Efficiency-Increasing and Fast Growth Strategy

The Magnitogorsk Iron and Steel Works OJSC (MMK) is the largest enterprise of Russia’s iron and steel industry and one of the world's largest steel producers. MMK’s plant in Russia is a large steel producing complex encompassing the entire production chain, from preparation of iron ore to downstream processing of rolled steel. MMK turns out the broad range of steel products with a predominant share of downstream value added goods. A significant portion of its output is exported to various parts of the world.

The past year, 2009, was the most difficult period of the global economic recession which affected Russia’s steel sector. But according to Victor Rashnikov, Chairman of OJSC MMK’s Board of Directors, MMK has met the challenge of that tough period. Mr. Rashnikov said, “the crisis has confirmed the viability of our strategy. This strategy is aimed at modernizing our production facilities, and diversification with a focus on new higher value added products in demand on the growing global markets, and in the first place, in Russia”.

In 2009, ММК produced 9,618 kt of crude steel and 8,764 kt of commercial products. The Company remains a leader of the Russian steel sector with its share accounting for 17% of all steel products sold on the Russian market. The Company sold 56% of its finished products in the domestic market which is of high priority and strategic importance for MMK’s top management.

Thanks to the management's expertise and efficacious actions, the Company was able to show excellent financial performance in 2009, earning USD 219 million of profit, the largest among the Russian steel-making companies. MMK's 2009 revenue amounted to USD 5,081 bn. Besides, MMK led the Russian steel sector in the rate of profitability recovery: with the 2009 EBITDA totaling USD 1,285, the EBITDA margin stood at 25%, 4% up on the 2008 figure.

It should be noted that MMK's confident performance under the crisis conditions stems from the earlier investments in the modernization of the Company's assets and diversification into high value-added products in demand. Now these investments allow to generate the required cash flows and maintain the margin at a high level under volatile market conditions. The last decade has seen practically all of MMK's main production divisions revamped, and many new high-capacity facilities installed, among them a two-stand reversing cold rolling mill (2002), two Russia's largest hot dip galvanizing lines (2002, 2008), a colour coating line (2004), two super powerful electric arc furnaces with an annual capacity of 2 m tons each (2006), three state-of-the-art, fully automated long products mills with the combined capacity of over 2 m tons of long products (2005-2006) and many others.

In 2009, ММК continued to invest in assets’ modernization and revamping. The low debt burden has enabled MMK to move ahead with several large-scale projects after rethinking their implementation schedules and priorities. MMK’s long-term investment programme is aimed at satisfying growing demands of the Russian customers and boosting production of value-added goods. Last year, MMK reported annual capex of RUB 28,547 million or USD 899 million while MMK Group’s capex as per IFRS stood at RUB 38,511 million or USD 1,213 million. Among largest completed projects are the 5,000mm Plate Rolling Mill (Rolling Shop #9) and Color-Coating Line #2 (the Coating Shop).

The unique 5,000mm Plate Mill is the key element of MMK’s plate production complex comprising the Mill, Secondary Steel Treatment Equipment and Continuous Caster #6. In November, 2006 OJSC MMK signed the contract for packaged supply of the equipment with SMS-DEMAG, an engineering company from Germany. The mill allows MMK to produce highly lucrative heavy-gauge plate of the strength class up to X120 and up to 4,850 mm wide for the oil and gas sector, ship and bridge building industries and heavy machines manufacturing. The Plate Mill produces about 1.5 mtpy, including 0.3 mtpy of heat treated plate. The mill includes the full set of in-line mechanisms and units, from the charging devices of the reheating furnaces to the coil-handling mechanisms at the finished product storage.The heart of the mill, the rolling stand, is capable of developing a rolling force of 12,000 tons. The 5,000mm Plate Mill was officially put on stream in July, 2009. Vladimir Putin who participated in the start-up of the Mill, highly praised the new facility. As a result of this project MMK obtained great flexibility in terms of production of high-quality hot-rolled products and plates using state-of-the-art metal forming techniques. According to Victor Rashnikov, Chairman of OJSC MMK’s Board of Directors, this project is of ultimate importance both for Magnitka and the entire country. Mr. Rashnikov said, “no doubt, that the output of this unique mill will be in demand. This confidence is based on the significance of the fuel and energy sector for Russia’s economy and importance of oil- and gas pipelines’ construction projects which are currently under implementation”.

In summer of 2009, a 200 ktpy color coating line supplied by the company FATA HUNTER from Italy, was put into operation. This project enabled MMK to produce up to 400 ktpy of color-coated steel. The line includes hot and cold laminators and an embosser, and the design of the line’s oven allows to produce steel for white goods (refrigerators, washing machines, etc).

Another large-scale investment project under implementation at MMK is construction of a state-of-the-art cold rolling complex. In July of 2007, the contract for delivery of the complex of the 2,000mm cold rolling mill with the capacity of 2 mtpy was signed with SMS-DEMAG. This complex will turn out high quality cold-rolled and galvanized steel using the most advanced and state-of-the-art technology, for manufacturing exposed parts of cars, household appliances and construction materials.

In addition, in 2009 the Company continued the modernization of the 2,500mm Hot Rolling Mill which will allow to increase its capacity in a wider sizes' range and improve products’ quality. After the revamping the mill’s equipment will include three high-performance heating furnaces, roughing mill, pre-finishing stand, intermediate roller table, coiler and coil-handling mechanisms. In summer of 2010, it is planned to put a cutting line on stream as a part of this project with the estimated value of RUB 30 billion.

Another prioritized sphere of MMK’s development is securing the Company’s raw materials supplies. One of the aspect of this strategy is increasing recovery of the Company’s iron-containing industrial wastes. In 2009, the Amkom-1 slag processing unit was constructed. In early 2010, the unit was revamped with its capacity increased up to 1.5 mtpy. Now new Amkom-2 and Amkom-3 slag processing units (with the capacity of 2.5 mtpy each) are under construction which is planned to be completed in 2010.

In addition, as a part of the raw materials strategy, in October of 2009 MMK completed the transaction of acquisition of 82.6% of shares of Belon, Russian coal mining company. Now Belon’s supplies cover up to 40% of MMK’s total demand for coking coal concentrate and in the long term it will be able to cover up to 80% of MMK’s needs. Furthermore, in 2009 ММК acquired the company Profit which covers practically 100% of MMK’s demand for metal scrap. The efforts were continued to develop the raw materials’ base in the Chelyabinsk Region (Bakal Mining Administration). Last year, the Bakal Mining Administration put the Sosnovsky Mine in service. In 2010, it is planned to produce 990 ktpy of raw ore, and once at full capacity the mine will produce 2.5 mtpy.

For the purpose of strengthening MMK’s positions in the key export region, Middle East, the Company is moving ahead with its Turkey steel production project (MMK-Atakas) with an annual capacity of 2.3 m tons. The complex will produce hot and cold rolled flat products and galvanized and colour-coated coils. In late 2008, a steel service center was put into operation in Iskenderun. In mid-January of 2010, a color coating line was commissioned and in April, a hot-dip galvanizing line. The construction of the Sea Port was completed.

The Company's management has not abandoned the social focus which has always been MMK's hallmark. In 2009, MMK spent over RUB 860 million on social and charity programs. Under the tough economic conditions the main goal of MMK’s crisis combating policy was preservation of the workforce and making maximum use of the freed-up personnel. As of January 1, 2010 the MMK Group’s total staff size was 62,195 persons. In 2009, the MMK Group’s average monthly wage increased to RUB 23,925, 3.4% up on 2008, with MMK’s average monthly wage standing at RUB 27,906. In the 1 ^st Quarter of 2010, the Company's management decided to increase the average monthly wage by 10%. The Company’s personnel continuously improve its qualification. In 2009, more than 33,000 MMK Group’s employees underwent training under different occupational and advanced training programs. The Company spent more than RUB 120 million on training and retraining of its personnel.

According to Mr. Rashnikov, “in 2009 we laid down a solid foundation for raising the Company's efficacy and improving on our production and financial performance of previous years as the economy recovers. The implementation of our modernization projects will undoubtedly contribute to strengthening our competitive ability and stable growth of MMK”.