Financial performance

Sales review

The Steel segment’s revenues fell, mainly due to lower revenues from sales of steel products. The main drivers were lower prices (down 4.9%, mainly on semi-finished products) and sales volumes (down 3.7%, primarily of construction products).

Revenues from external sales of semi-finished products dropped by 9.3% due to lower average prices (down 9.3%). External sales of billets rose, while volumes of slabs and pig iron decreased compared with 2015, as billets had a higher profit margin. Lower slab volumes, mainly to the Russian and European markets, were partially offset by increased billet shipments to Africa.

Revenues from sales of construction products to third parties dropped, mostly due to reduced volumes (down 9.8%) as a result of weaker demand in the CIS (including Russia) and lower average prices (down 1.0%).

Geographic breakdown of external steel product sales, US$ million
2016 2015 Change, %
Russia 2,222 2,342 (5.1)
Asia 1,001 1,047 (4.4)
Europe 438 578 (24.2)
CIS 384 437 (12.1)
Africa, America and rest of the world 424 448 (5.4)
Total 4,469 4,852 (7.9)

Revenues from external sales of railway products increased due to higher sales volumes (up 12.6%), partially offset by lower average prices (down 6.4%). The increase of railway products sales volumes in 2016 was attributable to operational improvements at EVRAZ ZSMK’s rolling mill, an improved product mix, higher demand for rails from Russian Railways and export customers, as well as higher demand for railcar sections.

External revenues from flat­rolled products dropped. This was mostly due to lower sales volumes (down 8.4%) and average prices (down 1.1%) following the deconsolidation of EVRAZ Highveld Steel and Vanadium, as well as to reduced demand.

Revenues from external sales of steel products in Russia decreased by 5.1% year-on-year, mainly due to reduced sales volumes (down 7.7%). However, the share of Russia in external sales of steel products increased from 48.3% in 2015 to 49.7% in 2016, mainly due to shifting sales from Europe and the CIS to the domestic market.

The Steel segment’s revenues from sales of iron ore products fell by 7.2%. This was due to a decrease in sales volumes (down 4.5%) following the deconsolidation of EVRAZ Highveld Steel and Vanadium, as well as to lower iron ore prices (down 2.7%). Prices for iron ore products generally subsided in 2016, moving in line with global benchmarks.

The Steel segment’s revenues from sales of vanadium products slipped by 0.7% due to a decrease in sales volumes (down 7.5%), which stemmed from the deconsolidation of EVRAZ Highveld Steel and Vanadium. This was partially offset by higher sales prices (up 6.8%), in line with market trends.

Steel segment revenues by products
2016 2015 Change, %
US$ million % of total segment revenues US$ million % of total segment revenues
Steel products, external sales 4,469 81.3 4,852 81.0 (7.9)
Semi-finished products Includes billets, slabs, pig iron, pipe blanks and other semi-finished products 1,694 30.8 1,867 31.2 (9.3)
Construction products Includes rebar, wire rods, wire, beams, channels and angles 1,783 32.4 1,999 33.4 (10.8)
Railway products Includes rail, wheels, tyres and other railway products 584 10.6 550 9.2 6.2
Flat-rolled products Includes commodity plate and other flat-rolled products 162 2.9 179 3.0 (9.5)
Other steel products Includes rounds, grinding balls, mine uprights and strips 246 4.6 257 4.3 (4.3)
Steel products, inter-segment sales 184 3.3 238 4.0 (22.7)
Including sales to Steel, North America 176 3.2 232 3.9 (24.1)
Iron ore products 155 2.8 167 2.8 (7.2)
Vanadium products 301 5.5 304 5.1 (0.9)
Other revenues 388 7.1 426 7.1 (8.9)
Total 5,497 100.0 5,987 100.0 (8.2)

Steel segment cost of revenues

The Steel segment’s cost of revenues fell by 8.2% year-on-year in 2016. The main reasons for the decline were:

  • The cost of raw materials decreased by 3.5% due to several changes:
    • Iron ore consumption declined by 17.2%, amid lower pig iron production at EVRAZ ZSMK and a decrease in iron ore prices in local currencies on the Russian market, accompanied by rouble and hryvnia weakening in 2016. The reduction was partially offset by an increase in consumption of iron ore at EVRAZ DMZ due to higher pig iron output and an increase in prices in local currencies on the Ukrainian market.
    • Coking coal consumption surged by 10.3%, driven by higher global benchmark prices. This was partially offset by rouble and hryvnia weakening, as well as the deconsolidation of EVRAZ Highveld Steel and Vanadium.
    • Scrap consumption dropped by 7.1%, largely due to the rouble and hryvnia weakening, albeit partially offset by higher scrap prices in local currencies.
    • Other raw materials fell primarily due to the rouble’s weakening, the deconsolidation of EVRAZ Highveld Steel and Vanadium, and a decrease in prices for vanadium materials and ferroalloys in 2016.
    • The decline in raw material costs is also attributable to cost-cutting initiatives, which reduced consumption.
  • Auxiliary material costs were down by 8.2%, primarily due to the rouble’s weakening and the deconsolidation of EVRAZ Highveld Steel and Vanadium. This was partly offset by higher prices in local currencies (mainly for refractories).
  • Lower service costs were driven by the rouble and hryvnia weakening, as well as the deconsolidation of EVRAZ Highveld Steel and Vanadium.
  • Transportation costs decreased by 9.6%, primarily due to the rouble’s weakening.
  • Staff costs fell by 14.3%, largely due to the rouble and hryvnia weakening and headcount optimisation, accompanied by the effect of EVRAZ Highveld Steel and Vanadium’s deconsolidation. This was partly offset by wage inflation at Russian sites.
  • Depreciation and depletion costs dropped by 7.0%, driven mainly by local currency depreciation.
  • Lower energy costs were driven by the rouble and hryvnia weakening, accompanied by the effect of the deconsolidation of EVRAZ Highveld Steel and Vanadium. Lower energy costs were partly offset by an increase in tariffs in local currencies.
  • Other costs decreased, primarily due to changes in goods for resale, intragroup URP, and the rouble and hryvnia weakening.
Steel segment cost of revenues
2016 2015 Change, %
US$ million % of total segment revenues US$ million % of total segment revenues
Cost of revenues 4,068 74.0 4,431 74.0 (8.2)
Raw materials 1,720 31.3 1,782 29.8 (3.5)
Iron ore 289 5.3 349 5.8 (17.2)
Coking coal 826 15.0 749 12.5 10.3
Scrap 274 5.0 295 4.9 (7.1)
Other raw materials 331 6.0 389 6.6 (14.9)
Auxiliary materials 314 5.7 342 5.7 (8.2)
Services 221 4.0 276 4.6 (19.9)
Transportation 347 6.3 384 6.4 (9.6)
Staff costs 456 8.3 532 8.9 (14.3)
Depreciation 213 3.9 229 3.8 (7.0)
Energy 393 7.1 448 7.5 (12.3)
Other Includes goods for resale, taxes in cost of revenues, semi-finished products and inter-segment unrealised profit. 404 7.4 438 7.3 (7.8)

Steel segment gross profit

The Steel segment’s gross profit decreased by 8.2% year-on-year, driven primarily by lower revenues from sales of steel products.