First, a few key numbers. Russian steelmaker and mining company Severstal produces 12 million tonnes of crude steel per year, 17 million tonnes of iron ore products half as pellet and the rest as concentrate and 4.8 million tonnes of coking coal concentrate. It is a vertically integrated producer from steelmaking raw materials through to finished products. The company has a key advantage of low-cost production that places its cost of slab output at less than $250 per tonne.
Core strands of Severstals strategy now include increasing the share of high-value-added (HVA) products, with an associated goal of becoming more of a solution- rather than simply a product- provider to customers. HVA products already account for 45% of its output.
Projects to increase steelmaking raw materials production are well under way, together with a continuous drive to keep costs low. Meanwhile, multiple digital initiatives and investments in modern plant and e-commerce support the business aims.
Five years ago, Severstal still owned mills in the United States, but nowadays most of its assets are in Russia, with two-thirds of its sales in the domestic market. Europe is the steelmakers main market for exports.
Alexander Shevelev, CEO, sees Severstals focus on its domestic market and concentration on its assets in Russia as another advantage now, given the current global geopolitical and macroeconomic outlook and uncertainties for international trade. I think it is a good strategic decision because, speaking about Russia and our local market, where we sell about 70% of our sales, we will have the opportunity to grow more, he said.
He added that Severstals sales in Russia are made at a premium to the export market, which he said is sometimes quite good, especially as the export market price is currently slowing down, but in Russia pricing is at a relatively stable level. At present, It allows us to earn additionally approximately $80/tonne because in Russia the market for flat products is quite concentrated and three players have more than 75% of this market, and the market is quite well balanced, he explained. The premium in the Russian market is above its typical level of $40-50 per tonne, but Shevelev said that it looks likely to remain positive for the coming months.
In Severstals major export market of Europe, the company sells to Scandinavian, central European and East European countries in particular. Our logistical position, at Cherepovets, is very good for us and for exports, especially in Nordic countries, Shevelev added. The companys flagship mill is based at Cherepovets, about 500 km to the north of Moscow.
Speaking about our strategy and our main competitive advantages, it is cost leadership through vertical integration when we have more than 100% of self-sufficiency in iron ore products [130%], and about 78% in coking coal, he explained.
Considering the cost curve, we are in the left [very low] position globally. That has given us the opportunity to sell our exports in any market in the world, but we are focusing on Russia because it is a more profitable market for us, he noted.
Customers in local markets for us are more understandable and more predictable. And currently we are changing our strategy by focusing on end-customers to deeply understand real customer needs and to be ready to provide not only product and not only service as usual which we have done before but also the products that we cannot produce yet, he added.
He gave the example of a partnership that Severstal has with Evraz, another major steel and mining company, we created a common sales platform in Russia to complete our range portfolio and provide some customer needs and solutions. Severstal is looking for discussions for more joint ventures and partners.
I am sure that through this strategy, when we are focusing on real customer needs and we are solving their business needs, not problems their business needs and business opportunities give us an additional push forward, Shevelev explained.
He confirmed that Severstal wants to become so well integrated into its clients supply chains that it becomes indispensable to them. Absolutely, its why we are sure that our target for additional Ebitda that is $2.1 billion additionally for the period 2018-2023 is doable.
He said that for the companys results in 2018 and 2019, Severstal has already earned about an additional $700 million, or about 27% of its five-year target. Our target is to add 10-15% annually to Ebitda and our result for 2018 and 2019 says that is possible and doable for us in the time and within the budget, he stressed. Route to the top
Shevelev has held multiple roles on his path to become Severstal CEO, each of which have added valuable experience for him to lead a business that employs 50,000 people as well as to execute the companys over-arching vision to become the leader of steel industry of the future.
I was born [in 1974] near Cherepovets. I finished state education and studied to become a mechanical engineer. My second education was about economics and management, and the third was a general MBA, he recalled
Shevelev started work on the shop floor 22 years ago, in 1997, in a Cherepovets steel rolling mill that is a subsidiary of Severstals steel plant there. He recalls the steps from working on the shop floor to the boardroom well.
I built my career in this plant. After I was a worker, I became a supervisor, the head of the shop floor; then head of the strategic department, the technical director and then the executive director of the Cherepovets site. Then I became CEO of Severstals metalware businesses, which produce finished products from steel, such as ropes, mesh and fasteners.
This post gave me the opportunity to feel [what it is like to be] a customer of the steel industry, because we bought product from the metallurgical plant at Cherepovets but not only from Cherepovets but also from the market.
He was free to choose what products he purchased: from Cherepovets steel mill or from the [external] market because the relationships between assets in our company is a market. If I could buy more efficiently from the market, I could if I wanted to.
He explained that it gave him the opportunity from the customer side to interact with his colleagues from the metallurgical plant. I had a lot of difficult conversations and discussions over quality, volume and pricing issues etc. I tried to understand better metallurgical technology and the metallurgical business model and how we can use them.
From the role of CEO of Severstals metalware businesses, he received an offer from the local government to become first deputy mayor of Cherepovets city. It was very exciting for me and it was an absolutely different way and track for me but, because I had already experienced more than 15 years in the steel business, it was really interesting for me, he recalled.
Severstals majority shareholder and chairman, Alexey Mordashov, agreed with Shevelev about the merits of him accepting the role. I went to town, where I was responsible for development, economic strategy of the town, construction, architecture and working with business connections. I was in that post for a year or so and it was a very interesting period of my life, because I received lots of different experiences working with other parts of the government and the political side and citizens needs.
He recalled holding regular meetings with the people to hear about their needs, issues and problems. I had to be focused on solving these problems because, in business, I have to demonstrate results. I was quite effective there because I received an offer from the regional government, which was a high position to be deputy governor.
He accepted that offer too and moved from Cherepovets to Vologda, which is the regions centre. But after working for only three months in that position, he received another offer from Alexey Mordashov to go back to Severstal. Business and community
Wherever they are located, it is common for large integrated steelworks that employ thousands of local workers to also have links and responsibilities to the communities in which they are based. Severstal is no exception, as Shevelev explained.
Cherepovets is quite a small town of only 315,000 citizens and Severstal is the biggest employer there. It is very responsible for society, the environment and the business environment there. We have many social programmes in the town. We have a lot of social investment into the hockey team, sport, and some special social programmes such as the Road home program for children who do not have a family.
We support a lot of these things and it means that the local government and the Vologda government and the Cherepovets government work closely with the Severstal management team. We decided and resolved absolutely that to increase the effectiveness of the town we needed to care about and increase the engagement of citizens and the corporate culture with the town.
He said that it was quite simple and comfortable for him to work in the government team too, because he had a constant connection and link with business people, not only from Severstal, but also from other businesses.
After receiving the offer to come back to Severstal at a higher position, I accepted it and came back to Severstal as the CEO of hardware businesses. After three years in that role, he was promoted to other Mordashov businesses, in plywood, which were also very interesting they have a big market share globally because Russia is a big player in plywood business.
He worked in the hardware business for 6 months and, after that, following changes in the management team at Severstal, he became CEO of AO Severstal Management in December 2016. Of course, I accepted immediately because it is a huge business in the Severgroup. Severstal creates 70% of the gross revenue and 75% of the profit of the assets held by Severgroup the investment company for Mordashovs multiple businesses. Communication is key
In support of all of Severstals strategic initiatives (see panel) that Shevelev ultimately takes responsibility for as CEO, he highly values systems and opportunities to communicate with the companys staff, managers and customers.
He prizes working with many different people, with multiple emotions. Each of us has emotions there are your own emotions and the emotions of other people, and if you are a manager working with a number of people you should understand these emotions and take them into account and use it in a positive way for a result, and not to destroy something but to create something, he said. It is a way that I constantly investigate and try to use and improve, he added.
The question arises of about how he achieves that in an organization employing tens of thousands of people. He explained that over the whole company there is a lot of focus on communications and channels, such as through video conferences with management teams to enable staff to ask questions.
Some years ago, it was really formal conversation with some special questions that were prepared before, but now with a constantly changing [dynamic] situation, I give a short speech about our results and our challenges, our trends and our position compared with our competitors, and about our main tasks for everybody.
Then I have more than half of my meeting for a Q&A session and we use an electronic system to allow people to ask questions confidentially from on-site. But at the same time if somebody asks me a significant question, everybody has the opportunity to mark, or rate, each question. That effectively gives employees the opportunity to vote on which questions are of most importance to them and for Shevelev to answer those from the top of the list.
It is good, because during these quarterly meetings, I have the opportunity from my side to send a message to everybody, but at the same time receive feedback, questions and further information through this channel.
As and when needed, Severstal also uses on-line webinars, typically lasting about an hour, for specific topics or targets.
The company undertakes 360 degree research to evaluate employees including top-managers, including Shevelev himself. Customers, suppliers, colleagues, subordinates and superiors are asked for feedback. To give recommendations and to give open feedback on what I should do better, and what I should keep because it is already good, he explained.
He said that he reflects immediately on the feedback he receives, adding that the process is undertaken at least once each year and that the system provides a constant opportunity to make recommendations or comments. For day-to-day communication, Severstal uses internal corporate social media (Yammer), where Shevelev also has a blog, as well as Facebook to provide a public profile and means of external communication.
Last but not least, we have engagement research via survey within our company, for which the response rate is very high: 76% of our employees are involved in this research, which is absolutely confidential for the employees responding, he said.
There are about 75 questions, asking what problems need to be addressed, whether there is any need for a change in the behaviour of management, what needs to change, and what employees think about Severstals NPS (Net Promoter Score) for its products and company.
A lot of this information is used for focus groups in order to better understand what our employees mean about this: why they evaluate this [particular] topic beyond what we expected etc. I think that we make the right decisions in the right way because our engagement level grows constantly. We started with 47% five years ago and currently we have 78% in Severstal globally.
These percentage scores are for Severstals engagement level in an independent methodology that many companies use internationally. That also enables comparison with the performance of different companies. Scoring above 75% means that we are an advanced company in terms of culture and the engagement of people. We have 78%. It is the right way to measure the feelings and engagement in the company, Shevelev stressed. What next?
Shevelev is just 45 years old, so where next for his career? I have a great opportunity to move my company from its current position in the local market to be a real leader in the future steel industry, he said.
I am going to transform our company from a production site to a real customer-centric company that will use not only technology for metallurgy, but implement it and use a modern business model that is digital. He noted that there are many digital business models at other successful companies to emulate.
We will not only provide products and service, but will be a solutions provider. It is a challenge for me and for my team and I think if I manage it, I will be really happy. It is my target for the near future.
Alexey Mordashov has delegated to and trusts me to manage this company, and he trusts me to change my company. It is very difficult, but a really interesting way to go, he concluded.
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