New challenges for Metalloinvest: Evolution 4.0

In the spring of 2019, Metalloinvest presented an updated Development Strategy with the aim of maintaining its leading position in the metals and mining industry and consistent growth in business efficiency, whilst upholding principles of sustainable development – particularly focusing on society and the environment. The Company intends to grow its output of iron ore and metallised products with high added value, to consolidate its positions on the high-quality rolled steel (SBQ) markets, introduce innovative technologies, and continue and intensify the digital transformation of its business.

• In 2019, Industry 4.0 will be introduced at OEMK and Ural Steel

• As part of Industry 4.0, a joint project is being implemented with KAMAZ: barcoding allowing the customer to trace the route of each rolled steel unit

• Metalloinvest’s business system is the key to driving fundamental change in the production philosophy

• The launch pad for introducing the Metalloinvest business system in 2018 was Lebedinsky GOK

• Metalloinvest is facing a serious challenge: to improve and develop innovative, high-tech grades of steel

• At OEMK, about 300 grades of steel are produced every month and work is constantly ongoing to expand the range, including as part of a comprehensive programme to enhance customer focus and the quality of SBQ

Offsets:

OEMK’s development focuses on making high-quality rolled steel products (SBQ) more customer focused and improving its quality. The programme provides for an increase in SBQ production capacity in 2020 by 300 thousand tonnes as compared to 2016 levels.

More than 30,000 organisational changes have taken place at the Company during the implementation of Industry 4.0. Today, Metalloinvest is the case study for the introduction of the ERP system across Russia.

4,000 employees of Lebedinsky GOK and Mikhailovsky GOK have transferred to using Industry 4.0 end-to-end business processes.

Metalloinvest’s development plans focus primarily on strengthening its position as a leading global producer of iron ore products with high added value. In the spring of 2015, the Company’s Development Strategy leading up to 2023 was approved. Ambitious goals were announced for product output and financial results. The development course for capacities of high value-added product output was determined: HBI, pellets and quality steel products. Today, we are pleased to confirm that the key objectives of Strategy 2023 for operational and financial indicators have already been reached and were indeed exceeded in 2018.

Metalloinvest’s strong results have confirmed that the correct strategic focus was chosen. Large-scale construction and modernisation of production capacities played a major role in attaining these results.

In 2016-2018, total capital expenditure topped USD 1.6 bn, despite the world market in 2015 and the first half of 2016 providing unfavourable conditions. The Company was careful in its cost planning, yet all the outlined investment projects were ultimately implemented.

The key investment projects in the mining segment included the 2017 launch of HBI-3 Plant at Lebedinsky GOK, with a production capacity of 1.8 mn tonnes a year, one of the biggest in the world. At Mikhailovsky GOK, in 2015, Pellet Plant #3 was launched with a capacity of 5 mn tonnes a year, becoming one of the biggest in Russia.

Investments in the metals segment went into:

• increasing the output of high-quality products which have a strong market demand

• minimising environmental impact

Key projects at OEMK: modernisation of the gas purification unit, installation of a reducing and sizing block at Rolling Mill 350 for improving the quality of SBQ.

At Ural Steel, Continuous Casting Machine #1 was modernised: production of wheel billet products was launched for our key client Vyksa Steel Works (VMZ), belonging to the United Metallurgical Company (OMK). This has allowed VMZ to close down its open-hearth plant and improve its environmental impact substantially.

Similarly, at Ural Steel, Roller Hearth Heat Treatment Furnace #1 and Rolling Quenching Machine #1 were launched into operation, improving the quality characteristics of heavy plate.

This work has resulted in a growing output of high valued-added products: above all, HBI, pellets and steel. Over four years (2015-2018) of implementing Strategy 2023, the share of processed iron ore has risen from 73% to 81%. Thus, we are fully focused on highly-processed products.

This means that the sales margin has grown and production throughout the chain has become more environment-friendly. Today’s main trend in the metals and mining industry is to use quality raw materials with a maximum share of iron and minimal impurities. By doing so, steel producers consume less energy and cause less environmental pollution.

The Company’s systematic work and strong results have been highly appraised by rating agencies. In 2019, S&P and Fitch raised Metalloinvest’s rating to BB+ and Moody’s raised the Company’s rating to Ba1. The Company’s ratings are thus one level behind investment grade and the same rating level as Russia’s country rating according to the three biggest international credit agencies. In addition, in 2019, the Russian rating agency Expert RA raised Metalloinvest’s credit rating to ruAA, stable.

The large-scale investment programme and higher operating and management efficiency have created a platform for the Company to achieve long-term leadership.

The situation in the industry and the world economy is changing, with new opportunities and challenges appearing. Consequently, in the spring of 2019, the Board of Directors of Metalloinvest decided to update its strategy to take into consideration the challenges and prospects for development in the new cycle.

Goals of the renewed strategy

• Metalloinvest’s leadership in the metals and mining industry

• Better quality iron ore, metallised and steel products

The key strategic priority is sustainable development

• Production safety

• Employee health and safety

• Environmental protection

In the next few years, the development of our sector will be determined by the following trends:

• Falling demand for iron ore by the biggest consumer - China.

• More environmentally-friendly production: a growing proportion of electric arc furnaces used for steel smelting, higher demand for scrap and metallised raw materials.

These factors provide Metalloinvest with new opportunities for growing production of HBI and high-quality iron ore raw materials.

Another trend is the increasing trade barriers and protectionism in the world.

We believe that Metalloinvest is in a good position for development in this new strategic cycle.

The Company will:

• Seek opportunities for profitable growth

• Focus on the most profitable products / clients / markets

• Consolidate its long-term relationships with key clients

• Make use of cost advantages

• Make smart investments in strategic projects

Metalloinvest’s strategic mission is to supply high-quality iron ore and metallised raw materials to support global technological development with a primary focus on sustainable development. This means that we are prepared to supply the global metals and mining industry with high-quality iron ore and metallised products to raise production efficiency.

We are convinced that long-term leadership is only possible when the principles of sustainable development are observed:  particularly focusing on society and the environment.

The enterprise development programmes in the metals segment are also set to entail a rise in product quality and a reduced impact on the environment.

The development of OEMK focuses on improving the quality and customer focus of SBQ products. The programme provides for SBQ production opportunities being 300 thousand tonnes a year greater in 2020 than in 2016. Ural Steel is conducting a large-scale reconstruction of production capacities.

In 2018, Metalloinvest received an independent appraisal of its sustainable development achievements: a ‘Silver’ Rating from the international company EcoVadis. The Company joined the top 11% of the best producers of metal resources and steel in the world with an EcoVadis rating (over 900 companies). Metalloinvest is also among the 7% of the world’s best metal resource and steel producers based on environmental impact criteria.

We are endeavouring to contribute to achieving the UN’s Sustainable Development Goals by adopting responsible approaches to business governance. The occupational health and safety goals under Metalloinvest’s strategy are:

• To ensure safe working conditions and protect employees’ life and health

• To cut the rate of accident, injury and occupational illnesses

• To be a leader among Russian metals and mining companies and comply with international standards in the field of industrial safety and production culture

The Company aims to be among the 25% best companies in the sector in terms of its LTIFR (Lost Time Injury Frequency Rate).

In order to achieve these goals, Metalloinvest actively co-operates with the World Steel Association, particularly in the crucial sphere of introducing best global occupational health and safety practices, as well as environmental protection standards and practices.

Metalloinvest is continuing to do its best to minimise environmental impact and reduce emissions and waste.

In 2019, Metalloinvest was one of the first companies in Russia to secure a “green” financing agreement. ING Bank opened a credit facility for up to USD 100 mn for Metalloinvest, with the interest rate depending on the Company’s EcoVadis sustainable development rating.

Both traditional and all other industries face transformations in order to maintain their competitiveness. New technologies are changing all the customary business processes, so transformation has become a vital element of the Company’s strategy. In 2016, Metalloinvest launched its large-scale business transformation programme Industry 4.0.

Key goals of the programme:

• improve the efficiency of the Company's business processes

• reduce operational costs

• improve the accuracy of planning and quality control over the execution of plans

• ensure the transparency of accounting and timely decision-making

• cost cutting by introducing an integrated system for financial and commercial governance (ICS FEA) on the basis of SAP S/4HANA*.

* SAP S/4HANA is a smart ERP system capable of providing, in real time, full information about all the business processes within a company. The solution combines all the Industry 4.0 trends: hyperconnectivity, the capability to work with In-memory technologies and Big Data in real time, which presupposes implementation of the Real Time Enterprise concept. The product gathers together all the available technology and developments, making S/4HANA one of the fastest and most adaptive systems for enterprise support and development.

A unified information space is being created for all  enterprises in the group: instead of one hundred local systems, all the functionalities will be supported by a single ERP system.

In the past year, the following important projects were implemented:

• A data centre in Stary Oskol was opened

• An integrated financial and commercial governance system was launched at Lebedinsky GOK and Mikhailovsky GOK

• An Innovation Centre was opened and became the main platform for the development of innovative solutions together with SAP and Accenture

The first wave of implementation — at Lebedinsky GOK and Mikhailovsky GOK— started in October 2017 and ended on 1 July 2018. Yuriy Gavrilov, Strategy, Development and Transformation Director, Management Company Metalloinvest, asserts that the core of SAP S/4HANA has never been introduced as fast at any other major industrial enterprises in Russia. During implementation of the Industry 4.0 programme, the Company has made more than 30,000 organisational changes. The transformation is also accompanied by changes in the organisational structure, processes and regulations.

“This is not an easy path, but based on the experience of other successful companies, an average of 3-5 years is needed for acclimatisation. Metalloinvest has everything it needs to achieve this in 2.5-3 years,” said Yuriy Gavrilov.

Metalloinvest’s large-scale transformation programme dictates a new level in production management processes and in employee competencies. Metalloinvest’s business system, the development of which is part of the new strategy, is called upon to fundamentally change the production philosophy.

The business system’s task is to support the constant improvement in production, as well as in corporate and production culture. It is based on the following principles:

• Workplace safety for each and every employee

• Involvement of all personnel in the daily process of continuous improvements

• Orientation on customer demands and wishes

• Effective use of human resources, relations between personnel and the company based on partnership and trust

• Maximum standardisation of operations, processes and procedures

• Making the rigorous compliance and improvements to standards the personal responsibility of each employee

In addition, the enhancement of tools in the production system forms part of the business system development programme. This will help to provide each employee with an opportunity to speak about problems, put forward ideas for improvements and demonstrate leadership qualities and potential. The ‘Factory of Ideas’, for example, makes it possible to concentrate on cutting production costs as a result of large numbers of proposals and suggestions coming from employees at all levels, from workers up to management.

Andrey Ugarov, First Deputy CEO, COO, Management Company Metalloinvest: “Metalloinvest is today facing a serious task: to improve and develop the innovative, high-tech steel grades and unique alloys requested by consumers. We will talk about the Company’s vital projects for improving output and raising production efficiency”.

Ural Steel. In the past, together with LOI Thermprocess, the biggest German manufacturer of advanced thermal metal processing equipment, the Company launched a high-tech heat treatment facility for processing rolled steel, thanks to which the share of high-profit-margin product sales was increased. Investment in equipping the complex was over RUB 1.2 bn (about USD 19 mn). In parallel, work began on modernising the electric arc furnace shop. A contract for the supply of two electric arc furnaces was concluded with the Italian company Tenova, specialising in innovative solutions for the metals and mining industry. As part of this, Ural Steel’s furnaces will be transferred to FMF (Flexible Modular Furnace) technology, which provides flexibility in the use of various charge components (hot metal, pig iron, HBI, scrap) with the possibility of increasing the share of hot metal in the charge to 85%

Andrea Lovato, General Director, Tenova: “This contract with Metalloinvest represents the first installation of FMF in Russia, but this technology is already in operation in plants in India and China proving Tenova’s leadership in this solution. One of our customers’ priorities is to minimize the environmental footprint of the steel production process, and therefore our commitment is to provide them with technologies, like FMF, which can contribute to this goal too.”

The Dutch company Danieli Corus was one of the main suppliers of the equipment for modernising blast furnaces #2 and #3 at Ural Steel. In 2020, they will be equipped with a cooling and lining system using high-heat copper cooling plates combined with graphite refractories.  Installation of new 1^st and 2^nd level automatic process control systems (APCS), including automation of natural gas injection, is envisaged, along with the supply of equipment for a new chemically-purified water pumping station.

OEMK. In 2018, OEMK saw the opening of a scientific and technical steel smelting laboratory in which Metalloinvest and NUST MISiS invested over RUB 60 m (about USD 1 mn). The laboratory’s vacuum-induction furnace with a maximum load of just 60 Kg provides for rapid experimental smelting of small volumes, which is impossible using OEMK’s 150-tonne industrial furnaces. This allows the specialists at OEMK to conduct more experiments and substantially reduces research costs. Recently, metalworkers at the scientific and technical steel smelting laboratory at the A.A. Ugarov Stary Oskol Technical Institute, which is located on the grounds of OEMK, conducted a series of projects jointly with scientists from the higher education institution to develop a new steel grade: sparingly alloyed chrome-manganese steel.

According to Ivan Malikov, Head of the Department of New Products at OEMK, the new grade was developed especially for the Slovakian company HKS, a leading manufacturer of forgings and stamping products in Europe, which are used in the automotive and mechanical engineering industries. The collaboration with the institute allowed us to satisfy the full range of technical requirements put forward by HKS.

As explained by laboratory leader Alexei Kozhukhov, Head of the Department of Metallurgy and Steelmaking at the A.A. Ugarov Stary Oskol Technological Institute of NUST MISiS, 37 smeltings were carried out for the selection of chemical components of steel, which enabled the formation of mechanical, hardening and exploitational characteristics of the end product according to customer demands.

As part of the programme for improving the quality of SBQ, by 2020 Metalloinvest will build in the OEMK Finishing Shop a facility with a capacity of 70,000 tonnes of SBQ bars (the project is costing approximately RUB 3 bn (in the region of USD 47 m)). It will permit various types of heat treatment to be undertaken (in a broad temperature range of 400-980 °C) required for producing steel for springs, ball and roller bearings and construction, as well as for high-strength metal.

Fabrizio Pere, CEO at equipment supply company Danieli Centro Combustion: “We are proud to be Metalloinvest’s partner for the heat treatment expansion project of the high-quality SBQ bars at OEMK. The furnaces, which process bars ranging from 19 to 90 mm in diameter, will perform five different heat treatments: isothermal annealing (standard and pendular), spheroidizing annealing, high-temperature tempering, and under annealing. Our partnership combines our furnace manufacturing capability together with know-how in the metals and mining industry.

Lebedinsky GOK and Mikhailovsky GOK. In 2022, Metalloinvest will complete the construction of open-pit crushing and conveyor facilities to transport mined rock. The German company TAKRAF GmbH, belonging to the Tenova group, is supplying the equipment for the crushing and conveying technology at Lebedinsky GOK and the cyclical and continuous transportation system on the north-east side of Mikhailovsky GOK.

According to Dr Frank Hubrich, General Director for Mining, Tenova TAKRAF, it is pleasing to have an opportunity to apply its extensive experience and know-how at Metalloinvest’s two advanced Russian projects. He said: “We will provide proven technology, which is sufficient for the heavy conditions works with high performance. The Company’s careful consideration of easy equipment maintenance will assure a high level of reliability and safety.”

Metalloinvest values the investment in the cyclical and continuous transportation system and the crushing and conveyor facility (at the north-eastern side of the quarry) at RUB 11 bn and RUB 4.6 bn respectively. The joint implementation of the projects will enable the Company to transport approximately 55 mn tonnes of iron ore per year at Lebedinsky GOK and up to 35 mn tonnes per year at Mikhailovsky GOK. The crushing and conveyor facility at the south-eastern side of the Mikhailovsky GOK quarry is in its implementation phase with capacity to transport 15 mn tonnes of iron ore per year.

Andrey Varichev, CEO, Management Company Metalloinvest: “Metalloinvest focuses on the quality of its products, and our long-standing, strong partnerships with customers all over the world are a testament to Metalloinvest’s reputation as a reliable supplier of high-quality iron ore, metallised and steel products.”