Trading update for the full year 2013

Metinvest B.V., the parent company of a vertically integrated group of steel and mining companies (jointly referred to as “Metinvest” or “the Group”), today published a trading update for the 12 months ended 31 December 2013.

The information in this press release has been prepared based on preliminary financial results. Intragroup transactions have been eliminated in consolidation. This announcement does not contain sufficient information to constitute a full set of financial statements. The following preliminary results may differ from financial statements prepared in accordance with International Financial Reporting Standards (IFRS). The numbers in this press release have not been audited or reviewed.

Metinvest B.V. publishes consolidated financial statements prepared in accordance with IFRS for the six months ending 30 June and for the year ending 31 December.

Given the current events in Ukraine, Metinvest’s management reiterates the Group’s commitment to open lines of communication with investors and all other stakeholders. In addition to our usual disclosure of our preliminary financial results, we would like to offer the following information.

• All of Metinvest’s production and other assets in Ukraine continue to operate as normal and without disruption, including those located in eastern and south-eastern Ukraine.

• The Group continues to ship products from Ukrainian ports. All export iron ore shipments go from the Odessa and Yuzhniy ports; bulk steel products are shipped from the Mariupol, Odessa, Mykolaiv, Zaporizhia and Avlita (Sevastopol) ports. Avlita accounts for around 7% of Metinvest’s steel exports.

• Metinvest believes that the Russian market for its products continues to represent significant long-term growth opportunities and is committed to customers in all of its markets. At the same time, Russia accounted for 8% of total revenues in 2013 (12% in 2012), limiting the Group’s immediate exposure to any possible disruptions of trade flows. 

• Metinvest’s management remains concerned about the possible impact of any devaluation of the national currency (hryvnia) on living standards. At the same time, the Group itself has not been directly harmed by the devaluation and the effect on margins is positive, given that revenues are denominated primarily in foreign currencies, mostly dollars, and costs in hryvnias. For third-party analysis, see the special comment on Ukrainian corporate issuers published by Moody’s Investors Service on February 28: “Hyrvnia Devaluation Would Have Positive or Neutral Effect on Most Rated Issuers”.

• To date, capital and currency controls (including the recent regulations nos. 48 and 49) introduced by the National Bank of Ukraine have not affected Metinvest, as the Group has historically changed more than 50% of its export revenues into hryvnias to cover local costs.

FINANCIAL HIGHLIGHTS

Revenues

In 2013, Metinvest's consolidated revenues increased by US$238 million year-on-year (y-o-y) to US$12,807 million, mainly driven by steel and iron ore sales volumes. The Metallurgical division accounted for 76% of external sales (74% in 2012) and the Mining division for 24% (26% in 2012).

Metallurgical division

Revenues in the Metallurgical division come from sales of steel and coke products. In 2013, the division’s top line rose by 5% y-o-y to US$9,727 million, of which steel sales accounted for 94%. Despite falling average steel prices and lower sales volumes of tubular products, higher sales volumes of pig iron, slabs, flat and long products helped to compensate.

Market trends in terms of demand for steel goods and sales by region in 2013 differed compared with 2012. Sales of semi-finished products totalled US$1,479 million, up 4% y-o-y. The rise was due to an increase in sales of pig iron by 291 thousand tonnes – mainly to the US, Europe and the Middle East and North Africa (MENA) – and slabs by 208 thousand tonnes to Europe and MENA. The market for slabs was stronger than that for plate due to a shortage of slabs, stronger exporter positions and a buoyant market for iron ore in China. The bulk of slab and plate sales went to the higher-margin markets of Europe (mostly Italy) and the Middle East (Turkey), while volumes to the Far East were lower. Sales volumes of billets decreased by 7% y-o-y correspondingly, while those of finished long products increased.

In 2013, revenues from sales of finished products declined by 12% y-o-y to US$5,803 million. This was mainly due to lower average prices of flat, long and tubular products, as well as a slump in sales volumes of tubular products.

In 2013, sales of flat products fell by 7% y-o-y to US$3,716 million, of which 11 pp was attributable to a decline in average prices throughout our markets, which was partly offset by 4% growth in sales volumes. Overall sales volumes of flat products increased y-o-y as a result of growing shipments to Southeast Asia (306 thousand tonnes) and the Middle East (288 thousand tonnes), including the Gulf, due to Metinvest’s strong presence in these regions, while the redistribution of volumes from the weaker local markets of Ukraine and Russia resulted in lower volumes of 422 thousand tonnes overall. The latter was caused by a fall in consumption in some segments in Ukraine and growing competition in Russia, which together caused a decline in sales of hot-rolled plates in Ukraine and Russia and debars in Russia. At the same time, sales to the high-margin European market increased (by 114 thousand tonnes) due to the further strengthening of the sales network (expansion in Western Europe, development of distribution and service in Southeast Europe).

Revenues from sales of long products fell by 4% y-o-y to US$1,654 million in 2013. The main cause was a 9% drop in average product prices, partly compensated by an increase in sales volumes in Ukraine, Europe and the Commonwealth of Independent States (CIS, except Ukraine) of 122 thousand tonnes overall.

In 2013, revenues from sales of tubular products fell by 79% y-o-y to US$111 million. This was caused by a 73% slump in sales volumes, as various large pipeline projects were completed in 2012 and some planned initiatives were rescheduled, particularly the second phase of the East-West pipeline (Turkmenistan) and the third stage of the Central Asia-China pipeline.

Revenues from sales of railway products decreased by 6% y-o-y to US$322 million in 2013, as volumes in Ukraine declined by 67 thousand tonnes. Despite this, most sales of rails to the CIS (except Ukraine) were stable in 2013, with fixed volumes sold to Kazakhstan, Georgia, Belarus, Uzbekistan and Turkmenistan. In addition, 12 thousand tonnes were sold to Latin America while some sales went to Lithuania and Latvia.

Following Zaporizhstal Iron and Steel Works’ (Zaporizhstal) integration with Metinvest, revenues from sales of flat products from the asset increased by US$812 million to US$1,462 million, driven by a boost in volumes of 1,481 thousand tonnes. Most of Zaporizhstal’s flat products went to MENA (51%) and Europe and the CIS (37%), while the rest were sold in Ukraine.

Mining division

Revenues in the Mining division come from sales of iron ore, coal and other products. In 2013, the division’s top line dropped by 6% y-o-y to US$3,080 million due to a slump in sales of coal products.

In 2013, sales of iron ore products grew by 9% y-o-y to US$2,691 million, or 87% of the division’s revenues. This was driven mainly by a rise in sales volumes of iron ore concentrate of 661 thousand tonnes and pellets of 937 thousand tonnes, while iron ore prices remained broadly flat y-o-y.

Revenues from iron ore concentrate increased by 7% to US$1,517 million in 2013. This was driven by a boost in shipments to China of 956 thousand tonnes, supported by an average sales price of US$130 per tonne. Sales volumes to Europe and Ukraine dropped by 295 thousand tonnes y-o-y overall.

Sales of iron ore pellets increased by 13% y-o-y to US$1,104 million. The rise was attributable to increased sales volumes to China (825 thousand tonnes), Ukraine (284 thousand tonnes) and MENA (233 thousand tones), partly offset by a fall in sales to Europe of 405 thousand tonnes.

Sales of coking coal concentrate dropped by 37% y-o-y to US$275 million in 2013. The decline was the result of a slump in average concentrate prices of 36% y-o-y to US$128 per tonne. Overall sales volumes remained broadly stable y-o-y, increasing by 173 thousand tonnes in the US and 24 thousand tonnes in other regions, but decreasing by 228 thousand tonnes in Ukraine due to the consolidation of Donetsk Coke Plant and Zaporizhia Coke Plant into Metinvest from December 2012.

In 2013, sales of steam coal concentrate were insignificant, as United Coal Company (United Coal) did not mine any steam coal in the period due to low demand on the US market.

Capital expenditure

In the fourth quarter, capital expenditure (CAPEX) soared by 82% q-o-q to US$321 million. This growth contributed substantially to the annual total, keeping it broadly stable y-o-y at US$747 million. Of this, the Group invested 26% in strategic projects, 44% in maintenance and the remainder in major overhauls. The Mining division accounted for 48% of overall CAPEX and the Metallurgical division for 41%. Key projects in 2013 included the:

• construction of pulverised coal injection (PCI) units at Yenakiieve Iron and Steel Works (Yenakiieve Steel) and Ilyich Iron and Steel Works (Ilyich Steel)
• construction of the infrastructure for a new Air Liquide air separation unit at Yenakiieve Steel
• construction of a stand-by turbine air blower for blast furnaces no. 3 and 5 at Yenakiieve Steel
• preparation work for the construction of a new sinter plant at Yenakiieve Steel
• construction of a crusher and conveyor system at the Pervomaisky quarry at Northern Iron Ore Enrichment Plant (Northern GOK)
• reconstruction of the Lurgi 278-B pelletising machine at Northern GOK
• construction of the fourth section at the Affinity mining complex at United Coal