentives. He also started phasing out the inefficient open-hearth furnaces in favor of oxygen converters. In 1996 output increased for the first time since the transition, reaching 7.4 million metric tons of finished steel.

Because the domestic economy was suffering, Severstal sought business in foreign markets. In 1996 about 60 percent of production was exported to North America, Southeast Asia, and China. Russian mills were able to produce steel at such low costs that the United States and the European Union accused them of dumping; opposition to Russian imports caused Severstal to turn its attention to domestic markets after the start of the new millennium.

In 2000 Severstal expanded into new markets through acquisitions. It purchased a Model 5000 rolling mill from the Izhorskiye Zavody near St. Petersburg in April with plans to modernize the factory and use it to produce pipes for the natural gas monopoly Gazprom. This facility became known as the Izhorsky Pipe Factory. That fall Severstal moved into the steel-consuming sector for the first time when it acquired a controlling interest in the off-road vehicle manufacturer Ulyanov Automobile Factory (UAZ). In 2001 Severstal acquired the coal mining concern Kuzbassugol and, after a protracted battle with Siberian Aluminum, the engine builder Zavolzhsky Motor Plant. That year low worldwide steel prices, a drop in demand from Southeast Asia and the imposition of steel quotas in the United States led to a $466.9 million net loss on sales of $1.79 billion after a $452.7 million profit the year before. But production remained steady and the company returned to profitable operation when steel prices rose in 2002.

During this time, Severstal also was spinning off many of the side enterprises that had sprung up during the Soviet period. Mordashov already had reduced Severstal's involvement in social services such as housing, transportation, and education. Now he hoped that the establishment of independent side enterprises would generate more diverse opportunities for job growth in a town that was still dependent on the steel mill. Mordashov put market-minded young people in charge of the furniture division Severstal-mebel and the kitchenware division Severstal-emal. Severstal's repair and maintenance division became an independent engineering and machine building concern and the catering division became a food company in charge of a brewery, restaurants, and a meat processor.

Severstal's restructuring became even more extensive in late 2001 when the company's activities were divided into three major divisions: steel production, raw materials, and the automotive industry. In mid-2002 these divisions became the independent companies OAO Severstal, OAO Severstal-Resurs, and OAO Severstal-Avto; shares in them were distributed in lieu of a dividend. The three companies became part of the loosely connected Severstal Group, of which OAO Severstal, or Severstal Joint Stock Company, was the largest and most profitable part.

Severstal's production capacities continued to develop. A new electric arc furnace had begun operation in 1999; in 2002 a continuous casting steel billet machine was added at this shop. Severstal signed an agreement with Arcelor S.A. in April 2002 for the joint production of galvanized steel. The venture, known as Severgal, was 75 percent controlled by Severstal and would produce zinc-coated steel sheet for the automotive industry when a continuous galvanizing line was completed. Also in 2002, Mordashov became chairman of the board and was replaced as general director by A.N. Kruchinin, who had been working at Severstal since 1982.

Key Dates:

1940:: A Soviet resolution calls for the creation of a steel mill at Cherepovets.
1947:: Construction of the mill is resumed after a hiatus during World War II.
1955:: The Cherepovets blast furnace produces its first molten iron.
1969:: The first electric arc furnace begins operation.
1980:: An oxygen converter begins producing steel as part of a plan to replace inefficient open-hearth furnaces.
1986:: The very large Severyanka blast furnace begins producing pig iron.
1994:: The Cherepovets mill is privatized as Severstal.
1996:: Alexey Mordashov becomes general director and implements reforms at Severstal.
2002:: Severstal's raw material and automotive operations are spun off into separate companies.
2003:: Severstal acquires Rouge Steel Co. of Michigan.

In 2003 Severstal began pursuing opportunities for foreign acquisitions. That fall it bid on the privatization of Krivorozhstal, the largest steel producer in Ukraine, but the tender was awarded to a firm controlled by the Ukrainian president's sonin-law even though Severstal's bid was higher. The company also bid on the Hungarian steel mill Dunaferr, but in December 2003 it transferred its attention to the bankrupt U.S. firm Rouge Industries, Inc., parent of Michigan-based Rouge Steel Co. In a deal valued at around $285 million, Severstal beat out United States Steel Corporation to gain control of this company, which became part of its new subsidiary Severstal North America Inc. Severstal considered shipping steel slabs to be rolled and finished in Michigan, but it was unclear what would happen to the American plant's melting shop. In the spring of 2004 Severstal also declared an interest in the Czech state-owned steel mill Vitkovice and secured Citigroup as an adviser for this investment. With a 2003 profit of $892 million, it appeared that Severstal had successfully transformed itself into a stable private enterprise. The company's domestic operations were now secure enough to allow for expansion beyond Russia's borders.

Principal Subsidiaries

OAO Cherepovets Steel Rolling Mill; ZAO Izhorsky Pipe Factory; OAO Orlovskii Steel Rolling Mill; Severstal-mebel; OOO Severstal-emal; OOO ZAO Severgal (75%); Severstal North America Inc. (U.S.A.).

Principal Competitors

Magnitogorsk Iron and Steel Works Joint Stock Company; Novolipetsk Metallurgical Group Joint Stock Company; United States Steel Corporation; LNM Group.