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ANALYSING SERVERSTAL COMPANY

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Catalog
ANALYSING SERVERSTAL COMPANY..........................................................................................1
Introduction..............................................................................................................................................3
Company profile of Severstal............................................................................................................3
Analysis of External Challenges and Opportunities for Severstal......................................................4
Challenges Confronting Severstal......................................................................................................4
Exploration of Opportunities.............................................................................................................5
Key Aspects of Severstal's Internal Business Landscape.....................................................................7
Recommendations for Severstal take in the coming years.................................................................11
References: -...........................................................................................................................................12
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Introduction

Company profile of Severstal

Severstal positions itself as the world’s leading manufacturer in the iron and steel

industry, partnering with customers and partners to develop innovative products and

comprehensive solutions in the steel industry. Poised with a view to appear as a

leading force in steelmaking and value creation (Martus, 2019 ), Severstal to

strengthen its financial performance, It promises to encourage increased valuation and

shareholder returns. At the same time, the company remains committed to employee

welfare and environmental responsibility, and strives to minimize its impact on the

environment. Embedded in Severstal’s advanced corporate culture (Wahtra and

Liuhto, Kay 2006), strategic priorities include providing outstanding customer

experiences, developing cost leadership, and embracing new opportunities.

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Analysis of External Challenges and

Opportunities for Severstal

Challenges Confronting Severstal

Established in 1955 as Cherepovet's Steel Mill and remaining under state ownership

until the Soviet Union's dissolution in 1991, Severstal underwent privatization in

1993. Operating under the ownership and management of Alexey Mordashov, it

became the publicly traded Severstal open-joint stock company. Cherepovets, located

in Northwest Russia, serves as the global headquarters for the current iteration of the

organization, known as the Severstal Group.

While Severstal's core activities revolve around mining and steel products, its

diversified portfolio includes non-core assets like a domestic airline and the

Cherepovets regional port. Since its privatization in the 1990s, Severstal has evolved

into one of the most globally oriented Russian companies, engaging in substantial

offshore exports and owning international resources. The company is listed on the

Russian Exchange and the London Stock Market. In addition to its Russian steel and

mining operations, Severstal operates manufacturing facilities in the United States,

France, CIS countries, and Africa (Stevens et al., 2013). Its product range

encompasses raw materials such as iron ore and coking coal, supplied for in-house

production of flat, long steel, rolled products, and downstream steel items like pipes,

cable ropes, and metalware. Business activities include the acquisition of a gold
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mining company (Nordgold) in Western Africa and a joint venture with Arcelor

producing galvanized steel products.

The emerging economies of South America, Asia, and the Middle East are identified

as the primary growth markets for steel goods, expected to continue expanding at

higher rates compared to the mature markets of the United States, the European Union

(EU 28), and Japan. The steel industry, characterized by cyclical patterns with short

peak-to-peak durations, experiences significant demand fluctuations among regional

markets, making accurate predictions challenging. Industry experts forecast an annual

growth of approximately 5% in global construction, automotive, and other

transportation markets by 2021, driven by sustained growth in the Asia Pacific,

Africa, and the Middle East. Conversely, the United States and Western markets are

anticipated to either stagnate or decline, posing strategic challenges for global steel

players seeking the most effective entry into future markets.

The demand for steel experienced yearly growth from the 1990s until the third quarter

of 2008 when the steel industry became one of the first sectors to feel the severe

impact of the global financial downturn, known as the Great Recession, marking the

most significant economic downturn since World War II.

Exploration of Opportunities

Since the late 1980s, the steel industry has become increasingly globalized in terms of

both competition and markets. Steel producers continue to invest in manufacturing

and energy efficiencies, leading to substantial profits. Opportunities arise from

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international direct investments and the rapid growth of emerging economies in

Eastern Europe, China, South America, and Russia, creating a financially rewarding

business environment. In 2015, global steel production reached almost 1.5 billion

metric tonnes, with China emerging as the largest consumer and producer (712

million metric tonnes), followed by Western Europe (147 million metric tonnes), and

the nations of the United States Free Trade Association (145 million metric tonnes)

(Nair, 2013).

China stands out as a major consumer and producer of steel products. Chinese

domestic production experienced a 15% annual growth rate up to 2014, but in 2015, it

took a reverse trajectory with an overall 3% decline in Chinese supply. Despite having

only a few highly productive Chinese manufacturers capable of producing steel, their

historical tendency to overproduce poses challenges to global steel prices. Conversely,

non-Chinese steel manufacturers view the lower quality of some Chinese steels as a

market opportunity and a catalyst for establishing joint ventures within China.

Outlined below are the opportunities identified for Severstal (Enloe and Baker, 2013):

 - Expansion of the resource base

 - Growth in emerging nations

 - Investment in infrastructure development

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Key Aspects of Severstal's Internal Business

Landscape

Severstal's core operations revolve around mining and steel products, supplemented

by non-core assets such as a domestic airline and the Cherepovets nearby port. Since

its privatization in the 1990s, Severstal has positioned itself as one of the most

internationally oriented Russian companies, engaging in significant overseas exports,

activities, and ownership of global resources. The company is listed on the London

Stock Exchange and the Russian Exchange. In addition to its Russian mining and steel

ventures, Severstal operates facilities in the United States, France, Africa, and CIS

countries. The product range encompasses raw materials like iron ore and coking coal,

supplied for in-house production of flat, long steel products, rolled items, and

downstream goods such as metal piping, cable ropes, and metalware (Safirova, 2013).

Business activities include the acquisition of a gold mining company in West Africa.

When the Great Recession began in 2008, Severstal was Russia’s third largest and the

world’s 14th largest steel producer in terms of production; It was producing 19.2

million tonnes of steel and generating revenues of $22.4 billion ($5.4 billion

EBITDA). It has more than 100,000 employees, most of whom work at the

Cherepovets Steel Plant. However, as of 2014, Severstal fell to the 27 th place among

world steel producers with 14.2 million tons of steel production.

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Severstal Steel has shifted its focus to value-added steel products since 2002,

especially in the profitable but difficult steel industry. The strategy included many

acquisitions outside Russia, starting with Rouge in the United States; this was

historically unprofitable for Ford at the time. Rouge changed its name to Dearborn

and became part of Severstal’s Americas network. The Severstal Columbus Steel Mill

in Mississippi, USA, is an expansion project that was built in 2007 at a cost of

approximately $880 million and later sold for $1.63 billion in 2014. U.S. steel mills

are located close to major customers, allowing them to produce better, lower-cost,

more efficient products. Severstal has also made several acquisitions in Europe,

including French-Italian steelmaker Carrington Wire and Britain’s Lucchini, both of

which were acquired during the steel market bubble of the mid-2000s.

Severstal created an important innovation project to reduce costs and simplify the

reporting process. Before 2014, Severstal Steel Group operated as a parent company

with three groups: Severstal Resources, Severstal International and Severstal Russian

Steel. Following the acquisition of American Resources in July 2014, Severstal was

divided into two main divisions: Severstal Russia and Severstal Resources. Both

segments adopted a vertically integrated business model, showcasing a global range

of associated diverse products. Further restructuring and refinement were anticipated,

including divestment of lower-margin production assets and a heightened focus on

emerging markets, where the demand for steel products was expected to continue

growing at a moderate rate.

Prospective strategic directions and alternatives that Severstal should contemplate

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In 2004, Severstal Group embarked on numerous international and domestic

acquisitions. Under the leadership and vision of Alexey Mordashov, a staunch

advocate of consolidating the steel industry, the aim was to establish the company as a

globally recognized player, particularly in the automotive market and other high-value

sectors. Guided by Mordashov’s strategic approach, the company actively pursued

several high-risk international acquisitions in the United States and Europe, taking

over loss-making steel mills to transform them into profitable ventures and expand the

global portfolio under the Severstal brand.

While the organization demonstrated proficiency in utilizing acquisitions to pursue its

strategic trajectory, a lack of shared collective management understanding within the

company when integrating newly acquired assets meant missed opportunities for

further growth during the favorable years leading up to the Great Recession of 2008.

There was a strong reliance on the expertise of a limited group of senior managers

who could negotiate and oversee newly acquired companies effectively, but at the

broader organizational level, there was a deficiency in shared knowledge and culture

regarding the integration of such managerial competencies to generate synergies. The

robust leadership in several divisions contributed to their successful and rapid growth,

while other units lacking similar management competencies clearly underperformed.

Coordination of global operations was highly centralized, providing moderate

flexibility, an area that Mordashov sought to improve through continuous acquisition

of managerial competencies, including management development training programs

to serve as facilitators for the overarching Severstal culture and mindset. Over several

years, senior Severstal managers engaged in ongoing training and upskilling, notably

through partnerships with Cranfield University and Northumbria University in the

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United Kingdom, and the Skolkovo School of Management in Moscow, alongside

internal Severstal management programs (Gurumurthy, 2007).

Severstal continues to allocate resources towards enhancing its corporate governance,

corporate social responsibility, and sustainability, as part of its strategy to bolster

global recognition of the Severstal brand and attract investment. In Russia, Severstal

and its leader, Alexey Mordashov, are perceived as the contemporary embodiment of

transparent and ethical Russian businesses, standing in comparison to well-established

American counterparts. The company’s investment in a robust corporate governance

reporting system, surpassing a successful London Stock Exchange listing in

November 2006 (valued at $1.1 billion), resulted in securing multimillion-dollar

funding from both Russian and international lenders to support the company’s global

expansion strategy.

Recommendations for Severstal take in the coming years

In our perspective, sustainable development must align with meeting present needs

without compromising the ability of future generations to meet their own

requirements. We agree with the idea that iron is considered an important element of

global security. The quality of steel below demonstrates its importance in this regard,

as it is 100% renewable and the most recyclable material in the world (Haugh and

Talwar, 2010).

Steel, as a material, competes with other fixed and variable materials. However, steel

has proven to be a versatile material, with a long history of new technology and

process advancements that have led to improvements and good value for the most

sought-after rare metals. This trend, combined with the impact of aging in emerging
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economies such as Russia and China, could lead to reduced demand for steel in the

future. Affected by macroeconomic trends and geopolitical instabilities, the

development of the country’s economy and traditional steel industries such as

construction, shipping and automobiles is also prone to uncertainty, especially in

North Africa and the Middle East (Ge et al., 2012). Due to the uncertain outlook, steel

industry leaders expect capacity development to remain stable until at least 2020.

However, given the possibility of increased urbanization, with 70% of the world’s

population expected to live in cities by 2050, the demand for steel will increase. Also

increases. Buildings, offices, public transportation, power plants and pipelines, the

demand for steel as a material in these structures must continue. Severstal Steel’s

strategy will be updated accordingly.

References: -

Enloe, C.M. and Baker, D.S., 2013. CHALLENGES AND OPPORTUNITIES FOR 3

RD GENERATION ADVANCED HIGH STRENGTH STEEL AT SEVERSTAL.

НАУЧНО- ТЕХНИЧЕСКИЙ ПРОГРЕСС В ЧЁРНОЙ МЕТАЛЛУРГИИ, pp.440-

446.
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Ge, S., Isac, M. and Guthrie, R.I.L., 2012. Progress of strip casting technology for

steel; historical developments. ISIJ international, 52(12), pp.2109-2122.Volovik, N.,

2016. Trade Restrictions Hamper World Trade Growth. Russian Economic

Developments. Moscow, (7), pp.43-46.

Gurumurthy, R., 2007. Indian enterprises investing abroad–Irritants, incentives and

issues. Haugh, H.M. and Talwar, A., 2010. How do corporations embed sustainability

across the organization?. Academy of Management learning & education, 9(3),

pp.384-396.

Martus, E., 2019. Russian industry responses to climate change: the case of the metals

and mining sector. Climate Policy, 19(1), pp.17-29.

Nair, S.R., 2013. Reverse knowledge transfer in Indian MNEs (Doctoral dissertation,

University of Sheffield). Safirova, E., 2013. The mineral industry of Russia. Minerals

Yearbook-Area Reports: International Review: 2011, Europe and Central Eurasia, 3,

p.14.

Stevens, P., Kooroshy, J., Lahn, G. and Lee, B., 2013. Conflict and coexistence in the

extractive industries. London: Chatham House.

Vahtra, P. and Liuhto, K., 2006. An overview of Russia's largest corporations abroad.

Journal of East-West Business, 11(3-4), pp.23-40.