4.0
KEY
INDICATORS
4.1
PRESIDENT’S STATEMENT

DEAR COLLEAGUES AND PARTNERS,

Most sectors of the economy experienced difficulties in 2016, due to the impact of negative factors, and industry and metallurgy were no exception to the general trend. Nevertheless, United Metallurgical Company has fully achieved its objectives, thanks to the coordinated and effective work put in by staff.

In my view, the most important event of the year was the signing of the contract to supply pipes for the international Nord Stream 2 gas pipeline – a record-breaking contract for the company. Deliveries for the project have already begun: we shipped more than 155,000 tonnes of pipes during the reporting period.

OMK also supplied large diameter pipes for two other trunk gas pipelines, Power of Siberia and Ukhta-Torzhok 2, in 2016. Due to the postponement of a number of major projects by Gazprom and cuts in investment programmes at oil and gas companies, however, OMK’s production of large diameter pipes decreased by more than a third in 2016.

The oil and gas pipes and tubes division has increased production volumes despite a shrinking market. We continued to develop new products with added properties to meet the most exacting requirements of our customers. We actively expanded the production of structural steel for construction, including for large infrastructure facilities nationwide such as the VTB Arena and Luzhniki water park in Moscow, stadiums in Saransk, Nizhny Novgorod and Volgograd for the 2018 world football championship, and Sheremetyevo Airport.

The divisions producing products for the transport industry (railway wheels and automotive springs) have done fairly well this year. Chusovoy Metallurgical Works increased its production volume by 10% in comparison with 2015, and ended the year with an operating profit for the first time in nine years. The enterprise developed and presented a new line of import-substitution springs for foreign vehicles under its own Springer brand. Railway wheel production at VSW remained at the previous year’s level. The division fulfilled a large contract for railway wheels and supplied modern wheels for the innovative Lastochka trains on the Moscow Central Circle. However, as before, the results are far from the record-breaking figures of the early 2010s, and the railway wheels market is still unstable.

Almetyevsk Pipe Plant slightly reduced production by 9%, but as far as production culture is concerned APP is at a solid level, and last year the plant’s level of engagement exceeded 80%, which indicates great potential. Trubodetal and Blagoveshchensk Valves Plant reduced production volumes by 12% and 25% respectively. The postponement of some investment programmes and the increase in competition due to the launch of new production facilities affected the production of pipeline fittings and valves.

In 2016 we continued to pursue our strategy aimed at improving efficiency and customer focus and strengthening OMK’s leadership positions. The best confirmation of this was the result of the annual audit of the company’s production system using the Toyota technique. All businesses achieved improved evaluations, and VSW got the highest score (3.11). For this, VSW was awarded the Toyota bronze medal for development of a production system — the first metals industry enterprise in the world to be so honoured.

In collaboration with Gazprom we launched a project to localize in Russia the production of special-purpose ball valves up to 1,400 mm in diameter for pressure up to 42 MPa for the gas industry, as these are currently imported. For this purpose, we started building the Ural Special Valves Plant in Chelyabinsk. Over RUB 5 billion is set to be invested in this plant. The production facility will create more than 150 modern jobs.

Having had a successful year, with lower costs and a reduced debt burden, we can look to the future with confidence — we are ready for interesting new projects. I would like to thank OMK employees for their support and the good results they have achieved. The competition level on markets in which OMK operates is becoming stronger. We face new challenges, and so it is important to continue effective and intense work.

Vladimir Markin
4.2
OPERATING
RESULTS 2016

Large diameter pipes

thou tonnes

875 -36%

Railway wheels

thou units

342 +7%

Small and medium diameter pipes

thou tonnes

1,102 +6.5%

Casing pipes

thou tonnes

280 -1.5%

Water and gas pipes

thou tonnes

166 -0.5%

Oil and gas pipes

thou tonnes

424 +3.5%

Shaped pipes

thou tonnes

232 +34%

Pipeline fittings

thou tonnes

14 -12%

Rolled products (rolls and sheets)

thou tonnes

1,213 +2%

Pipeline valves

thou tonnes

5 -25%

Wide sheets

thou tonnes

730 -22%

Automotive springs

thou tonnes

48 +10%

LARGE DIAMETER PIPE DIVISION

LDP production

thousand tonnes

Production of wide sheet for LDP on Thick-Plate Mill 5000

thousand tonnes

PRODUCTS:

  • Wide sheet steel for production of large diameter pipes, heavy industry, shipbuilding and construction. Width: 900–4,850 mm. Thickness: 10–150 mm. Maximum capacity: up to 1.2 million tonnes per year
  • Straight-seam and single-seam ERW pipes for trunk oil and gas pipelines with inner and outer anti-friction or anti-corrosion coatings. Strength class: up to Х80 Diameter: 508–1,420 mm. Maximum capacity: up to 2 million tonnes per year

In 2016, OMK and Nord Stream 2 signed the largest single pipe contract in OMK’s history to supply 745 km of large diameter pipes for the Nord Stream 2 gas pipeline. Shipments began in September. Over the reporting period, the company supplied a total of 155,000 tonnes of pipe with inner diameter of 1,153 mm and wall thickness of 30.9 and 34.6 mm, with three-layer outer and inner anti-friction coating made of grade SAWL 485 FD steel for a working pressure up to 220 atm for the project. The company also supplied large diameter pipes for the strategic Power of Siberia and Ukhta-Torzhok – 2 gas pipelines.

Nevertheless, large diameter pipe production did decrease in comparison with the record year of 2015. This was due to a decline in demand from oil and gas companies in Russia. Financing for Gazprom projects decreased significantly, resulting in project deadlines being postponed, and the programmes to renovate and repair Transneft pipelines were completed. Oil companies did not carry out any major new construction projects in 2016 and pipes were only purchased for the repair and renovation of existing pipelines.

The production of Thick Plate Mill 5000 is directly dependent on the demand for large diameter pipes. Consequently, the drop in demand also had a negative impact on the production of Mill 5000.

OIL AND GAS PIPE DIVISION

Division’s tubular goods production volume7

(thousand tonnes)

Casting and Rolling Mill production volume (roll and sheet)

(thousand tonnes)

7Including pipes 508 and 530 mm in diameter for VSW Electric Pipe Welding Shop 3

PRODUCTS:

  • Hot-rolled flat sheet steel in rolls and sheets for small and medium diameter pipes. Can also be used in shipbuilding, heavy industry, and construction. Width: 30–1,750 mm. Thickness: 1–12.7 mm. Maximum capacity: up to 1.2 million tonnes per year
  • Oil and gas and general-purpose pipes and tubes, water and gas and general-purpose pipes and tubes, hollow sections and casings
  • For a detailed list, see Appendix B.

Thanks to the joint efforts of the commercial department and production facilities, OMK actually maintained the production volumes of casings, water and gas pipes and tubes, oil and gas pipes, and general-purpose pipes and tubes at 2015 levels. There was significant growth in the hollow sections segment and a slight increase in the production of flat sheets and rolls

The production capacities of the Casting and Rolling Mill reached record levels due to a joint programme involving the division, the OMK Engineering Technology Centre in Vyksa, and the Technical Production Inspection Service.

The division undertook a number of groundbreaking projects in 2016, aimed at developing and promoting modern, in-demand products with improved properties. For instance, new threaded connections for large diameter casings were developed for the first time. All such tubes are now purchased abroad for offshore oil and gas well completion. OMK presented a model of a 762-mm-diameter casing with wall thickness of 38 mm with a new VSW threaded connection at the International Gas Forum in St. Petersburg.

In 2016, the company supplied 245-mm-diameter casings to Bashneft for the first time since 2010. Over 7,500 tonnes of steel pipes were produced and shipped for 12 major infrastructure projects, including the construction of three stadiums — Volga Arena (Nizhny Novgorod), Pobeda (Volgograd) and Yubileyny (Saransk) — and the construction and modernization of infrastructure at Simferopol and Sheremetyevo airports.

TRUBODETAL

Pipeline fittings production volume

(thousand tonnes)

PRODUCTS:

  • Pipeline nodes, cold and hot bent branches, stamped and welded pipeline parts: bends, T-bends, reducers and ends. Used in construction of trunk pipelines, pipelines for the development of oil and gas fields, distribution and pumping stations, gas processing plants and oil refineries, nuclear power plants, and thermal power plants. Diameter: 57–1,420 mm. Maximum capacity: up to 30,000 tonnes per year

The decrease in pipeline fittings production at Trubodetal was due to the revision of the Gazprom schedules for construction of gas pipelines and compressor stations for the Power of Siberia and Bovanenkovo-Ukhta projects, as well as increasing competition in the market. Gazprom was still the largest consumer of Trubodetal pipeline fittings in 2016: the plant supplied parts for the Bovanenkovo-Ukhta gas pipeline project. The plant also began shipping batches of products to Yakutia and 1,420-mm-diameter bends, bent using high-frequency currents, and stamped and welded products (tees, assembly units, and adapter rings) with anti-corrosion coatings were designed for the Power of Siberia gas pipeline.

4.2
OPERATING RESULTS 2016

BLAGOVESHCHENSK VALVE PLANT

Pipeline valves production volume8

(thousand tonnes)

PRODUCTS:

  • Cast wedge gate valves, spring-loaded safety relief valves, rotary check valves, changeover valves, safety relief valve assemblies, wellhead and shutoff valves, etc. Applications: oil and gas extraction, oil and gas processing, petrochemicals, power generation. Diameter: 25–800 mm. Maximum capacity: up to 13,900 tonnes per year

Blagoveshchensk Valves Plant reduced production to its lowest level since becoming part of OMK. The pipeline valve segment has been negatively affected by the continuing low oil prices, which led to the largest oil companies in Russia reviewing their investment programmes and, as a result, postponing a number of oil refinery modernization projects.

In 2016, BVP supplied products for major oil refinery renovation and construction projects at enterprises within Surgutneftegaz, Gazprom, Lukoil, TAIF, Gazprom Neft and Tatneft, and the New Stream Group’s Antipinsky Oil Refinery, among others. The Mozyr Refinery (Republic of Belarus) is the largest foreign customer for BVP’s pipeline valves.

8Became part of OMK in 2013

ALMETYEVSK PIPE PLANT

APP tubular goods production volume

(thousand tonnes)

PRODUCTS:

  • Water and gas pipes and tubes, oil and gas pipes and tubes – straight-seam electrically welded, including with two- and three-layer outer polyethylene coating. Applications: oil and gas industry, water supply and heating, construction, agriculture. Diameter: 21.3–219 mm. Wall thickness: 1.5–8 mm. Length: 6–12 m
  • Square hollow sections. Used in machinery and tractor production, construction, furniture production, and other industries. Cross section: 15х15–180х180. Wall thickness: 1.5–6 mm.

Production decreased slightly in comparison with last year. This was due to a decline in the capacity of the Russian pipe and tube market – including lower demand in the Volga region, a key area for the business – and an increase in competition.

RAILWAY WHEELS DIVISION

Railway wheel production volume

(thousand units)

PRODUCTS:

  • One-piece rolled railway wheels and wheel centres for freight and passenger trains, including Lastochka high-speed trains. Diameter: 710–1,098 mm, 140 sizes. Maximum capacity: 850,000 units per year
  • One-piece rolled railway wheels for fast and high-speed trains. Maximum capacity: 10,000 units per year

Railway wheel production volume at VSW remained at the previous year’s level and the wheel rolling shop operated below capacity with forced downtime, but orders were still filled on time and in full conformity with customer requirements. Several interesting projects were implemented in VSW wheel production in 2016. In particular, the plant delivered railway wheels for the Lastochka high-speed trains which have run on the Moscow Central Circle Line since September. Preparatory work was also done and, as a result, in January 2017 only OMK received an order for the supply of 3,000 wheels for the innovative Moskva cars for the Moscow Metro.

CHUSOVOY METALLURGICAL WORKS

Spring production volume

(thousand tonnes)

PRODUCTS:

  • More than 800 sizes of springs using the latest designs, including parabolic, as well as arms for air suspensions. Supplier to key Russian (KamAZ, Ural, NefAZ, etc.) and foreign truck manufacturers
  • Capacity: 110,000 tonnes per year

Chusovoy Metallurgical Works achieved an increase in automotive spring production in 2016, the first increase in the last five years. This growth was due to an increase in production by auto manufacturing customers, the expansion of the product range, modernization of production facilities, and also an increase in the speed of filling orders and improved working conditions. The plant also increased production of springs for foreign vehicles by more than 75%.

4.3
STATEMENT FROM THE DIRECTOR OF THE ECONOMY AND FINANCE DEPARTMENT

DEAR FRIENDS, COLLEAGUES AND PARTNERS,

For the markets, 2016 was a year of uncertainty, with high interest rates and volatile exchange rates. Only now can it be said that the Russian economy has begun to stabilize. Oil prices have levelled out, the rouble has strengthened by more than 20% relative to the dollar and euro, inflation has been held to a low level, and the Bank of Russia has continued to cut its key rate, albeit slowly. However, things are still difficult for industrial companies. The recession continues, the situation is difficult in most markets, and demand is falling.

Against this background, we have mobilized resources, concentrated on solving strategic tasks, and achieved good results. Profit, the key financial indicator of company operations, rose in comparison with 2015 due to a combination of several factors.

Significant work has been undertaken to reduce the debt burden.

An extremely important corporate reorganization project has also been implemented. In particular, the Casting and Rolling Mill, which was previously an independently managed company, has become part of Vyksa Steel Works. We have created an organizational structure that is understandable both for intra-corporate users and for partners and creditors. This logical step has made it possible to harmonize the corporate structure with the actual state of the business, simplify production and administrative processes at VSW, optimize operating expenses, reduce costs, and improve OMK’s investment appeal

Now, from a financial viewpoint, OMK is a transparent, stable and robust company. Despite the broad range of challenges in the economy, we look to the future with confidence and we are ready to invest in developing our assets further.

Yulia Shkhiyants