Severstal Reports Q2 & H1 2016 Operational Results

Severstal reports Q2 & H1 2016 operational results

Moscow, Russia - 12 July 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 Q2 & H1 2016.

Q2 2016 GROUP HIGHLIGHTS 

·      Hot metal output decreased 6% q/q to 2.21 mln tonnes (Q1 2016: 2.35 mln tonnes) mainly impacted by short-term maintenance of BF#5 at Cherepovets Steel Mill (CherMK) during the quarter.

·      Reflecting abovementioned maintenance as well as scheduled short-term maintenance of continuous casters #3 and the billet caster, crude steel production declined 3% q/q to 2.81 mln tonnes (Q1 2016: 2.91 mln tonnes). Meanwhile, seasonal demand growth underpinned improved production run rates at the Balakovo mini-mill, which partially mitigated the negative impact of the maintenance works.

·      Despite a decline in crude steel output, consolidated sales of steel products increased 14% q/q to 2.79 mln tonnes (Q1 2016: 2.45 mln). This reflects higher domestic steel consumption on the back of seasonal factors as well as improved activity by local traders anticipating RUB-denominated domestic steel price increases. This resulted in a substantial inventory reduction by the Company during the period.

·      The seasonal improvement in domestic steel consumption enabled the Company to swiftly relocate volumes from export destinations to the local markets given the proximity of the main producing assets to the border, resulting in the share of domestic steel products sales volumes in the sales mix increasing to 64% (Q1 2016: 60%).

·      The Company completed the refurbishment of the four-stand cold rolling mill at CherMK in May 2016. This will increase mill capacity to 200,000 tonnes per annum and significantly improve product quality, enabling the Company to expand its product line and enter new markets.

·      The four-stand cold rolling mill was in ramp-up mode in June 2016. Despite this, the share of high value-added (HVA) products in the sales portfolio increased to 43% (Q1 2016: 42%) reflecting robust demand in the domestic market.

·      The Company continues to monitor methane gas concentration levels at Severnaya mine in order to identify further steps in the recovery process. Operations at the mine remain suspended with the flooding process having been completed in May 2016. Among the potential options to be considered by the Company is mining the Severnaya coal reserves via an adjacent Komsomolskaya mine. All of Vorkutaugol's other four mines and one open pit are operating as usual. The Company will provide further updates as soon as information becomes available.

·      Following a significant spike in global steel prices in March 2016, we continue to observe the expected steel price normalisation process. We believe this price normalisation will once again trigger an intention by Chinese steel producers to start cutting production capacities. In the domestic market, Russian steel companies managed to successfully deliver several rounds of RUB-denominated price increases in order to catch up with export USD-denominated prices.

·      The domestic market, which typically offers higher sales margins, remains the priority focus for the Company. Nevertheless, we foresee normalisation of domestic market premiums towards the end of the construction season.

SUMMARY OF KEY PRODUCTION, SALES VOLUMES AND SELLING PRICES DATA

SEVERSTAL'S CONSOLIDATED SALES (NET OF INTERCOMPANY SALES)

SEVERSTAL RESOURCES

● Coal mining at Vorkutaugol has been negatively impacted due to the tragic incident at the Severnaya mine in February 2016. The Company is still considering different options for the mine's recovery. The Company completed flooding the mine with water, and now monitors methane gas concentration levels in order to identify further potential steps.

● Reflecting the above, coking coal concentrate sales at Vorkutaugol decreased 21% q/q to 1.08 mln tonnes (Q1 2016: 1.36 mln tonnes). Internal coking coal concentrate procurement remained largely unchanged. In the meantime and as anticipated, external sales volumes compressed by more than 50% q/q.

● Steam coal sales at Vorkutaugol decreased 34% q/q on the back of much lower domestic consumption by the end of the heating season.

● The improved economics of the iron ore business resulted in a decision to restart iron ore concentrate external shipments at Olcon. This was a key factor behind the 18% q/q increase in sales volumes. Moreover, Severstal also increased iron ore concentrate inventories at CherMK.

● While internal procurement of iron ore pellets decreased marginally, the seasonal sharp improvement in demand in export markets resulted in an 18% q/q increase in iron ore pellets sales to 2.85 mln tonnes (Q1 2016: 2.41 mln tonnes).

SEVERSTAL RUSSIAN STEEL ('RSD')

● RSD steel product sales increased 14% q/q to 2.80 mln tonnes due to a robust increase in both domestic final steel demand and improved traders' activity. The Company released its steel inventories, previously stockpiled prior to the construction season. The proximity of key assets to the border also facilitated shifting to domestic deliveries with the share of export sales within the sales-mix decreasing to 36% in Q2 2016 (Q1 2016: 40%).

● Given the higher demand in the domestic market, sales volumes of cold-rolled coil, galvanized and metallic coated coil and colour coated coil went up 14% q/q, 39% q/q and 41% q/q, respectively. This is partially because of the low base due to the scheduled upgrade of the four-stand cold rolling mill in January-May 2016, which has already resulted in even higher rerolling capacities.

● Taking into account the above factors the share of HVA products within the sales mix improved marginally to 43% (Q1 2016: 42%), despite a 9% q/q increase in hot rolled coil sales volumes. Long product sales volumes increased 19% q/q following the Balakovo mini-mill production ramp-up due to improved domestic demand.

● Large diameter pipes (LDP) sales volumes remained largely unchanged q/q. In Q2 2016 Izhora Pipe Mill continued supplying LDPs for the Gazprom maintenance projects. Meanwhile, Severstal began supplying LDPs for the Power of Siberia and Ukhta-Torzhok-2 projects.

● To recap, March 2016 marked positive developments in the global steel markets with steel prices globally improving sharply. In the domestic market, Russian steel companies managed to successfully command several rounds of RUB-denominated price increases in order to catch up with export USD-denominated prices. Severstal's average selling prices achieved an increase of 14-57% q/q depending on specific product. In the meantime, we are observing both global and domestic prices gradually returning to more normalised levels.

1) All production data is reported in metric tonnes;

2) Sales prices are stated on EXW basis;

3) Segmental data includes intercompany sales;

4) Semi-finished products include pig iron, slabs, billets, ingots, steel casting and forgings;

5) Metalware sales volumes and metalware average selling prices include Severstal Metiz, Severstal Distribution LLC and AO Severstal Distribution data;

6) Large diameter pipes include all pipes with a diameter between 820 and 1420 mm.

Investor Relations

Victor Drozdov

T: +7 (495) 926-77-66 ext. 6987

victor.drozdov@severstal.com

Public Relations

Anastasia Mishanina

T: +7 (495) 926-77-66 ext. 6457

anastasia.mishanina@severstal.com

Severstal's financial communications agent - Hudson Sandler

Andrew Hayes / Elena Garside / Alex Brennan

T: +44 (0) 20 7796 4133

PАО Severstal is one of the world's leading vertically integrated steel and steel related mining companies, with assets in Russia, Ukraine, Latvia, Poland and Italy. Severstal is listed on RTS and MICEX and the company's GDRs are traded on the LSE. Severstal reported revenue of $6,396 million and EBITDA of $2,096 million in 2015. Severstal's crude steel production in 2015 reached 11.5 million tonnes. www.severstal.com

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