Severstal’s H1 results for 2012 saw revenue slightly down by 2.2% to $7397M (H1 2011: $7566M), the result being more resilient than the earnings due to ramp-up of new production facilities at Severstal International in H1 2012.

EBITDA was down 31.9% to $1226M (H1 2011: $1799M) and the EBITDA margin was down to 16.6% (H1 2011: 23.8%), reflecting lower realized prices at Severstal Russian Steel and Severstal Resources.
Both Severstal’s steel divisions – Severstal Russian Steel and Severstal International – delivered improved results Q1/Q2 2012 thanks to lower costs and better product mixes. Severstal Resources performance was weaker compared to Q1 due to lower coking coal and iron ore prices and slightly higher costs at Vorkuta, due to planned maintenance work.

Cash capital expenditure in Q2 was $371M, up 33% from the seasonally lower levels in Q1. Following the completion of an expansion and modernisation programme in the US. The company is now focusing capex on the steel and mining assets in Russia. The major capex projects in 2012 include the Balakovo minimill, the reconstruction of coke battery #7 at Cherepovets and a coalmine methane thermoelectric power station at Vorkuta coal operations. The FY 2012 capex target across all divisions remains $1.7bn.

Severstal Russian Steel’s Q2 revenue was down 0.8% Q1/Q2 to $2209M (Q1 2012: $2226M) driven by lower selling volumes. EBITDA, however, increased 44.6% Q/Q to $269M (Q1 2012: $186M) with EBITDA margin up 3.8% Q/Q to 12.2% as a result of lower input costs and a $56.7M one-off non-cash inventory provision, taken in Q1.

In the US, Q2 saw softening in demand and prices, but a lag in realised prices passed on from a strong Q1 helped soften the impact of declining prices. This coupled with the higher share of value-added galvanized steel in the sales portfolio due to the launch of two modern galvanizing lines in Q1 helped minimise the decrease in average price in Q2. Slightly lower prices and weaker selling volumes contributed to lower revenue of $1063M (Q1 2012: $,095M). However lower production costs provided support for earnings growth with EBITDA climbing 16.7% to $77M (Q1 2012: $66M). EBITDA margin improved 1.2% Q/Q to 7.2%, while EBITDA per tonne increased 18.5% Q/Q to $64.


In Russia in Q3 demand is expected to be similar to Q2. Domestic apparent steel use remains fairly high allowing continuing high capacity utilisation of the Russian mills. Domestic steel consumption is expected to increase driven by high construction activity. On the export front decreasing prices are anticipated. Buying activity is expected to revive in September which should lead to price increases.

In the US producers started to increase prices in August on the back of improving market balance with lower imports, production cuts due to idling of several facilities and seasonal maintenance work. Real steel demand remains healthy, and a seasonal pick-up of automotive activity is expected after the summer breaks.
Overall the global economic environment continues to remain challenging with leading indicators endorsing this view. Crude steel production in China is expected to decrease in 2H 2012 which could put pressure on raw materials prices. Measures to promote growth by the Chinese authorities could boost construction activity in H1 2013. Overall Severstal’s H2 2012 results expect to be broadly similar to H1 2012.