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Strategy and implementation

Strategy

Metalloinvest’s development strategy aims to strengthen its position as the world’s leading producer of commercial hot briquetted iron and a leading regional producer of commercial iron ore and high-grade long steel products, as well as increase the output of high value-added products, improve their quality, and boost itsproduction efficiency and customer-centric approach.

Platform for Success


Unparalleled reserve base

Metalloinvest owns the world’s second largest iron ore reserves, which guarantee around 140 years of operation.

Higher efficiency of business processes

In 2016, we launched a project to develop Metalloinvest’s Production System and improve the Company’s efficiency. The project provides for the training of employees to use the best-performing management models and their engagement in the continuous improvement process. During the year, the Company’s controlled entities identified areas to pilot the Production System, and conducted initial training of programme participants. The aggregate economic benefit of the programme is estimated at USD 3.3 billion.

Low controllable cash costs

Availability of high-quality iron ore reserves and access to energy resources enable the Company to maintain HBI / DRI and pellet production costs at a much lower level than to its global peers. In 2016, Metalloinvest maintained its cash cost position in the lowest quartile of global manufacturers.

Flexibility

Our vertically integrated business model, including ore mining and several processing stages to produce high-quality steel, helps us build a diversified portfolio of high value-added products. Our flexibility and ability to balance between intragroup and external customer sales of products processed to various degrees help us deliver stable financial performance even amid strong market volatility.

Diversified sales

The Company’s core production assets are located in the European part of Russia and have access to developed infrastructure and key domestic, regional and international markets, including Russia, CIS, Eastern Europe, Middle East, and Asia.

Prioritisation

To improve margins, Metalloinvest’s management team prioritises strengtheningthe Company’s position in the mining industry to build up and realise its production potential for high value-added products, such as HBI / DRI.

Metalloinvest defines its development priorities, long-term goals and objectives based on current trends in the global iron ore, metallised raw material and steel product markets, while also taking into account the Company’s competitive advantages.

Metalloinvest has successfully weathered the period of low commodity prices, proving itself as a sustainable company. In 2016, the Company continued its initiatives related to cost saving and technological improvements to streamline operations and reduce per-unit costs.

Metalloinvest focuses on further deleveraging and financing investment projects primarily from its free cash flow. The Company plans to maintain its target EBITDA margin at 30% and above by boosting operational efficiency and sales margins, and reducing costs.

The management team pursues a balanced borrowing policy to maintain the net debt / adjusted EBITDA ratio at 2.5x. The Company’s stable position provides flexibility in choosing funding options and a liquidity cushion in case oflong-lasting market turbulence.

The Company makes every effort to ensure its sustainable development, which helps boost efficiency and business continuity in the long term. Our strategy includes the launch of projects to minimise our impact on the ecosystem across the Company’s footprint, on maintaining safe working conditions and ensuring fair salaries, sufficient leisure and healthcare opportunities for our employees, and improving social and cultural environment in the regions where we operate.

Strategic priorities
 



Increase the Company’s Value

  • Enhance the scale and quality of business
  • Ensure sustainable development and growth of shareholder value over the long term



Grow Sales Margins

  • Increase share in the global market of high-quality metallised products, mainly HBI / DRI
  • Strengthen the Company’s position in the high-quality rolled steel market



Improve operational and management Efficiency

  • Focus on the efficient development of existing iron ore deposits
  • Reduce cash cost of production and processing operations
  • Optimise existing processes and integrate new technologies Ensure customer-centric approach



Increase Investment Appeal

  • Improve transparency
  • Promote a balanced approach to ensure employee development and social and environmental responsibility

Strategy implementation in 2016

Grow sales margins


Increase the Company’s share of the global market for high-quality metallised raw materials, mainly HBI / DRI

Metalloinvest is building a third hot briquetted iron facility (HBI-3 Plant) at Lebedinsky GOK in order to increase the proportion of high value-added products at its mining facilities.

The construction of the plant is in line with the Company’s strategy to strengthen its position as the world’s leading producer of merchant HBI. The launch of the facility will help reinforce the Company’s position in the market for metallised raw materials, which are set to enjoy growing demand driven by:

  • an increase in the proportion of steel produced in electric furnaces;
  • stricter environmental and product quality requirements; and
  • lower quality of scrap materials.
Key projects and results in 2016:

Ramp up of production to design capacity at Pellet Plant #3 at Mikhailovsky GOK
For more details, please see Major investment projects

Construction of HBI-3 Plant at Lebedinsky GOK
Development of an external power supply system at Lebedinsky GOK
For more details, please see Major investment projects

Strengthen the Company’s positions in the high-quality rolled steel market

Metalloinvest defines its sales geography depending on the conditions and outlook in regional markets. A wide range of products and a flexible logistics chain (with routes to Asia and Europe via the Black Sea and Baltic Sea ports) make the Company a strong competitor to both leading global suppliers and local producers.

The Company seeks to significantly increase the proportion of high-quality, high-margin products. In particular, as part of the special bar quality (SBQ) production and sales development programme, the Company is completing the installation of a reduction and calibration unit at OEMK’s Rolling Mill 350, replacing the hydraulic descaling unit, and expanding the warehousing and logistics operations. In addition, Ural Steel is carrying out works for the intermediate cooling of semi-finished rolled products at its Rolling Mill 2800, upgrading heat treatment furnaces and installing a quenching press.

Key projects and results in 2016:

Installation of a reduction and calibration unit in the medium section of OEMK’s Rolling Mill 350
For more details, please see

Construction of Rolling Heat Treatment Furnace #1 and Quenching Press #1 at Ural Steel
For more details, please see Major investment projects

Upgrade of Continuous Casting Machine #1 and the vacuum degasser at Ural Steel
For more details, please see Major investment projects

Improve operational and management efficiency


Focus on efficient development of existing iron ore deposits

Metalloinvest is implementing investment projects aimed at developing its iron ore deposits more efficiently. In 2016, the Company continued ton construct conveyor facilities at Lebedinsky GOK and Mikhailovsky GOK.

Key projects and results in 2016:

Construction of a crushing and
For more details, please see Major investment projects

Construction of cyclical and continuous ore mining facilities at Lebedinsky GOK
For more details, please see Major investment projects

Technical upgrade
For more details, please see Major investment projects

Reduce cash costs of mining and processing operations

Lower production costs
HBI / DRI and pellet production costs at Metalloinvest’s enterprises are significantly lower than those of its global peers. In 2016, Metalloinvest maintained its cash cost position in the top quartile of global manufacturers.

The main factors supporting low pellet and HBI / DRI production costs at Metalloinvest’s enterprises are:

  • availability of a substantial, high-quality resource base;
  • in-house mine development;
  • use of low-cost magnetic separation as the primary method of iron ore beneficiation;
  • “zero operational costs” for shipping iron ore concentrate from Lebedinsky GOK to OEMK via a 26km slurry pipeline;
  • energy-efficient production technologies;
  • availability of necessary infrastructure (railways and roads) and relatively cheap energy sources (natural gas, electricity).

Introduction of cyclical and continuous transportation technology
Design and surveying works are taking place at Lebedinsky GOK and Mikhailovsky GOK to introduce a cyclical and continuous method of transporting rock mass from the mine to the beneficiation plant. This technology will allow the Company to significantly decrease the cash cost of iron ore products due to the optimisation of mining and transportation processes..

Optimise existing processes and integrate new technologies

Develop existing iron ore deposits more efficiently
The Company is implementing a beneficiation technology improvement programme and has marketed new products, such as high-quality concentrate from Lebedinsky GOK with an iron content of over 70%, high basic iron ore pellets with an iron content of over 65.8% and basicity between 0.9 and 1.1.

Increase efficiency and productivity due to business process automation
The Company is implementing an ERP-based planning and management system to increase the overall efficiency of interrelated management processes, switch to a rolling planning framework and enable customers to track their orders and delivery online.

Build an optimal structure dividing powers and responsibilities
To improve business unit performance, Metalloinvest is creating a shared centre for repair planning and control. The new centre will streamline repair services, standardise planning and repairing processes and put in place a unified repair schedule coordination system. Going forward, the Company plans to unify the equipment and technologies used across its operations.

Enhance customer centricity

As part of its efforts to become more customer-centric, Metalloinvest is working to develop customer service and optimise its customer relations policy. The Company’s enterprises are taking steps to improve the quality of finished products to meet current and future consumer requirements (construction of a quenching press at Ural Steel and a reduction and calibration unit at OEMK, development of premium concentrate and pellet grades at Lebedinsky GOK and Mikhailovsky GOK, respectively), hosting industry workshops to increase customer awareness of the advantages offered by Metalloinvest’s products, and holding co-ordination councils with consumers. At the same time, the Company is developing a programme to promote finished products, involving the implementation of up-to-date customer relations systems, use of company-wide service standards, implementation of global pricing practices, and streamlining of logistics arrangements.

  1. Written consumer surveys: distribution of questionnaires, collection and systematisation of responses – twice a year.

  2. Regular co-ordination councils involving groups of technical experts from controlled entities to review product quality, develop joint product launch programmes, and discuss co-operation prospects. Co-ordination councils were held jointly with ChelPipe in Novotroitsk (July 2016), Vyksa Steel Works in Novotroitsk (August 2016), and Pervouralsk New Pipe Plant in Pervouralsk (October 2016).

  3. Regular video conferences with pipe plants involving production staff and technical experts from controlled entities – quarterly.

  4. Site visits to show new consumers our equipment, production technology, smelting processes, and grade range; audits of controlled entities and visits to key consumers’ plants to learn about new equipment and technologies and expand the grade range.
    In 2016, Metalloinvest’s experts visited around 40 partner facilities.

  5. A working group involving technical experts from OEMK, the European Bearing Corporation (EPK) and Brenco to approve OEMK as a supplier of rolled steel for Amsted Rail. This project included meetings on the premises of OEMK, EPK Saratov, EPK Brenco, and Brenco’s US plant.

  6. A permanent joint working group with AVTOVAZ that includes representatives from the technical and commercial units of both companies. The group’s joint efforts focus on the development of new steel grades, improvement of the existing technical agreements and delivery terms, and prompt resolution of current issues.

  7. A joint working group with KAMAZ to co-operate in the area of OEMK’s ZF7B steel supplies and official approval.

Improve transparency


Respond promptly to internal and external changes

In 2016, Metalloinvest continued to develop its corporate risk management system as planned. The Company has launched a mechanism to categorise possible risk events and issued guidelines and policies to regulate related processes. Metalloinvest is also introducing risk response procedures and implementing quantitative assessments of potential damage.

Key projects and results in 2016:

Projects to implement an integrated financial and business management system

Confirmation of credit ratings

Promote a balanced approach to ensure talent development and social and environmental responsibility

Key projects and results in 2016:

Upgrade of gas purification units at OEMK’s electric arc furnaces (DSP–150) #1 and 2
For more details, please see Major investment projects

Automation of core HR management processes through the rollout of SAP systems
For more details, please see Major investment projects