HIGH VALUE ADDED PRODUCTS: OPPORTUNITIES AND RISKS Andrey Laptev, Head of Corporate Strategy June 26 th, 2012

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1 HIGH VALUE ADDED PRODUCTS: OPPORTUNITIES AND RISKS Andrey Laptev, Head of Corporate Strategy June 26 th, 2012

2 Disclaimer These materials are confidential and have been prepared by OAO Severstal (Severstal) solely for your information and may not be reproduced, retransmitted or further distributed to any other person or published, in whole or in part, for any other purpose. These materials may contain projections and other forward-looking statements regarding future events or the future financial performance of Severstal. You can identify forward-looking statements by terms such as expect, believe, estimate, intend, will, could, may or might, or other similar expressions. Severstal cautions you that these statements are only predictions and that actual events or results may differ materially. Severstal will not update these statements to reflect events and circumstances occurring after the date hereof. Factors that could cause the actual results to differ materially from those contained in projections or forward-looking statements of Severstal may include, among others, general economic and competitive environment conditions in the markets in which Severstal operates, market change in the steel and mining industries, as well as many other risks affecting Severstal and its operations. These materials do not constitute or form part of any advertisement of securities, any offer or invitation to sell or issue or any solicitation of any offer to purchase or subscribe for, any securities of Severstal in any jurisdiction, nor shall they or any part of them nor the fact of their presentation, communication or distribution form the basis of, or be relied on in connection with, any contract or investment decision. No representation or warranty, express or implied, is given by Severstal, its affiliates or any of their respective advisers, officers, employees or agents, as to the accuracy of the information or opinions or for any loss howsoever arising, directly or indirectly, from any use of these materials or their contents.

3 Overview Strong, Global, Integrated Steel Player Karelsky Okatysh (Russia) 10,1 mt Iron ore pellets Olkon (Russia) 4.8mt Iron ore concentrate Cherepovets (Russia) 11.6mt Crude steel capacity Vorkutaugol (Russia) 7.4mt Coking and steam coal Centralniy (Russia) Potential: 7.5mt Coking coal concentrate Starting 2018 PBS Coal (US) 3.2mt Coking and steam coal Dearborn (US) 2.2mt Crude steel capacity Moscow Columbus (US) 3.1mt Crude steel capacity Amapa (Brazil)-JV Potential: 10 20mt Iron ore concentrate Starting 2017 Coking/steam coal Iron ore Steel mill/dri plant Note: 2011 sales volume for mining assets, capacities for steel assets Source: Company data Putu Range (Liberia) Potential: 20 30mt Iron ore concentrate Starting Crude Steel Production 14.7mt 15.3mt Revenue $12.8bn $15.8bn EBITDA $2.9bn $3.6bn People c.85,000 Page 3

4 Overview: Severstal is a Global Efficiency Leader EBITDA 2 FY 2011, $bn EBITDA Margin FY2011, % ROCE FY2011 1, % Arcelor Mittal 1st CSN 1st 40.6% Severstal 1st 22.8% Posco 2nd Jindal 2nd 38.5% Jindal 2nd 18.5% Nippon Steel 3rd Tenaris 3rd 24.6% CSN 3rd 17.3% ThyssenKrupp 4th Severstal 4th 22.7% Tenaris 4th 15.5% CSN 5th NLMK 5th 19.5% Ternium 5th 13.8% JFE 6th Mechel 6th 19.1% Mechel 6th 13.7% Severstal 7th Ternium 7th 18.3% Evraz 7th 13.2% Baoshan 8th Vallourec 8th 17.8% NLMK 8th 12.5% Evraz 9th Evraz 9th 17.7% Vallourec 9th 12.3% Gerdau 10th MMK 10th 14.4% Nucor 10th 11.6% Source: For the Russian, European and Latin American companies EBITDA is calculated by the companies themselves and converted in $ at average rate for the period; for others - EBITDA is operating income + D&A (1) ROCE is calculated by the following formula: LTM profit from operations/total assets minus current liabilities (average for the period) (2) For current companies EBITDA calculated by the following formula: Operating Income + Amortization Page 4

5 And a Leading Russian Player 1,018 EBITDA 3Q 11-1Q 12, $m EBITDA Margin 3Q 11-1Q 12, % Q 11 Severstal Mechel 4Q 11 Evraz NLMK 1Q 12 MMK 3Q 11 Severstal Mechel 4Q 11 Evraz NLMK 1Q 12 MMK Net Debt 3Q 11-1Q 12, $m Net Debt/EBITDA 1 3Q 11-1Q 12, $/t 8,982 6,636 4,212 2,933 9,226 6,442 4,112 3,074 3,355 3,931 3,799 6,930 3,538 4, Q 11 4Q 11 1Q 12 3Q 11 4Q 11 1Q 12 Severstal Mechel Evraz NLMK MMK Severstal Mechel Evraz NLMK MMK Source: Company data, Bloomberg 1 LTM EBITDA Page 5

6 Our Strategy Financial and Industrial Objectives Industrial Targets Financial Targets Vertical integration TOP 5 by EBITDA globally EBITDA margin >20% over the cycle HVA Product Mix Net Debt/normalized EBITDA between 0.5x and 1.5x (1) Consolidated & Growing Markets In TOP 10 global steel companies by ROCE (1) Normalized EBITDA average EBITDA from 2004 Page 6

7 Focus on High Value Added Products Translates into Higher Margins Page 7 Split of Production vs. Peers, 2011, % 45% 30% 23% 32% 30% 55% 46% 66% 40% 22% 9% 1% Severstal Peer 1 Peer 2 Peer 3 Semi-finished Hot-rolled HVA Severstal targets the high quality-value added segments of the market:» Galvanized sheets» Cold-rolled flat products» Colour-coated sheets Source: Company data Page 7

8 Strong Demand on HVA is Expected in Russia» Automotive and construction & metal trade industries growth impacts increase of high value-added products demand Medium-Term Growth by Product vs. Average Industry, E CAGR, % 4% 3.4% 3.0% 2% 0% -2% 0.0% 0.6% -0.6% 1.1% -4% -6% -8% -6.3% Long HRC Thick Plate CRC Galvanized Polymers Tubes» Galvanized steel and Polymers are the most attractive niches Source: Severstal analysis Page 8

9 Consumption is Ahead of Production» In last two years Severstal has launched: o o o o 400kt/y continuous HDG unit 170kt/y Severstal-Gonvarri-Kaluga service center 200kt/y 2 nd line of color-coating line 250kt/y pipe plant Sheksna Supply/Demand, Galvanized and Color-Coated Steel, kt A gap still exists despite the launch of new capacities E 2013E 2014E 2015E Supply Demand Source: Company data Page 9

10 Investment in HVA is Expensive Valued-Added Chain of 1 Tonne of Production Capacity, 2010/11 $/t + $313 + $ $ Source: MCI Page 10

11 Fully Self-Sufficient Integrated Steel Producer Contributing to Higher and More Stable Margins Severstal Self-Sufficiency in Raw Materials, 2011, % 120% 116% 119% 96% Severstal Russia Severstal Globally Iron ore Coking coal» Severstal s Russian operations are fully self-sufficient in iron ore and coking coal» Severstal is the only Russian steelmaker to be fully self sufficient in both iron ore and coking coal» The vertical integration insulates Severstal against raw material price fluctuations Source: Company data Page 11

12 Ahead of Peers in Vertical Integration Capture Additional Margin in Mining Through Efficiency Improvement Self-Sufficiency in Iron Ore and Coking Coal 2011 Coking Coal Cash Cost Inflation, 2007/11 CAGR, % Iron ore Coking Coal 29% Severstal 116% Severstal 119% 16% Peer 1 109% Peer 1 50% Peer 2 92% Peer 3 43% Peer 3 30% Peer 2 0% -4% Vorkutaugol Peer 1 Peer 2 Source: Companies data, Crédit Suisse Source: Companies data, Severstal» Vertical integration reduces Severstal s steel production cost base, as own raw material production is significantly cheaper than market prices» Severstal s continuous improvement reduces costs of raw materials production Source: Company data Page 12

13 Raw Materials: Supply Story The industry s headline story for the last 5 years was demand, the main story for the next 5 years will be supply Global iron ore supply vs. Iron ore price, mmt/y, $/t Global metcoal supply vs. metcoal price, mmt/y, $/t 300% 250% +173% 300% 250% +144% 200% 200% 150% 100% + 24% 150% 100% + 29% 50% 50% 0% % Iron ore supply, mmt/y Hard Coking Coal, FoB Australia, $/t Iron ore pellet price, Fob Brazil, $/t Hard coking coal supply, mmt/y Source: CRU, SBB, AME, Severstal analysis Page 13

14 Raw Materials: Demand Drivers and Supply Constraints Previous drivers: demand Urbanization: in the next decade it s expected that ap. 160 mln. ppl. in China will move to cities Middle class: around 350 mln. ppl. with annual income of $ $ emerged in China in the last 20 years Future drivers: supply constraints Resource depletion: 4% annually New projects are pushed back: average delay for mining projects 3 years CAPEX & OPEX inflation: global cost curve is constantly moving up by 10% per annum (in dollar terms) Tightening regulation: Australia case to get the mining it s required to deal with 54 governmental bodies Environmental restrictions Page 14

15 Cost Inflation Puts Significant Pressure On Profitability Which is Expected to Continue in Mid-Term Labor costs: growth in average wages, % 40% Railroad transportation, local prices indices, previous year=100% 18% 16% 30% 20% 10% 0% F 2013F 2014F XX% CAGR in RUB, % XX% CAGR in USD, % 11% 10% 10% 11% 20% 15% 10% 5% 0% F 2013F 2014F 5% 5% Electricity price, cent/kwth Gas price, $/ 000 m Russia USA March 2012 Russia USA, Henry Hub Index Source: Company data Page 15

16 Russian Producers Faced Margin Contraction Steel-Only EBITDA Сomparison 2007 vs. 2011, $/t $27 - $ $91 - $49 - $21 - $62 - $55 - $ Russian producers (steel+mining) Russian producers (steel only) Nucor Steel Dynamics Baoshan ThyssenKrupp Posco Key elements of successful strategies: 1. Vertical integration 2. Contain cost inflation 3. High value added downstream: Customer care Intimate knowledge of market Source: Company data Page 16

17 Business System of Severstal Addresses Challenges Severstal Business System Strategy Development Customer Care Business Standard (ERP based on the SAP platform) Technology Development Customer Care» Targeting products and services with the highest demand» Just-in-time resolution of customer requests and awareness of order progress» Improvement of customer satisfaction» Product quality improvement Severstal People Health&Safety Market Foresight Continuous Improvement M&A Continuous Improvement» Systematic identification and removal of all major production losses Excess production and shipments, overstocking Idles and redundant production stages/operations Reworking of defective production Management of Investment Projects Page 17

18 Highest EBITDA/t and Lowest Margin Volatility as a Result of HVA in the Portfolio and Vertical Integration Split of Production vs. Peers, 2011, % Vertical integration, 2011, % 45% 30% 23% 32% 30% 55% 46% 66% 9% 40% 22% 1% Severstal Peer 1 Peer 2 Peer 3 Semi-finished Hot-rolled HVA Source: Companies Data 120% 96% Severstal Russia Iron ore 116% 119% Severstal Globally Coking coal Source: Severstal EBITDA/tonne 2011, $/t EBITDA Margin Standard Deviation , % % 7.4% 8.6% 12.1% Severstal Peer 1 Peer 2 Peer 3 Source: Bloomberg, Company data Severstal Peer 1 Peer 2 Peer 3 Note: Severstal restated for disposal of non-performing assets Source: Rating Agencies Information for EBITDA Margin, Companies Data Page 18

19 Thank You!