annual report 2o16ar2016.omk.ru/eng/files/omk_ar2016_eng.pdfthe omk annual report for 2016 includes...

ANNUAL REPORT

2O16G4-3 G4-7

THE OMK ANNUAL REPORT FOR 2016 INCLUDES INFORMATION ABOUT OMK’S PERFORMANCE.REPORTING PERIOD FROM 1 JANUARY 2016 TO 31 DECEMBER 2016.

The financial information in the annual report has been consolidatedin accordance with Russian Accounting Standards (RAS). Operational datais provided according to an internal company order. Information about OMK’ssustainable development activities is presented in accordance with the GRI G4 sustainability reporting guidelines.

ABOUT THE REPORT

G4-17

3 ОМК Annual Report 2016

CONTENTS

OVERVIEW

KEY INDICATORS

MANAGEMENT

SUSTAINABLE DEVELOPMENT

CONTACT INFORMATION

STRATEGY

CONTENTS

1 OVERVIEW

1.1 ABOUT THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

1.2 BEST PIPELINE PROJECTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

1.3 RESULTS FOR THE YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

1.4 CHAIRMAN’S STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

1.5 MAIN EVENTS IN 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

2 STRATEGY

2.1 MISSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

2.2 VISION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

2.3 PRIMARY AREAS FOR DEVELOPMENT . . . . . . . . . . . . . . . . . . . .17

2.4 OMK BUSINESS PRINCIPLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

2.5 BUSINESS MODEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

2.6 STRATEGY IMPLEMENTATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

2.7 INVESTMENT AND R&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

2.8 STRATEGIC VISION AND OBJECTIVES . . . . . . . . . . . . . . . . . . . 25

2.9 RISKS OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

2.10 MARKET OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

3 CORPORATE GOVERNANCE

3.1 APPROACH TO CORPORATE GOVERNANCE . . . . . . . . . . . . . 31

3.2 MANAGEMENT STRUCTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

3.3 MANAGEMENT BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

3.3.1 COMPOSITION OF MANAGEMENT BOARD. . . . . . . . . . . . . . 36

4 KEY INDICATORS AND ANALYSIS

4.1 PRESIDENT’S STATEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

4.2 OPERATING RESULTS FOR 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . 44

• LARGE DIAMETER PIPE DIVISION . . . . . . . . . . . . . . . . . . . . . . . . 46

• OIL AND GAS PIPE DIVISION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

• TRUBODETAL PLANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

• BLAGOVESHCHENSK VALVES PLANT . . . . . . . . . . . . . . . . . . . . 51

• ALMETYEVSK PIPE PLANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

• RAILWAY WHEELS DIVISION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

• CHUSOVOY METALLURGICAL WORKS. . . . . . . . . . . . . . . . . . . 54

4.3 STATEMENT FROM DIRECTOR

OF THE ECONOMY AND FINANCE DEPARTMENT . . . . . . . 55

5 SUSTAINABLE DEVELOPMENT ACTIVITIES

5.1 APPROACH TO SUSTAINABLE DEVELOPMENT . . . . . . . . . . 57

5.2 PERSONNEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

5.3 OCCUPATIONAL SAFETY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

5.4 ENVIRONMENTAL PROTECTION. . . . . . . . . . . . . . . . . . . . . . . . . 86

5.5 ENERGY RESOURSES CONSUMPTION . . . . . . . . . . . . . . . . . . . 97

5.6 DEVELOPING OPERATING REGIONS. . . . . . . . . . . . . . . . . . . . . 99

5.7 RESPONSIBLE PROCUREMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 110

6 APPENDICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .113

7 CONTACT INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .117

1.0OVERVIEW


CONTENTS

OVERVIEW

KEY INDICATORS

MANAGEMENT


CONTACT INFORMATION

STRATEGY

OMK is an integrated high-tech producer of steel,rolled sheet, pipes, pipeline valves and fittings,railway wheels, and automotive springs. Our products enable safe and efficient transportationof freight and passengers.

The group consists of five large industrial plants:

Vyksa Steel Works (Nizhny Novgorod Region)Blagoveshchensk Valves Plant (Republic of Bashkortostan)Trubodetal Plant (Chelyabinsk)Almetyevsk Pipe Plant (Republic of Tatarstan)Chusovoy Metallurgical Works (Perm Territory)

1.1 ABOUT THE COMPANY

1

42

53

1

2

3

4

5

VYKSA

MOSCOW

CHUSOVOYALMETYEVSK

BLAGOVESHCHENSKCHELYABINSK

G4-5 G4-6 G4-17


CONTENTS

OVERVIEW

KEY INDICATORS

MANAGEMENT


CONTACT INFORMATION

STRATEGY


LARGE DIAMETERPIPE DIVISION, VYKSA

• Thick-Plate Mill 5000 (Mill 5000) producing hot-rolled thick sheet

• VSW electric pipe welding shop No. 4 producing large diameter pipes

• Pipe anti-corrosion coating shop

OMK’S BUSINESS INCLUDES SEVEN DIVISIONS

G4-4

OIL AND GAS PIPE DIVISION, VYKSA• Casting and rolling mill producing hot rolled sheet

• VSW electric pipe welding shop No. 2 producing water and gas pipes and small sections

• VSW electric pipe welding shop No. 3 producing oil and gas pipes and large sections

• VSW electric pipe welding shop No. 5 producing casing pipes

RAILWAY WHEELS DIVISION, VYKSA• VSW Steel Works producing blanks for railway wheels

• VSW Wheel Plant producing railway wheels


CONTENTS

OVERVIEW

KEY INDICATORS

MANAGEMENT


CONTACT INFORMATION

STRATEGY


APP DIVISION, ALMETYEVSK• Almetyevsk Pipe Plant producing oil and gas pipes,

water and gas pipes and shaped pipes

TRUBODETAL DIVISION, CHELYABINSK• Trubodetal plant producing pipe fittings

BVP DIVISION,BLAGOVESHCHENSK• Blagoveshchensk Valves Plant producing

pipeline valves

CMW DIVISION, CHUSOVOY• Chusovoy Metallurgical Works producing

automotive springs


CONTENTS

OVERVIEW

KEY INDICATORS

MANAGEMENT


CONTACT INFORMATION

STRATEGY

OMK is the largest supplier of pipes for trunk oil and gas pipelines. We supply almost halfof all railway wheels and just under two thirds of all truck springs in Russia.


¹ Unless otherwise noted, all data published in the annual report, including the company’s market shares, supply and production volumes, etc. , are based on OMK’s expert estimates.

OMK’s strategic partners include leading Russian and foreign oil and gas, transportation, and machine building companies: Gazprom, Transneft, Gazprom Neft, Lukoil, Rosneft, NOVATEK, Sibir, Shell, ExxonMobil, Russian Railways, Kamaz, GAZ, UAZ, MAZ, etc.

In production of large diameter pipes, railway wheels and automotive springs OMK is no. 1 not only in Russia, but throughout Europe.

Springs17

2nd1st

%Сompany share of domestic tubular goods market

placeplace Significant market share

RUSSIAN MARKET POSITION AND SHARE¹

33%

22%

9%18%12%

14%17%

49%65%

Large diameter pipes

Railway wheels

Shaped pipes

Water and gas pipes

Pipe fittings

Casing pipes

Oil and gas pipes

Pipeline valves

G4-8 G4-9


CONTENTS

OVERVIEW

KEY INDICATORS

MANAGEMENT


CONTACT INFORMATION

STRATEGY

1.2 BEST PIPELINE PROJECTS

G4-9

620 470570340 155

495340

55130

360

thou tonnes

thou tonnes

thou tonnes

thou tonnes

thou tonnes

thou tonnes

thou tonnes

thou tonnes

thou tonnes

thou tonnes

Bovanenkovo ››› Ukhta Nord StreamVyborg ››› Greifswald

Eastern Siberia ››› Pacific Ocean

Sakhalin ››› Khabarovsk ››› Vladivostok

Nord Stream 2Ust-Luga ››› Greifswald

Southern CorridorPisarevka CS ››› Russkaya CS

Ukhta ››› Torzhok

Filanovsky field pipelineFilanovsky field ››› Kalmykia

Ukhta ››› Torzhok — 2

Power of SiberiaKovyktynskoe field ››› Blagoveschensk

OMK PIPES ARE USED IN THE CONSTRUCTION OF THE LARGEST OIL AND GAS PIPELINES (total deliveries since 2005)

2016DELIVERIES IN

2016DELIVERIES IN

2016DELIVERIES IN


CONTENTS

OVERVIEW

KEY INDICATORS

MANAGEMENT


CONTACT INFORMATION

STRATEGY

1.3 RESULTS FOR THE YEAR

Total tubular goodsthou tonnes

Pipeline valvesthou tonnes

Railway wheelsthou units

Lost time injury frequency rate LTIFR

Social programmes for personnelRUB million

Automotive springsthou tonnes

1,997 -18%Pipeline fittingsthou tonnes

14 -12%

Share of engaged emplyees

54% +4 pp

Large diameter pipesthou tonnes

875 -36%

5 -25%

Social and charity projectsRUB million

431

Rolled products (rolls and sheets) thou units

1,213 +2%

342 +7%

2.22 -6%598 +8%

Wide sheetsthou units

730 -22%

48 +10%

PRODUCTION

SOCIAL RESPONSIBILITY


CONTENTS

OVERVIEW

KEY INDICATORS

MANAGEMENT


CONTACT INFORMATION

STRATEGY

1.4 CHAIRMAN’S STATEMENT

DEAR FRIENDS, COLLEAGUES AND PARTNERS,

In 2016, United Metallurgical Company operated successfully in line with a strategy at the heart of which lies the development of modern products that meet our customers’ strictest requirements. Increased efficiency, reduced operating costs and the coordinated, professional work of the OMK team were the key drivers behind this success.

Despite the difficult macroeconomic climate, OMK concluded 2016 on a confident note. The company has retained its leading positions in the most important markets. We remain the largest manufacturer of large diameter pipes, railway wheels and automotive springs in Russia. We also hold a significant share of other market segments: casings, oil and gas pipes and tubes, water and gas pipes, hollow sections, pipeline fittings, and pipeline valves. This shows that we have chosen the right direction for development and are producing competitive products that are in demand.

We have reorganized corporate management to strengthen our position in the industry. The structure of the Group is more transparent and easier to understand, document workflow has been reduced, and decision-making is now faster. We are reacting more quickly to changes, and this is opening up new prospects for further development.

In order to concentrate on improving the efficiency of our core business and implementing new projects, a decision was taken to sell off some non-core and unprofitable assets. Due to continuing uncertainty in the American market, OMK sold OMK Tube in Houston (USA) to the South Korean company SeAH Steel. We also finalized a deal to sell the Baltic metals terminal at the port of Ust-Luga. The revenue received from the sale has been earmarked for expanding production and reducing corporate debt.


CONTENTS

OVERVIEW

KEY INDICATORS

MANAGEMENT


CONTACT INFORMATION

STRATEGY

40

41.4 CHAIRMAN’S

STATEMENT

It is very pleasing to note that during this reporting year customers have once again, for the fourth time in the past five years, recognized OMK as the best manufacturer of tubular goods for oil and gas companies in the Oil Country Tubular Goods category. The study is based on the results of questionnaires sent to more than 30 companies in the industry, including Gazprom, Gazprom Neft, Surgutneftegaz, Sibur and other leading energy firms. We would like to thank our partners and customers for their support and their faith in us!

Expanding our comprehensive production offering for clients is a key part of OMK’s strategy, and that is why we have planned an extensive investment programme. Over the next few years we intend to invest more than RUB 40 billion in modernizing the VSW pipe production plant. This will enable us to offer our strategic partners casings, tubing, and oil and gas pipes with improved properties and to meet their strictest quality requirements.

In my view, the greatest potential for growth lies in further developing our production system, improving our corporate culture, and increasing efficiency in each individual department.

I am very grateful to all our employees and management staff for the work they have done and their contribution to the success of OMK. I am confident that the combined efforts of our highly professional team can handle the most complex tasks and projects!

Anatoly Sedykh

billion roubles

invested in modernizing pipe production at VSW, 2016-2022

times in the last 5 years, clients have named OMK the best pipes producer in Russia


CONTENTS

OVERVIEW

KEY INDICATORS

MANAGEMENT


CONTACT INFORMATION

STRATEGY

1.5 MAIN EVENTS IN 2016

• OMK won an international tender and signed an agreement to supply 745 km of large diameter pipes for construction of the Nord Stream 2 pipeline (33% of the total volume). This is the largest single pipe contract in the company’s history. Deliveries began in September 2016

• OMK signed a long-term contract with Gazprom to build an import-substitution production facility for special ball valves, the Ural Special Valves Plant (Chelyabinsk)

• OMK produced a test batch of pipes at VSW made of innovative 05KHGB steel for use in all of Russia’s oil- and gas-producing climate regions without limits on the operating temperature or the composition of the aggressive components of the associated gas

• VSW received a bronze medal for developing its production system according to the Toyota principles, becoming the first metals company in the world to be honoured with this award

• OMK held the second OMK Partnership competition for social and charitable projects in the regions where it operates; 256 applications were received. The company allocated RUB 9.3 million to make the 59 best projects happen

• OMK ran Start Your Business, a social entrepreneurship competition in Chusovoy, for the first time. The 20 winners received RUB 1.85 million in financial support from the company to carry out social business projects

• OMK’s ethics committee began its work. Its task is to review employee feedback concerning compliance with corporate rules of conduct and employee rights. The committee is headed by Natalya Eremina, Deputy Board Chair

• OMK held the sixth Art Ravine Festival in Nizhny Novgorod Region and became a partner in the Giving Tuesday movement

• OMK sponsored the 11th Victors’ Ball, held in honour of veterans at the Museum of the Great Patriotic War on Poklonnaya Hill in Moscow

SOCIAL RESPONSIBILITY

BUSINESS

• OMK’s large diameter pipe production facility was declared best import substitution project by the Russian Union of Industrialists and Entrepreneurs (RSPP)

• OMK received the RSPP National Congress ‘Russian Business Leaders: Dynamic and Responsibility 2016’ award

• OMK was recognized as the best Russian supplier of oil country tubular goods in 2016. The company had previously received this prestigious award in 2012, 2013 and 2015.

• OMK won the Leaders in Corporate Philanthropy competition and the Russian Civic Chamber’s I Am a Citizen prize

• OMK’s volunteering development programme won second place in the ‘Contribution to the Expansion of Corporate Volunteering’ category in the Champions of Good Deeds national competition for corporate volunteering

• OMK won the prestigious Nizhny Novgorod Phoenix 2016 regional prize for philanthropy and volunteering

• OMK’s corporate newspaper was recognized as the best in Russia

AWARDS

2.0STRATEGY


KEY INDICATORS


CONTACT INFORMATION

MANAGEMENT

CONTENTS

STRATEGY

OVERVIEW

• PRODUCTION OF HIGH VALUE ADDED METAL PRODUCTS FOR THE FUEL AND ENERGY, TRANSPORTATION, CONSTRUCTION AND OTHER INDUSTRIES, WHICH BEST SATISFY CLIENT DEMAND BY OFFERING AN OPTIMAL PRICE-TO-PERFORMANCE RATIO

2.1 MISSION

G4-56


KEY INDICATORS


CONTACT INFORMATION

MANAGEMENT

CONTENTS

STRATEGY

OVERVIEW

• OMK IS A MANUFACTURER OF HIGH VALUE ADDED METAL PRODUCTS

• OMK IS THE LARGEST PRODUCER OF STANDARD PARTS AND AN INTEGRATED SUPPLIER OF PRODUCTS AND SOLUTIONS FOR RUSSIAN FUEL AND ENERGY INDUSTRY COMPANIES

• OMK HAS ASSEMBLED THE BEST TEAM OF PROFESSIONALS AMONG METALLURGICAL COMPANIES IN RUSSIA

2.2 VISION


KEY INDICATORS


CONTACT INFORMATION

MANAGEMENT

CONTENTS

STRATEGY

OVERVIEW

In 2016, as it has done over the past several years, OMK continued to implement its chosen strategy, aimed at expanding the company and strengthening its position in the industry.

Our objective is to become the key supplier of integrated solutions for the oil and gas industry and the most efficient metals business in Russia. This model is based on the expansion of our own modern products, including import-substitution products, which meet the strictest requirements of current and prospective customers.

To this end, we are working on the following priority areas:

2.3 PRIMARY AREAS FOR OMK’S DEVELOPMENT

1

2

3

4

Improving operational efficiency • Further expanding the production system • Eliminating bottlenecks • Searching for reserves to reduce costs• Applying an integrated approach: we pay significant attention

to environmental protection, occupational safety, and improving working conditions

Creating a new business model • Integrating products and facilities• Developing and using synergies• Certifying production facilities according to leading international

standards

Employing critical risk management

Expanding the product line • Reaching new segments• Developing production — modernization and retooling

G4-19 DMA


KEY INDICATORS


CONTACT INFORMATION

MANAGEMENT

CONTENTS

STRATEGY

OVERVIEW 1 5 82 6

9

37

10

4

2.4 OMK BUSINESS PRINCIPLES

HIGH-TECH FOCUS• We invest in developing

high-tech products

RELIABILITY• We procure raw materials and components by establishing

mutually profitable long-term relationships with suppliers that offer an optimum price-quality ratio

• We develop reliable long-term relationships with consumers, using a long-term formula pricing system that ensures reliable company revenue

• We have a predictable order filling chain — from raw materials to delivery of the product to the consumer — with minimum process losses

• We comply with ISO social and environmental standards

SYNERGY• We develop efficient cooperation

between divisions

OPERATIONAL LEADERSHIP• Operational efficiency is the main driver

of OMK’s future development

INVESTMENT LEADERSHIP• Our investment policy is aimed at earning maximum profit

or covering unacceptable risks• We develop manufacturing of products that are in demand• We implement an import-substitution programme

OMK EMPLOYEES ARE OUR PRIORITY• Human capital is our most important asset• We create teams of professionals first and invest further

resources second• Employee safety is the company’s priority

SOLVENCY• We always meet our obligations to creditors• We maintain a reliable company debt-to-income ratio

(debt/EBITDA), which ensures that we can reliably meet our obligations and are attractive to creditors

PRIORITY OF BUSINESS MODELOVER PRODUCT

SAFETY AND ENVIRONMENT• We are creating safe working conditions

for staff and contractors and are constantly striving to reduce the environmental impact of our operations.

CORPORATE RESPONSIBILITY

• The company complies unwaveringly with all legal

requirements and adheres to the principles of ethical behaviour in its interactions with internal and external interested parties, following the principles of accountability and transparency in our operations


KEY INDICATORS


CONTACT INFORMATION

MANAGEMENT

CONTENTS

STRATEGY

OVERVIEW

2.5 BUSINESS MODEL

Divisions Raw materials OMK Group assets – redistribution and integration Finished products

LARGE DIAMETER PIPE DIVISION Slabs TPM 5000 Sheet EPWS 4

Large diameter pipes

Hot-rolled wide sheet

OIL AND GAS PIPE DIVISION

APP DIVISION

Scrap EPWS 2

EPWS 12

Casting and Rolling Mill Roll

EPWS 3

EPWS 5

Oil and gas pipes

Water and gas pipes

Casing pipes

Shaped pipes

Hot-rolled sheet

Roll

Pipe production

Oil and gas pipes

Water and gas pipes

Shaped pipes

RAILWAY WHEELS DIVISION

Scrap,

Cast ironSteel Works Wheel rolling plant Railway wheels

Blanks Section rolling mill Automotive spring shop Springs

Rolled sections

Pipes, components,

sheet steel Trubodetal Pipeline �ttings

BVP DIVISION

TRUBODETAL DIVISION

Blagoveshchensk Valves PlantScrap, rolled stock Pipeline valves

2 EPWS1 is a new shop for production and �nishing of pipes

CLIE

NTS

CMW DIVISION

G4-20 G4-24


KEY INDICATORS


CONTACT INFORMATION

MANAGEMENT

CONTENTS

STRATEGY

OVERVIEW

2.6 STRATEGY IMPLEMENTATION

The businesses within United Metallurgical Company completed an annual production system audit cycle in accordance with the method employed by the Japanese company Toyota. According to the results, all OMK plants have made progress in comparison with the first audit conducted a year ago.

VSW received the highest score. For this, the plant was awarded a bronze medal for developing its production system according to the Toyota principles, becoming the first metals company in the world to be honoured with this award. The acknowledgement of VSW’s achievements by the Japanese company once again confirmed the plant’s operating efficiency and the high quality of its products.

The situation in the sectors where OMK operates remains difficult: major pipeline projects are being delayed, demand continues to fall, and difficult new challenges are arising. Nevertheless, in 2016 OMK undertook a number of projects aimed at putting the company’s long-term strategy into practice, specifically: expanding existing production, developing new, in-demand products, and improving efficiency.

PRODUCTION SYSTEM

G4-20 G4-25 Photo: Toyota Engineering Corporation auditor Tatsumi Kimura and OMK President Vladimir Markin


KEY INDICATORS


CONTACT INFORMATION

MANAGEMENT

CONTENTS

STRATEGY

OVERVIEW


• Construction of a new tubing production section and a casing finishing centre began at VSW, which will enable the company to enter the segment of diameters exceeding 245 mm.

• A project was implemented at VSW to construct a section for the application of polyurethane foam insulation to 219–1,067 mm diameter pipes.

• VSW launched production of complex pipes for the Nord Stream 2 project, pipes resistant to hydrogen sulphide cracking made of grade 13KhFA steel, and high-strength pipes with monolayer coating

• In response to market demand, VSW began production of thin-walled pipes, 51 mm in diameter with wall thickness of 2.5 mm, made of carbon steels in accordance with GOST 10705-80. A batch of pipes was shipped to a customer, who confirmed the high quality of the product.

• In line with the plan to expand the product range, the production of grade 05KhGB steel oil and gas pipes and tubes (including 159-mm-diameter pipes), casings of strength group ‘L’, and round and hollow sections made of grade С345 steel was developed.

• VSW began production of several new types of hollow sections, including some made of S235JRH steel in accordance with DIN 10219. Around 1,800 tonnes of these products were sold to non-CIS countries.

To improve the efficiency of the core business and concentrate on new projects, last year OMK sold off non-core and unprofitable businesses and assets.

• The company sold an American asset, the OMK Tube welded pipe production plant and associated finishing shops in Houston, USA, to the South Korean company SeAH Steel. The business had faced falling sales from late 2014 onwards due to the drop in oil prices and the decrease in oil production in the US. In view of the changes in market conditions and the continuing uncertainty on the US pipe market, we made the logical decision to sell the asset.

• OMK also sold the Baltic metals terminal in the port of Ust-Luga.

PIPESMANAGEMENT


KEY INDICATORS


CONTACT INFORMATION

MANAGEMENT

CONTENTS

STRATEGY

OVERVIEW


• OMK continues to develop new applications for its steel and to seek out customers for this type of product. One step forward in fulfilling this strategy was obtaining a TUV certificate, making it possible to supply S275N and S355N sheets after normalizing rolling in accordance with European standard EN 10025-3 for export orders from customers in construction and heavy industry.

PIPELINE VALVES

• OMK launched a project to localize in Russia the production of special-purpose ball valves for the gas industry up to 1,400 mm in diameter and designed for pressure up to 42 MPa. These are currently imported. For this purpose, the Ural Special Valves Plant (UZSA) was founded and commissioned in close cooperation with the Trubodetal plant at its industrial site, following the company principle of developing synergies between businesses and improving efficiency. The full-cycle production of ball valves for special conditions is planned for 2018–2019, with maximum localization over the subsequent few years.

• The Blagoveshchensk Valves Plant developed new sizes of wellhead valves and sixth-generation downhole pressure safety valves with increased capacity. The plant is constantly optimizing the existing designs of wedge gate valves and check valves to improve their specifications.

PIPELINE FITTINGS

SPRINGS

STEEL

RAILWAY WHEELS

• To meet customers’ needs, the Trubodetal plant built and commissioned a section for the application of internal anti-corrosion coating on small- and medium-diameter pipeline parts.

• As part of its programme to improve efficiency, OMK signed a contract with Metalloinvest to supply steel billets for solid railway wheels. The 455-mm-diameter round cast billets will be produced at the Ural Steel complex owned by Metalloinvest and shipped to VSW. The contract runs until the end of 2027.

• During 2015 and 2016, VSW prepared to transition from the use of its own open-hearth billets to continuously cast billets. Test lots of wheels were produced, the required certification was conducted, and the installation of modern saw complexes continues.

• Chusovoy Metallurgical Works retooled its equipment. Technical, marketing and pre-sales work was done to enter the market with its own Springer brand of springs for foreign vehicles

• As part of the localization programme, agreements were reached with world leaders in automobile manufacturing to supply test lots of Chusovoy springs to Ford Motors, BPW and Hyundai Motors assembly lines.

• Fifty-one new types of spring product were launched, including 16 for automotive plants and 31 for foreign vehicles.


KEY INDICATORS


CONTACT INFORMATION

MANAGEMENT

CONTENTS

STRATEGY

OVERVIEW

2.7 INVESTMENT AND R&D

Key projects focused on expanding production and developing new products with improved properties, and were implemented at VSW and the Trubodetal plant.

VSW: • Constructing a high-tech finishing centre for casings

139.7–426.0 mm in diameter for the oil and gas sector

• Organizing a section for producing tubing, casings, and oil and gas pipes and tubes 60–178 mm in diameter

• Renovating the fifth tube section to expand the product line and increase production volumes

• Constructing VSW’s own shop for the application of internal anti-corrosion coatings for 114–530 mm pipes in the third pipe section

• Purchasing a coupling sleeve machine complex

• Modernizing the wheel rolling section’s preparation shop

Trubodetal• Organizing the production

of 57–630-mm-diameter pipeline fittings with internal anti-corrosion coating

• Modernizing the production of stamped and welded pipeline parts to conform to altered technical requirements

MAIN INVESTMENT PROJECTS IN 2016:


KEY INDICATORS


CONTACT INFORMATION

MANAGEMENT

CONTENTS

STRATEGY

OVERVIEW

2.7 INVESTMENT AND R&D

Investment (RUB billion)

R&D expenditure (RUB million)

6.0

6.0

131.0

131.0

2016

2016

2015

2015

5.3

131.3

2014

2014

11.5

119.0

2013

2013

2012

2012

16.1

128.8

16.8

85.4

PRIMARY AREAS FOR R&D IN 2016:• Launching the production of wheels made of continuous cast

steel billets

• Optimizing the chemical composition of steels for the manufacture of rolled stock on the Thick Plate Mill 5000 and at the Casting and Rolling Mill

• A package of operations to increase the output of the Casting and Rolling Mill

• Reducing the content of non-metallic inclusions in steel

• Developing new types of threaded couplings

• Optimizing conditions for heat-treating pipes with high-frequency current


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2.8 STRATEGIC VISION AND OBJECTIVES

OMK will strive to retain its substantial share of the Russian large diameter pipe market in the near future. Pipes will continue to be shipped for international projects (Nord Stream 2). There are plans to participate in pipeline projects for Gazprom (Power of Siberia, North European Gas Pipeline, etc.), Transneft and oil companies, and to supply large diameter pipes for workover and operating needs.

In 2016, Vyksa Steel Works started implementing an automatic execution system. A contract for the project was signed with Danieli Automation, Italy. In four years' time, all VSW pipe facilities and the railway wheel rolling facility will be equipped with high-tech manufacturing execution tools. This will make VSW's order fulfilment more reliable and guarantee the quality of our product thereby helping meet customers' most stringent requirements.

With respect to the highly competitive markets for water and gas pipes and hollow sections, OMK’s objective is to maintain its existing position. The basis of this strategy is to meet the challenge of leading in terms of costs, and to take advantage of the capabilities of upgraded equipment.

Over the next three to five years, the range of medium and large diameter pipes is due to be expanded at production facilities, and there are plans to develop technology for thin-walled pipe production (using the capabilities of the Casting and Rolling Mill in the production of rolls with wall thickness of 1.0–1.3 mm), which will make it possible to reach new niche markets for these products. The supply of pipes for heavy industry, liquefied natural gas plant projects, and structural steel, including for unique structures (high-rise buildings, airports, stadiums, etc.), looks promising.

In the oil and gas pipes and tubes segment, the plan is to maintain OMK’s current market position in the threaded and line pipes segments and to expand its product lines in the OCTG, oil and gas pipes and tubes, and casings segments. In addition, action will be taken to increase the share of high-strength threaded pipes in the shipments portfolio, as well as pipes with premium and semi-premium threading, and to differentiate grades of steel, coatings, and combinations thereof for different regions and fields.

LARGE DIAMETER PIPES

MANAGEMENT

SMALL AND MEDIUM DIAMETER PIPES


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2.8 STRATEGIC VISION AND OBJECTIVES

Chusovoy Metallurgical Works continues to develop its own unique brand of springs for foreign vehicles. The plant will also continue to implement the localization programme for this type of production. Further market recovery, as well as an increase in the share of orders for small leaf springs, is expected.

The switch to continuously cast billets guarantees steady fulfilment of orders, however complex, and the production of wheel products that meet the latest standards and demanding requirements of customers, including foreign customers. Work is under way to develop and introduce new products with improved consumer properties.

With increasing competition from new manufacturers of pipeline fittings, the objective of the Trubodetal plant is to maintain its share of the Russian market at the current level, and to increase exports.

We intend to develop our technical competencies and capabilities as regards integrated supplies of pipeline fittings and valves, and to increase the sales volumes of high-margin types of pipeline valve by developing promising new designs and technologies.

RAILWAY WHEELS

PIPELINE FITTINGS

PIPELINE VALVES

SPRINGS


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2.9 RISK OVERVIEW

General

Increasing competition due to the emergence of new manufacturers on the market Tubular goods railway wheels pipeline fittings pipeline valves

Decreasing market capacity in Russia and the CIS

Tubular goods railway wheels automotive springs

Stricter requirements in standards and specifications

Tubular goods railway wheels pipeline fittings pipeline valves

Rising prices for raw materials

Tubular goods railway wheels pipeline fittings pipeline valves automotive springs

Decreasing consumer buying power and rethinking of investment programmes Tubular goods railway wheels pipeline fittings pipeline valves automotive springs

Specific

Aggressive pricing policy of foreign competitors Railway wheels

Environmental risks due to retention of open-hearth steel production

Railway wheels

Introduction of stricter requirements in European standards on painting of wheels by the manufacturer

Railway wheels

Counterfeit products

Pipeline valves


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GLOBAL STEEL MARKETAccording to a report from the World Steel Association (worldsteel), total global steel production in 2016 was 1,628.5 million tonnes, 0.8% higher than the year before. Steel production decreased in Europe, America and Africa. On the other hand, it increased in the CIS nations, the Middle East, Asia and Oceania.

Russia was fifth in the ranking of nations with the highest production volumes, producing 70.8 million tonnes of steel (-0.1% in comparison with 2015); only the USA, India, Japan, and the undoubted leader, China, produced more.

2.10MARKET OVERVIEW

808.4 +1.2%

95.6 +7.4%

78.6 -0.3%

70.8 -0.1%

104.8 -0.3%

China

Japan

India

USA

Russia

Largest steel producers by country (million tonnes)

1,628.5 +0.8%World steel production in 2016³(million tonnes)

OMK products for the oil and gas, transport and other important industries are in demand worldwide. The company supplies pipes and tubes, railway wheels and automotive springs to more than 30 countries. Russia and the CIS are, however, the key markets for OMK.

³ Source: worldsteel


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2.10MARKET OVERVIEW

DOMESTIC MARKETSPipes, fittings and pipeline valves

Pipes are OMK’s key business, accounting for more than 80% of company revenues, so the situation on the domestic tubular goods market is decisive.

According to data from the Pipe Industry Development Fund, total pipe production in Russia was 10.3 million tonnes in 2016, 9% less than the year before, while pipe consumption fell by 10% in 2016 to 9.7 million tonnes. The main reason behind the shrinking of the Russian pipe market was the decrease in demand for large diameter pipes, down 35% in comparison with peak consumption in 2015, to 2.14 million tonnes. This is primarily explained by the decline in demand for large diameter pipes for the construction of new trunk pipelines in the Russian Federation.

Due to the increase in the length of oil and gas wells, the increase in drilling volumes, the maintenance of oil production levels, and the expansion of oil production in new territories with undeveloped infrastructure in 2016, consumption in the oil and gas pipes and tubes and OCTG segment increased by 2% to 3.1 million tonnes. But the biggest growth was seen in the heavy industry (industrial pipes) segment – up 9% to 189,000 tonnes.

The markets for pipeline fittings and pipeline valves fell in line with the pipe market for the same reason: the postponement of major projects and changes in the plans of strategic partners – oil and gas companies. In 2016, imports of pipe products increased by 19.5% compared with 2015, reaching 0.44 million tonnes.

10.3 -9%

9.7 -10%

2.14 -35%

Pipe production in Russia in 2016 ⁵(million tonnes)

Pipe consumption in Russia in 2016(million tonnes)

Large diameter pipe consumption in Russia in 2016(million tonnes)

Railway wheels

Demand for railway wheels showed some signs of reviving in Russia and the CIS and on the 1520 gauge market as a whole. But the situation is still difficult. The decrease in demand for the products of Russian manufacturers was driven by the increase in imports and the market share of Ukrainian wheels, despite the anti-dumping fines that were introduced in the Eurasian Economic Union at the beginning of the year at the initiative of the Eurasian Economic Commission (EEC).⁴

Springs

Chusovoy Metallurgical Works is the Russian leader in automotive spring production. The market for this type of product has decreased in recent years due to the slowdown of the economy as a whole, but certain positive signs were seen in 2016; in particular, freight haulage has experienced growth. Further market recovery, as well as an increase in the share of orders for small leaf springs, is expected in the future.

⁴ Customs tariff regulations changed on 1 January 2016 due to Russia’s decision to stop levying a 0% import duty on its trade with Ukraine. Russia now applies standard tariffs, similar to those on imports from outside the CIS, to imports of goods from Ukraine, including one-piece rolled railway wheels.⁵ Infographic on this page – source: Pipe Industry Development Fund

3.0CORPORATE GOVERNANCE


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3.1 APPROACH TO CORPORATE GOVERNANCE

OMK is not a public company, but its corporate governance system is built on the basic principles of the Corporate Governance Code, including:

• The company ensures equal and fair treatment of all shareholders as they exercise their right to participate in the governance of the company

• Shareholders are provided equal and fair opportunities to share in the company’s profits by receiving dividends

• The corporate governance system and practice ensures equal conditions for all shareholders owning shares of the same category (type), including minority shareholders and foreign shareholders, and equal treatment of them by OMK

• Shareholders have been provided with reliable and effective means for accounting for rights to shares, as well as the opportunity to dispose of the shares belonging to them freely and without encumbrance

• The company’s corporate secretary is responsible for conducting all ongoing communications with shareholders, and coordinating actions to protect the rights and interests of shareholders

• The level of remuneration paid by the company is sufficient to enable it to attract, motivate and retain employees who have the required skills and qualifications

• The system of remuneration for members of the executive bodies and other key executives of the company provides for their remuneration to be dependent on the company's performance and their personal contributions to achieving it

• The company organizes an internal audit to ensure a systematic, independent evaluation of the reliability and effectiveness of its risk management and internal control system and its corporate governance practices

• OMK’s operations are sufficiently transparent for shareholders, investors and other stakeholders

• The company discloses complete, up-to-date and reliable information about itself to allow its shareholders, investors and contractors to make informed decisions

• OMK Group companies provide information and documents at the request of shareholders in accordance with the principle of equal and unhindered access

• Any actions that materially affect or may materially affect the company’s share capital structure and its financial position and, accordingly, the position of its shareholders (‘material corporate actions’) are taken under fair terms and conditions that ensure that the rights and interests of shareholders as well as other stakeholders are observed

• The company provides a procedure for material corporate actions which allows shareholders to receive timely and complete information on such actions, provides them with the opportunity to influence decision-making about such actions and ensures compliance and an adequate level of protection of shareholder rights in the performance of such actions. OMK’s operations are based on global best practices and corporate governance standards. An important aspect of OMK’s corporate governance policy is that the company uses its non-public status not to ensure secrecy about its operations, but rather to respond more promptly to the challenges and demands that the company might face

G4-24 DMA


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3.1 APPROACH TO CORPORATE GOVERNANCE

OMK implements a set of functional strategies, which are reflected in the constituting documents of the corporate governance system. One of these is the Declaration of Corporate Ethics. The basic objective of this document is to ensure that members of the Management Board, managers and company employees adhere to high standards of corporate ethics, take action in the event of conflicts of interest, and conduct business in a responsible manner.

An important feature of the system of internal documentation is its consistency and flexibility. Any external and internal challenges are quickly reflected in the provisions of local regulations.

OMK adheres to a sustainable development policy aimed at accomplishing its mission, supporting its strategy, and streamlining and standardizing sustainable development operations across all companies controlled by OMK. The document describes the basic priorities in sustainable development, requirements for reporting and analysis of operations, as well as the allocation of responsibilities for implementing the policy.

In July 2007, OMK adopted a Declaration of Corporate Ethics, which regulates the corporate governance system. The current version was approved in 2016. The document affirms the fundamental principle of corporate behaviour — avoiding conflict between employees’ personal interests and the interests of the company — and regulates the use of insider information.

The provisions of the Declaration protect the interests of employees as well as shareholders. The Declaration of Corporate Ethics is one of the documents underpinning the efficiency and investment attractiveness of the company. It promotes trust between participants in corporate relations that are based on honesty, integrity, and reliability. Compliance with ethical principles and standards helps to avoid unjustified risks, to support long-term economic growth, to strengthen the company’s position in the markets, to promote an increase in capitalization and profit, and so on.

The Declaration of Corporate Ethics is an open document which is available on the OMK website and its internal portal. Employees also received an email containing the text of the new version of the document. Specialists in corporate governance have published several articles in the company publication OMK Team, explaining how the provisions of the Declaration are applied.


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3.2 MANAGEMENT STRUCTURE

A very important project was implemented in 2016 with regard to the reorganization of the OMK Group. OMK Steel and OMK Holding were merged into VSW, which became the parent company for the majority of the group’s production assets and service companies. This step will make it possible to optimize the structure and administrative processes.

The Chairman of the Management Board exercises the authority of the sole executive body. Company operations are managed by the Chairman of the Management Board (sole executive body) and the collegial executive body — the Management Board, which consists of nine elected members. Some of the authorities for managing the company are delegated to the President and Deputy Board Chair.

The authorities of Chairman of the Management Board Anatoly Sedykh include management of strategic issues, expansion of the company, new projects, investment, marketing, and efficiency.

The role of the President focuses on managing production, one of the most important areas of management. The directors of production units report to the President. Deputy Board Chair Natalya Eremina is responsible for overall management of other areas of operations.

The Russian company VSW is the sole shareholder of the core OMK companies (Trubodetal, Almetyevsk Pipe Plant (APP), Blagoveshchensk Valves Plant (BVP), Chusovoy Metallurgical Works (CMW), and OMK).

The controlling company, OMK, managed the routine operations of the primary companies in the group (VSW, Trubodetal, APP, CMW and BVP) in 2016, having been given the functions of the sole executive body of these companies. OMK provides corporate governance for the OMK Group.

G4-34


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3.2 MANAGEMENT STRUCTURE

External Auditor

(chosen by the shareholders)

Sole Executive Body — Chairman of the

Management Board

(Anatoly Sedykh)

Auditing Commission

(chosen by the shareholders)

Internal Audit Service

(documents regulating the activity

of the Internal Audit Service are approved, and the director is appointed, by the Chairman of the Board;

internal audit procedures are approved by the shareholder)

Sole Shareholder of OMK — VSW (the functions of the executive body were transferred to OMK)

Collegial Executive Body — OMK Management Board


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3.3 MANAGEMENT BOARD

In 2016, 125 meetings of the OMK Management Board were held (20 in person and 105 in absentia), during which 224 issues were reviewed.

The time spent on decision-making was reduced in comparison with 2015 by optimizing the work of the collegial bodies. The speed of administrative decision-making was increased by 21%.

The following committees and commissions operate within OMK:The Chairman of the Board is a member of and heads the following committees: efficiency management, operations, HR, audit, finance, strategic development, information technology, and economic security.The President manages the committee on production safety and the research council. The Deputy Board Chair manages the working group on economic security, the ethics committee, and the committee on interaction with government bodies.

The OMK Management Board has nine members. One change has been made in comparison with 2015: Efficiency Management Director Petr Trushin has joined the Board.⁶

The key areas of the Board’s work in 2016 were: improving the efficiency of the businesses, budgeting and achieving objectives, implementing social programmes in areas where the company operates, strategic development, and future projects.

Throughout the year, the members of the Board worked according to approved individual objectives. These focused primarily on improving the efficiency of management teams, transforming the role of the supervisory function in the business and relaying changes to employees, effective presentation, mentoring, and so on.

A matrix of the functions of the first and second levels of OMK was developed and approved. This matrix defines the areas of the company’s operations and assigns responsible supervisors and owners for the core functions: development of functional strategies, policy, standards, rules, procedures, processes, functional budgets, organizational structures, delegation of authorities, and description of the operations of subdivisions.

Meetings of Management Board

Meetings of collegial bodies

125 +11% 331 +37%

STATISTICS

40%HR management

and social development

Efficiency management

Management of businesses

Economics

Information technology

Miscellaneous

Key issues discussed at meetings of collegial bodies (% of total meeting time)

18.5%

14%

5%

4%

18.5%

⁶ Appointed early in 2017


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3.3.1 COMPOSITION OF MANAGEMENT BOARD

Anatoly SedykhChairman of the Management Board

Anatoly Sedykh was elected Chairman of the OMK Management Board at the GeneralMeeting of Shareholders on 29 January 2013.

He has held leadership positions in the company since 1999. Initially, he headed Vyksa Steel Works and led the company out of crisis. Subsequently, he was appointed OMK Director General and Chairman of the Board of Directors of VSW. In 2002, he was elected Chairman of the Board of Directors of the Company, and was OMK President between 2003 and 2006.

Anatoly Sedykh is a member of and heads the following committees and commissions: efficiency management, operational activity, HR, audit, financial, strategic development, information technology, and economic security.

He was born in 1964 and graduated from the Moscow Institute of Steel and Alloys (Ph.D. in Economics).


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3.3.1Vladimir MarkinPresident

Vladimir Markin rose from pipe finishing subforeman at the Vyksa Steel Works to OMK President, a post he has held since April 2006.

He has held management positions in the company since 2001. He has been Director General of the OMK Technical Centre, OMK Marketing and Sales Director, Deputy Large Diameter Pipe Shop Foreman, Marketing and Sales Manager, and Deputy General Director.

Vladimir Markin is a member of the following committees and commissions: efficiency management, HR, audit, financial, strategic development, economic security, and operational activity. He heads the production safety committee.

He was born in 1954 and graduated from the Moscow Institute of Steel and Alloys with a degree in Metallurgical Engineering.

Natalya EreminaDeputy Board Chair

Natalya Eremina joined OMK as the Head of the Controlling Department in 2001. In 2004, she was appointed Director for Corporate Finance and Investor Relations.

She was appointed OMK Vice President in 2006. She previously worked at Metallinvestbank as Head of the Interbank Credit Department, Head of the Lending Division, and Deputy Chairman of the Management Board.

Natalya Eremina is a member of the following committees and commissions: efficiency management, HR, audit, financial, production safety, strategic development, information technology, and economic security. She heads the government relations committee, ethics commission, and economic security working group.

She was born in 1971 and graduated from the Department of Mechanics and Mathematics at Lomonosov MoscowState University.

COMPOSITION OF MANAGEMENT BOARD


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Dmitry ChernyshevDirector of the Asset Development and Investment Department

Dmitry Chernyshev was appointed Director of the Asset Development and Investment Department in February 2016. He was appointed Vice President and Director for Research and Strategy in November 2007.

He has been working with the company since 2002 as Project Manager and First Deputy Director General of APP and Director for Strategic Development of VSW. Throughout 1996–2001, he held different positions in the business development divisions of various Russian industrial companies.

Dmitry Chernyshev is a co-chairman of the R&D council and a member of the following committees: HR, financial, and government relations.

He was born in 1974 and graduated from Lomonosov Moscow State University and the Academy of the National Economy of the Government of the Russian Federation with a degree in Strategic Management.

Eduard StepantsovHead of Commercial Department

Eduard Stepantsov has been the Head of the Commercial Department since February 2016.

Previously, he was appointed Vice President in December 2008. He joined OMK in 1999 as OMK Technical Centre Director General. In 2001, Eduard Stepantsov was appointed OMK Deputy Director General and Director for Commercial Issues. He worked in the investment business from 2003 to 2008.

Eduard Stepantsov is a co-chairman of the R&D council and a member of the following committees and commissions: operational activity, financial, strategic development, information technology, government relations, and production safety.

He was born in 1963 and graduated from the Irkutsk Institute of the National Economy with a degree in Economics and Procurement Planning.



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Yulia ShkhiyantsDirector of the Economy and Finance Department

Yulia Shkhiyants has been the Director of the Economy and Finance Department since February 2016. She was previously appointed OMK Vice President in February 2013.

Yulia Shkhiyants joined the company in May 2007 as Director for Economy and Finance. She previously served as Chief Financial Officer of Greenoak Holdings, Finance Director of Zepter International, and as a senior auditor at KPMG.

Yulia Shkhiyants is a member of the following committees: strategic development, efficiency management, audit, financial, information technology, and government relations.

She was born in 1975 and graduated from the Peoples’ Friendship University of Russia with a degree in Economics.

Svetlana NikolashinaDirector of the Human Resources Department

Svetlana Nikolashina has been the Director of the Human Resources Department since February 2016. She was appointed HR Director in 2003 and Vice President in February 2015.

From 2002 until 2003, Svetlana Nikolashina was HR Director of VSW. She previously worked for Severstal in project teams and as HR Director in the company’s subsidiaries.

Svetlana Nikolashina is a member of the HR and information technology committees, and the production commission.

She was born in 1979 and graduated from the St. Petersburg State University of Engineering and Economics with a degree in Finance and Credit and the Academy of National Economy of the Government of the Russian Federation with an MBA in Strategic Management. She has also taken HRM training courses.



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Alexey MitenkovDirector of IT and Intelligent Security Systems

Alexey Mitenkov has been Director for IT since February 2013. In February 2016, he was appointed Director of the new Intelligent Security Systems Department, which is tasked with preventing risks and investigating fraud.

Alexey Mitenkov worked as Director General of OMK-Audit from February 2009 until February 2016.

He joined the company in April 2008 as Deputy Director for Economy and Finance. From 2000 to 2008, he worked at KPMG.

Alexey Mitenkov is a member of the information technology committee and economic security commission. He was born in 1977 and graduated from the Finance Academy under the Government of the Russian Federation with a degree in Finance and Credit.

Petr Trushin Efficiency Management Director

Petr Trushin was appointed Efficiency Management Director and became a member of the OMK Board in February 2017.

He previously headed OMK’s Target Setting and Evaluation Department. He joined the company in 2008 as the Head of Business Consulting. He has also held management positions in company subdivisions involved in internal audit and improving the efficiency of business processes. Prior to joining OMK, he worked at Siberian Coal Energy Company (SUEK) and PwC.

Petr Trushin is a member of the operational activity and IT committees.

Petr Trushin was born in 1982. He graduated from the National Research University Higher School of Economics in Moscow with a degree in Management.


4.0KEY INDICATORS


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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.


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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.

4.1 MESSAGE FROM THE PRESIDENT

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

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4.2 OPERATING RESULTS 2016

875 -36% 342 +7% 1,102 +6.5%

280 -1.5% 166 -0.5% 424 +3.5%

Large diameter pipesthou tonnes

Railway wheelsthou units

Casing pipesthou tonnes

Water and gas pipesthou tonnes

Small and medium diameter pipesthou tonnes

Oil and gas pipesthou tonnes


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4.2Shaped pipesthou tonnes

Pipeline fittings thou tonnes

Pipeline valvesthou tonnes

Wide sheetsthou tonnes

Rolled products (rolls and sheets)thou tonnes

Automotive springsthou tonnes

232 +34% 14 -12% 1,213 +2%

5 -25% 730 -22% 48 +10%

OPERATING RESULTS 2016


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4.2LDP production thousand tonnes

875

730

2016

2016

2015

2015

1,3801,058

937

2014

2014 623

2013

2013

2012

2012

800

544

690

300

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

LARGE DIAMETER PIPE DIVISION

Photo: First consignment of large diameter pipes for Nord Stream 2 project



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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.


Chairman of the Board Anatoly Sedykh signs the first pipe for Nord Stream 2


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4.2OIL AND GAS PIPE DIVISION

963

1,213

2016

2016

2015

2015

971

1,181

2014

2014

873

1,029

2013

2013

2012

2012

797

920

748

1,100

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

Casting and Rolling Mill production volume (roll and sheet) (thousand tonnes)

Division’s tubular goods production volume⁷ (thousand tonnes)

Photo: www.gazprom.ru



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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.


Photo: Nikolai Bravilov


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4.2TRUBODETALPipeline 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.

142016

2015 162014 192013

201213

21




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4.2BLAGOVESHCHENSK VALVE PLANTPipeline 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.

5.02016

2015 6.7

2014 6.4

2013

2012

7.0 8

9.4



⁸ Became part of OMK in 2013


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4.2ALMETYEVSK PIPE PLANTAPP 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.

2162016

2015 2372014 2472013

2012226

215

Photo: www.gazprom-neft.ru



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4.2RAILWAY WHEELS DIVISIONRailway 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.

3422016

2015 320

2014 450

2013

2012

661

850



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CHUSOVOY METALLURGICAL WORKSSpring 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%.

482016

2015 43.4

2014 55

2013

2012

59

67

Photo: www.volvocars.com


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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

G4-17

5.0SUSTAINABLE DEVELOPMENT ACTIVITIES


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5.1 APPROACH TO SUSTAINABLE DEVELOPMENT

In 2016, the new OMK Corporate Social Responsibility Policy⁹ was developed, setting out the company’s priorities with respect to corporate social responsibility. Priority areas for the development of the corporate social responsibility system were selected on the basis of the mission and strategy approved by senior management, stakeholders’ views as documented, and the current versions of international sustainable development standards. The provisions of the Policy apply to all permanent and temporary employees of OMK (including subsidiaries, affiliates and controlled companies).

Furthermore, OMK will recommend that its contractors and suppliers comply with these standards, which over time should result in significant changes to the product quality control system and production safety throughout the entire supply chain.

⁹ Enacted by a resolution of the OMK Management Board in February 2017.

OMK is a major employer and an industrial group that is focused on extensive international collaboration. The group plays a significant role in the metal products market and in the regions where its production assets are located. This position requires that aspects of sustainable development be included in the strategic management system, with the meeting of key indicators being directly monitored by management at the highest level.

G4-19 G4-21 G4-24 G4-26 DMA


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5.1OMK CORPORATE SOCIAL RESPONSIBILITY PRIORITIES

• CREATING A MORE EFFECTIVE MANAGEMENT SYSTEM

• DEVELOPING MECHANISMS FOR WORKING WITH STAKEHOLDERS

• PREVENTING CORRUPTION

• MONITORING RESPECT FOR HUMAN RIGHTS

• DEVELOPING RESPONSIBLE PROCUREMENT PRINCIPLES

• DEVELOPING RESPONSIBLE SUPPLIER PRINCIPLES

• IMPLEMENTING CHILD PROTECTION PROJECTS

• IMPROVING QUALITY OF LIFE IN OPERATING REGIONS

APPROACH TO SUSTAINABLE DEVELOPMENT


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5.2 PERSONNEL

Headcount as of 31 December 2016 persons

Percentage of engaged employees

Satisfied with employment at OMK

Social expenditureRUB millions

24,274 -4%

54% +4 pp

55% +2 ppAverage age of personnelyears

40.8 +1.2 yearsAwards received by employees in 2016

730

598 +8%

KEY INDICATORS

G4-LA9 G4-LA12


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5.2OMK HR SERVICE DEVELOPMENT STRATEGY

Key processes monitored by the HR service Significant organizational changes in 2016

• Management of HR indicators, integration of HR processes, HR analytics

• Target groups (talent pool) and career planning

• Translation of corporate KPI system into employee targets

• Evaluation of staff performance and competencies

• Improving the transparency of HR decisions

• Proactive selection and development

• Personnel management in unanimity with managers

• Managing engagement

• Establishment of a personnel records service centre

• Establishment of expert centres on management methodology; development of non-standard HR management decisions

• Development of HR partners: fast resolution of HR management issues aimed at achieving primary KPIs as per business plan and long-term strategy

HR Service tasks – development of the following areas: Key documents determining HR management strategy:

• Effectiveness (cost/benefit)

• Competence (I can do it)

• Engagement (I try)

• Service (HR partnership)

• Labour Code of the Russian Federation

• Industry agreement

• Functional HR management strategy

• Collective agreements at enterprises

OMK IS DEVELOPING ITS HR SERVICE TO BE AN INTERNAL ‘STRATEGIC PARTNER’

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5.2Improving the HR services provided to the business remains a basic target indicator for OMK’s HR Department. The achievement of this objective involves developing basic processes which impact the sustainability of the company’s business model. Managing the organizational structure and workforce planning were priority areas for improvement in 2016.

In connection with the launch of the Pipe Shop No. 1 project at VSW, for example, the staff freed up were reassigned to Pipe Shop No. 2. In cases where production capacities have an uneven workload, time management technology is used instead of reducing personnel. The potential impact of implementing this approach was RUB 278 million over the year.

Attention is traditionally focused on projects that will increase labour productivity, develop employees’ skill sets, attract young employees, ensure optimum working conditions, create conditions for employees’ development and professional growth, and improve the incentives system.

MEMBERSHIP OF ASSOCIATIONS

IMPROVING HR SERVICES

Name Role and attitude towards participation

Association of Russian Metallurgists (national association of employers in the industry)

The company has seats in the management bodies

Industry Council on Professional Standards The company views its membership as strategic

G4-16

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5.2EFFECTIVENESS COMPETENCE ENGAGEMENT SERVICE

Optimizing OMK’s organizational structure

Improving the payroll system

Improving the efficiency of social facilities

Improving professional skills and competencies

Increasing engagement

Social responsibility

Keeping staff better informed

Establishing the HR partnership structure

HR record keeping using advanced information systems

Social support system operating according to best practices

HR SERVICES: AREAS FOR DEVELOPMENT

KEY HR MEASURES IMPLEMENTED IN 2016• Time management for primary production workforce when a production facility has a low workload

• Implementation of strategy to reorganize/expand social facilities

• Development of plan to introduce re-engineering measures in 2016–2017

• Creation of HR records service for the Vyksa Production Site and centralization of accounting functions for other legal entities (2017 plan)

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5.2PERSONNEL STRUCTURE

Vyksa Steel Works

Other

Chusovoy Metallurgical Works

Trubodetal Plant

Almetyevsk Pipe Plant

Blagoveshchensk Valves Plant

14,812

3,409

2,457

882

1,707

2,019

14,501 -311

2,157-300

819-63

1,687-20

1,990-29

Actual as of 31 December 2015

Headcount HeadcountActual as of 31 December 2016 3,120

-289

G4-10

25,286

24,274 ↓ 4%

OMK headcount as of 31 December 2015

OMK headcount as of 31 December 2016

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Gender balance, %

Percentage of women in personnel categories (%)

Percentage of women in personnel age groups

Men

Women

5.2

2015 2016

65 66

35 34

Factor analysis of change in headcount in 2016

25,286Headcount as of 31 December 2015

Decrease due to closeout of projects, reduction in volumes, outsourcing

Hiring for additional volumes, projects, insourcing

Optimization

Hiring of additional staff without effect, including temporary staff

Headcount as of 31 December 2016

532

376

1,185

329

24,274

Blue-collar workers

under 30

Specialists

30–50 years

Managers

Over 50

29

23

54

37

22

37

2016

2016

2016

2016

2016

2016

2015

2015

2015

2015

2015

2015

30

29

56

39

22

36

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5.2WORKING WITH EDUCATIONAL INSTITUTIONS

MAIN CAREERS ADVICE PROGRAMMES

OMK takes the creation of its manpower reserve seriously and begins reaching out to potential employees at the very earliest stage – while they are still in school. Careers advice was provided for students aged 16–18 during the reporting year to encourage them to choose careers in industry.

Measure Target group Programme duration

Number of participants

annually

Competition for Batashev Brothers scholarships for secondary school students

Pupils aged 14–17 11 years 150

Industry and Proflandia games Pupils aged 14–15 5 years 500

Trajectory careers academy Pupils aged 15–16 2 years 180

Young Innovators and Inventors Festival Primary and secondary school pupils 1 year 450

Managing Director’s scholarship award

Awarded to the student at the Vyksa branch of MISiS National University of Science and Technology who achieves the top score on the standardized state exams (239 marks)

1 year 1

Trips to an actual metal works Secondary school and college students >10 years Up to 1,400 (150 trips per

year)

The company organized work experience placements for students at more than ten vocational and higher educational institutions to help students adapt better to the workplace and get to know the company’s production culture.

Cooperation with higher educational institutions is not limited to training for students. OMK runs corporate programmes aimed at improving the level of employees’ specialist education through bachelor’s, master’s and PhD-level study programmes and business education programmes.

of those taking part in careers guidance events enrol on technical programmes in vocational educational institutions

70%

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5.2As part of the programmes, schoolchildren visit the metal works, participate in workshops for VSW specialists, and build their own virtual metal works. Nearly 70% of those taking part in careers guidance events go on to enrol on technical programmes in vocational educational institutions.

The careers advice magazine Path to a Profession has been published especially for school and college students in Vyksa for two years (2015–2016). It gives students information about the operations of Vyksa Steel Works, the career paths of senior managers and top employees, professions in the metals industry, and the educational institutions which provide training for these professions.

CAREERS GUIDANCE FOR SCHOOL PUPILS

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5.2CORPORATE PROGRAMMESOMK CAMPUS The OMK Campus programme has been running since 2009 and is aimed at training highly qualified metals industry specialists for OMK enterprises at Russia’s top educational institutions (MISiS National University of Science and Technology, and Peter the Great St. Petersburg Polytechnic University).

As part of the programme, more than 60 employees at the Vyksa Production Site have completed master’s degrees in mill production, welding production, and steelmaking. Over 50% of them are employees of the Technical Engineering Centre and the division technology and quality departments.

In 2017, the OMK Campus programme will focus on training employees in maintenance and repair.

MBA: INDUSTRIAL ENTERPRISE MANAGEMENT OMK and MISiS National University of Science and Technology have jointly developed an MBA programme in Industrial Enterprise Management. The programme is designed for OMK line managers who are capable of initiating improvements in the area of efficient production management.

The course lasts one year. Managers with a higher technical education can learn about state-of-the-art techniques in production management for subsequent use in practice. The course involves 240 hours of study. A work placement at a leading Russian enterprise is also planned for programme participants.

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5.2MAIN PERSONNEL DEVELOPMENT PROJECTS IMPLEMENTED IN 2016

Project Measure

Introduction of career choice and management based on the SuccessFactors system

A competency assessment has been automated and conducted using the 360 degree method; 600 employees have been evaluated

Updating of corporate competency model A questionnaire was drawn up to evaluate competencies in accordance with the corporate values and Corporate Constitution

Production Management MBA programme A six-module development programme for production and maintenance personnel has been developed on the basis of the MISiS National University of Science and Technology system

Launch of Open Dialogues project Managers, including members of the Management Board, gave reports to employees and answered questions about the company’s plans

Effective Management Team development programme Development sessions were held for front-line managers at the Vyksa Production Site, Trubodetal Plant, CMW and BVP, and for members of the Management Board

Effective Feedback development programme HR partners were trained in corrective feedback so that they could pass on their knowledge to managers for work with their staff. A development programme on giving feedback was run for senior executives

Ethics Commission An ethics commission for OMK has been set up and is functioning

OMK Corporate Social Responsibility Policy A new OMK Corporate Social Responsibility Policy has been developed and forms the basis for the corporate social responsibility management system

underwent the 360 degree competency assessment

600 employees

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5.2SALARY

Region Enterprise Average salary (RUB)

Ratio of average salary at enterprise to average

salary in region (%)

Nizhny Novgorod Region VSW 40,947.00 above market rate

Chelyabinsk Region Trubodetal Plant 44,573.00 above market rate

Perm Territory CMW 30,057.00 market rate¹⁰

Republic of Bashkortostan BVP 35,417.00 market rate

Republic of Tatarstan APP 32,686.00 market rate

Average salary for 2016

¹⁰ Average salary at the enterprise does not deviate from the average salary in the region by more than +/-15%.

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5.2NON-FINANCIAL INCENTIVESTo increase engagement and build up the company’s profile, employees took part in the most prestigious professional skill competition, the National Championship for Cross-Industry Professions in High-Tech Industries (using the WorldSkills Hi-Tech procedure). OMK employee Ilya Filippov took third place in the Reverse Engineering category in 2016.

Every year for the last nine years, OMK has organized an Applied Science Conference for Young Specialists, which develops young specialists professionally and gives them an opportunity to solve non-standard production tasks in a new way.

The conferences were attended by over 1,000 participants from all of the company’s enterprises, as well as students from Bauman Moscow State Technical University, the Vyksa branch of MISiS National University of Science and Technology, Alekseev Nizhny Novgorod State Technical University, Vyksa Metallurgical College, and other institutions. An expert commission made up of highly qualified specialists and managers determines the best level 1 and 2 competition reports in each subject area, the work with the best innovative idea, and the best work in terms of economic impact.

Since 2015, OMK’s annual Applied Science Conference for Young Specialists has been named after Serafim Afonin, honoured metallurgist of the Russian Soviet Federative Socialist Republic and the Russian Federation and three-time winner of awards from the Soviet and Russian governments.

First place in the Most Effective Work category went to ‘Improving the Technology for Production of Strength Class K50-K60 Cold-Resistant Rolled Stock under Casting and Rolling Mill Conditions’. The authors of the project – Yevgeny Soldatov, Alexander Muntin, Vitaly Naumenko and Dmitry Yermakov (VSW) — developed a uniform technology for each modification of steel that provides for optimum alloying and thermal deformation rolling. It means that fewer readjustments of equipment are required to produce various grades of steel in a single series. The implementation of this project will save more than RUB 120 million.

The winner in the Best Innovative Idea category was a project by VSW’s Chief Refractories Specialist Alexander Kosonogov, which makes it possible to reduce the contamination of metal by non-metallic inclusions by 50%. Experts believe that, due to its universal nature, this idea could be applied in every metallurgical plant worldwide.

In 2016, OMK began a collaboration with the Talent and Success educational foundation on the Sirius Education Centre project in Sochi, based on the Olympic infrastructure. The initiative for the project came from President Vladimir Putin.

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13TH IVAN & ANDREY BATASHEV FOUNDATION AWARDS CEREMONYIn April 2016, OMK celebrated the top employees of the year from each of its enterprises at the annual awards ceremony of the Ivan and Andrey Batashev Foundation held in Vyksa.

Prizes were awarded in 11 categories, five of which were only open to blue-collar workers. In all, 206 candidates and 12 primary production teams were nominated for awards.

By tradition, the Ivan and Andrey Batashev Foundation prizes were awarded by the honoured guests at the ceremony: Yevgeny Lyulin, Deputy Governor and Deputy Chairman of the Nizhny Novgorod Regional Government; Alexander Tabachnikov, Deputy Chairman of the Nizhny Novgorod Region Legislature; Alevtina Chernikova, Rector of MISiS National University of Science and Technology; Albert Demchenko, head coach of the Russian national luge team and honoured sportsman; Alexey Levykin, Director of the State Historical Museum and member of the Federation Council Committee on Culture; stars of stage and screen, and so on. Russian Deputy Minister of Industry and Trade Sergey Tsyb gave the opening remarks at the ceremony.

The Batashev Foundation prize has been awarded since 2004. It is awarded to the most worthy OMK employees who demonstrate outstanding successes in their work, are the very best at their job, and make a significant contribution to the company’s development. Since its inception, the prize has been awarded to around 200 people and there have been over 600 nominees.

5.2 PERSONNEL


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5.2INCREASING EMPLOYEE ENGAGEMENTSince 2013, the company has conducted annual employee engagement studies, which are one of the primary channels for gauging the opinion of staff as primary stakeholders. Roughly 20,000 people took part in the engagement study in 2016.

The introduction of the Enterprise Social Chart, a joint project with the Mining and Metallurgical Trade Union of Russia, continued in 2016. The trade union gathers information from workplaces on existing problems, structures it by sections into a single chart, discusses possible solutions with managers, beginning at the shop foreman level, records what is agreed, and notes how the problem was solved when the deadline for action falls due. The chart is published on the internal corporate portal and regularly updated.

At the end of the reporting period, the project was working successfully at Chusovoy Metallurgical Works and in individual shops at VSW.

AWARDS RECEIVED BY COMPANY EMPLOYEES

Total VSW Trubodetal APP BVP CMW

National government 2 – – – 2 –

Departmental 43 24 6 3 4 6

Regional 38 31 3 – 4 –

Municipal 72 34 8 18 2 10

Corporate 36 4 1 5 17 9

Plant 539 164 42 36 87 210

Total: 730

Indicator Percentage of staff (%) Change

Percentage of engaged employees 54 +4

Satisfied with employment at OMK 55 +3

Employer brand 51 +4

took part in the engagement study in 2016

20,000 people

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5.2SOCIAL PARTNERSHIPThe previous collective bargaining agreements remained in effect at OMK enterprises in 2016. There were no collective labour disputes.

A new model employment contract was introduced in 2016 that includes specific examples of extra pay for work in hazardous conditions, types and duration of additional leave, and describes other employee rights granted by employment law in greater detail. Employees no longer need to look elsewhere for the information they need; all the important terms and conditions from local regulations and employment law have been incorporated into the text of the contract. More than 5,000 people were already working under the new contract by the end of the year.

There are three major trade unions at OMK: the Mining and Metallurgical Trade Union of Russia (at VSW, Trubodetal and CMW), the Russian Trade Union of Nuclear Energy and Industry Employees (at BVP), and the Trade Union of Russian Agribusiness Employees (at APP). When the Casting and Rolling Mill at Vyksa was absorbed into VSW, a local branch of the Mining and Metallurgical Trade Union of Russia was established to replace the previous labour collective council. All mandated legal conditions for the operation of trade unions have been provided at the company’s enterprises. The reasoned opinion of trade unions is considered in all cases stipulated by the Labour Code of the Russian Federation. Joint commissions on labour disputes are in operation and employee appeals on labour relations issues are granted review.

Trade unions participate in the distribution of benefits, as well as in a number of the company’s social projects: they participate in the expert commissions for the OMK Partnership social and charitable projects competition; they work with enterprise management to develop plant action plans according to the findings of engagement studies; and they participate in arranging sporting and cultural events.

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5.2Most interaction with trade unions occurs at the enterprise level. At the OMK level, the social partnership is coordinated by the Social Council set up in 2015. The Council includes the chairs of the enterprise trade unions and the HR Director, as well as representatives of the management company.

The Council’s main achievement in 2016 was to agree on the uniform tasks and principles of social partnership at OMK, on which the parties plan to base cooperation going forward.

Social partnership tasks

1. Concern for people

• Ensuring production safety• Material wellbeing of employees• Creation of an environment where employees

can show initiative and realize their potential• Organization of sporting, cultural

and volunteer events

2. Effective labour

• Achievement of production, economic and social goals and objectives

• Employee engagement• Workplace discipline and procedure

3. Modernization and development

• Sustainable development of the company• Keeping the business competitive• Jointly seeking out and introducing best

practices in social partnership• Advanced training and retraining

for employees

4. Social stability

• A supportive environment within teams• Employment stability • Timely and accepted preparation for changes

Principles of social partnership

1. Common objectives

• Drive towards overall result• Agreement on actions• Joint resolution of business

challenges

2. Constructive dialogue

• Openness and trust• Seeking solutions through

discussion, questioning, and consideration of views

• Conflict prevention• Equal rights

3. Responsibility • Legal compliance • Compliance with agreed

obligations

4. Good communication

• Exchange of objective information between employer and employees on the situation within the organization

• Responsible attitude towards the information obtained, and agreement with social partner on ways to use it going forward

PERSONNEL


CONTACT INFORMATION

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5.2SOCIAL POLICY

Name 2013 2014 2015 2016

Total social expenditure: 426 599 553 598

Direct social payments 207 248 201 197

Medical assistance 9 156 155 171

Nongovernmental pensionprovision

25 22 30 43

Sanatorium and resort treatment and wellbeing for employees and their family members

87 53 38 43

Meal provision 57 85 92 97

Other 41 35 37 46

PERSONNEL


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PENSION CONTRIBUTIONS

To ensure a decent standard of living after retirement, various nongovernmental pension programmes are in place at OMK via the Gefest Nongovernmental Pension Fund. The basic principle is that the company doubles the voluntary contributions made by its employees. Employees determine the amount of their contributions independently. As of the end of 2016, more than 6,100 employees participated in nongovernmental pension programmes, and 3,788 people participated in voluntary pension support programmes (three parties in equal shares: the employee, the employer, and the state).

Pension payments from the Gefest Nongovernmental Pension Fund were RUB 16.4 million in 2016, 9% higher than in 2015. This rise was due to the increase in the average time employees had been enrolled in the programme. The amount of the additional pension in 2015 ranged from 2% to 11% of the government pension across the regions where OMK operates. The low percentage is explained by the fact that corporate pension programmes have existed for a relatively short time, but in the future they are intended to assist OMK employees to reach a pension income level of up to 40% of lost earnings (the world standard).

16.4

6,100

+9%

3,788

millionroubles

people

people

in pension payments from the Gefest Nongovernmental Pension Fund in 2016

participate in nongovernmental pension programmes

participate in voluntary pension programmes

5.2 PERSONNEL


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5.3 OCCUPATIONAL SAFETY

THE PRIMARY OBJECTIVES FOR OMK, BOTH IN 2016 AND IN THE LONG TERM, ARE TO PREVENT FATAL INJURIES AND SYSTEMATICALLY REDUCE WORK-RELATED INJURIESThere were no fatal injuries in production at OMK enterprises in 2016 .

Priority areas for efforts to improve production safety in 2016:• improving the production safety culture• monitoring and development of contractor safety• development of the production process safety system• development and introduction of transport safety system• introduction of a staff occupational health system

The company plans to continue work in these areas in 2017–2018.

KEY PRODUCTION SAFETY RISKSCorporate standards for production process safety were developed and introduced at OMK in 2016 to eliminate and minimize these risks:

• STK.12-56.17 Mechanical Integrity of Equipment• STK.12-56.15 Pre-Startup Safety Inspections• STK.12-56.16 Managing Technical Changes

A pilot project for production process safety was successfully launched at the Trubodetal Plant. Enterprise managers were trained in the new standards and benefit from regular mentoring. Equipment safety status is assessed according to approved schedules. Plans are drawn up for rendering equipment safe. New equipment and equipment received after major overhaul undergoes a pre-startup safety inspection. Technical changes are subject to a risk assessment procedure.

All OMK enterprises have achieved certification in accordance with the OHSAS 18001 international standard.

80 -13%Reduction in workplace injuries (number of workplace injuries in 2016)


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5.3KEY PERFORMANCE INDICATORSKEY PERFORMANCE INDICATORS FOR EVALUATING OMK MANAGEMENT ACTIONS ON PRODUCTION SAFETY:

1. Reduce the LTIFR11 across OMK by 10% in comparison with 2015.

2. Increase the level of development of the production safety management system across the OMK group.

11 Lost time injury frequency rate.12 Target indicators for the level of development of the OMK group’s production safety management system, which are calculated on the basis of an assessment of all areas of production safety. Assessment of production safety management system = (occupational safety management system assessment + fire safety assessment + environmental safety assessment + industrial safety assessment + production process safety assessment + transport safety assessment) / 6. Each area has specific assessment criteria and special checklists on the basis of which the assessments are carried out during annual comprehensive audits.

Actual 2015 LTIFR

Actual 2015

Actual 2016 LTIFR

Actual 2016 Target 2016

2.37

2.2 12

↓ 2.22

↓ 2.51 2.5

The LTIFR reduction target was not achieved in 2016, but the LTIFR was reduced by

6.3%

OCCUPATIONAL SAFETY


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5.3Target indicators for reduction of workplace injuries (LTIFR)

↓ -10%

↓ -10%

↓ -10%

1.40

0.902020

2025

2019 1.562018 1.73

There are also plans to increase the level of development of the production safety management system and, with an annual 0.3-point increase in the indicator, to achieve a production safety management system level of 3.5 points by 2020 and over four points by 2025.

With this level of production safety, we believe that by 2025 the injury rate will fall to 0.9, the level of the world leaders in LTIFR.

G4-LA6

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5.3OMK PRODUCTION SAFETY COMMITTEEThe effective organization of the production safety management system at OMK enterprises is based on sharing experience and best practice among plants, and on management decisions that aim to reduce the risk of injuries and incidents through the work of the production safety committees.

The OMK Production Safety Committee is joined by the enterprises’ occupational safety coordinating committees and shop working groups to form a unified managerial hierarchy.

The OMK Production Safety Committee is responsible for the practical implementation of the company’s objectives, development strategy, and policy as regards environmental protection, occupational safety, and industrial safety, and manages ongoing production safety efforts at all OMK enterprises.

The production safety committee is chaired by the President of OMK. Members include the Director for Production Safety, the Deputy Chair of the Management Board, the Head of the Commercial Department, the Head of the HR Department, the Director for Business Systems Development, and the managing directors of the enterprises.

Committee responsibilityMembers of the Production Safety Committee are responsible for:• ensuring that the production safety management system works effectively at the enterprises, to the extent of their authority• ensuring that decisions comply with Russian law, company policy on environmental protection, health and industrial safety,

and the decisions of company management• supporting decisions made by the OMK Production Safety Committee by providing the necessary resources • carrying out the decisions made by the committee• ensuring that the production safety coordinating committees work effectively at the enterprises controlled by OMK

In 2016, the two departments responsible for occupational safety and production process safety at OMK were merged into the Production Safety Department. OMK’s Production Safety Department covers the primary areas for development in the field of occupational, industrial, fire, transport and environmental safety, employee health management, and production process safety. There were no significant changes in the system of internal regulations determining occupational safety policy in 2016.

OCCUPATIONAL SAFETY


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5.3TRAINING ON THE DEVELOPMENT OF AN OCCUPATIONAL AND INDUSTRIAL SAFETY MANAGEMENT SYSTEM 1 . Seminar for senior managers: ‘Safety Management: Systems Used by Facility Managers’2 . Seminar for line managers: ‘Effective Safety Management Techniques with Training

on Conducting Behaviour-Based Safety Audits’3 . Seminar for employees: ‘Developing a Conscientious Attitude Towards Safety’4 . Seminar on internal investigation of incidents: ‘Investigation of Incidents and Analysis

of Key Causes’5 . Seminar: ‘Organization of a Transport Safety System’6 . Seminar: ‘Defensive Driving’7 . Seminar: ‘Production Process Safety’

PRODUCTION SAFETY MANAGEMENT PROGRAMMES

Over the last five years, corporate training programmes have been attended by

28,606OMK employees

OCCUPATIONAL SAFETY


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CONDUCTING COMPREHENSIVE AUDITS1. Occupational safety2. Industrial safety3. Environmental safety4. Transport safety5. Production process safety6. Fire safety

Six planned audits were conducted at OMK enterprises in 2016.

Number of people trained in safety programmes

2015 2016

4,293 3,096

Mentoring by managers (sessions/persons)

2015 2016

33/231 38/266

5.3This is direct assistance provided by Production Safety Department experts to line managers to help them introduce new production safety processes. This assistance is provided during training in new safety requirements directly at the workplace. The main purpose of mentoring is to involve managers in the performance of job functions relating to production safety. As mentoring is provided on an individual basis, it is essentially of a practical nature.

The mentoring programme comprises the following steps:

1 . Meeting with manager, evaluation of assignment from previous session.

2 . Progress made by manager in fulfilling his or her personal action plan to improve occupational safety (planned/actual performance and adequacy of actions taken to successfully implement key areas, difficulties encountered and ways of overcoming them).

3 . Actual status and problems in providing mandatory information on all incidents at the production facility, and methods for overcoming these problems in departments subordinate to session participant.

4 . Schedule and practical results of occupational safety inspections and audits (behavioural) conducted personally by the manager in subordinate departments.

5 . Foundations for methodology and internal investigations of incidents: purpose, membership and formation of investigation commissions; concept of ‘indirect’, ‘associated’ and ‘systemic’ causes of incidents; assessment of sufficiency of measures; development and application of ‘lessons learned’.

6 . Personal role of the manager in organizing and supporting the internal investigation process (including personal efforts to ensure swift internal organization of an investigation and assess its quality in the case of incidents that had or could easily have had serious consequences).

7 . Planning of session participant’s personal actions to introduce and support the internal investigation process.

8 . Visit to production section: honing skills for behavioural occupational safety audits and direct motivating interaction with subordinates and contractors.

9 . Summary:• reach a shared understanding and agreement with session

participants on the actions they need to take to further improve occupational safety (internal investigation and behavioural safety audits).

• plan the actions specified by the session participant (adjust/add to personal plan): specific actions, deadlines, and persons responsible.

MENTORING PROGRAMMES

OCCUPATIONAL SAFETY


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5.3STANDARD FOR PERSONAL PROTECTIVE EQUIPMENT FOR EMPLOYEES OF OMK AND CONTROLLED COMPANIESIn September 2016, OMK introduced a new (second) edition of its corporate standard, ‘Personal Protective Equipment for Employees of OMK and Controlled Companies’. This standard was used to identify a single supplier of personal protective equipment for enterprises in the OMK group. An expert committee on personal protective equipment was organized. Eleven technical specifications were developed for the manufacture of men’s and women’s summer clothing, as well as for winter clothing to protect against low temperatures and general contamination.

All personal protective equipment is selected according to the employee’s gender, height, clothing size and shoe size, as well as the specifics of the work they do.

A great deal of work was also done in 2016 to review internal standards on the issuance of free personal protective equipment to company employees and ensure that they comply with the model industry standards specified by Russian law.

39

225

291

132

978CMW

VSW

Trubodetal Plant

BVP

APP

Unscheduled assessment of workplaces at OMK enterprises in 2016:

WORKPLACE INSPECTIONA special assessment of working conditions at OMK was conducted in 2015 in accordance with Federal Law No. 426-FZ ’Special Assessment of Working Conditions’. An unscheduled special assessment was conducted in 2016.

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5.3OCCUPATIONAL HEALTHOMK spent more than RUB 250 million on occupational health in 2016. The comprehensive action plan included: preventive medical examinations (for all employees whose work requires that they undergo such examinations), vaccinations (against flu, hepatitis B, diphtheria and tetanus), rest and treatment at the company’s health resorts for employees and their children; preventive action on cancer and diabetes.

250 million roubles

Employees receiving preventive medical examinations¹³

Health expenditure

100%¹³ All company employees whose work requires that they undergo medical examinations.

OCCUPATIONAL SAFETY


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5.3WORK WITH CONTRACTORSThe corporate standard ‘Contractor Management in the Field of Occupational Safety, Environmental Protection and Fire Safety’ was introduced to ensure compliance with industrial and occupational safety requirements by OMK group contractors. This standard establishes the requirements for interaction with contractors to ensure safe working conditions and compliance with environmental requirements when organizing work to be done by contractors at company facilities or at other facilities in the company’s interest.

Evaluation of a contractor on the basis of the requirements of the standard begins at the selection stage. The documented evaluation of the contractor is carried out according to established criteria:• There is a local standard regulating the production safety management system (copy of the provision

on the production safety management system, or production safety standards for the enterprise or organization)

• The work of the production safety management bodies is organized (copy of the order establishing a production safety service or appointing a production safety specialist, or a service contract)

• The organization’s employees have mandatory insurance against workplace accidents (copy of the document confirming mandatory insurance of employees against workplace accidents)

• The organization has production safety instructions drawn up for each job or type of work (copies of the current approved list of occupational safety instructions and approved title pages)

• Employees undergo regular medical examinations (copy of the final report on the results of the regular employee medical examination, or the initial report for those who have been working less than one year)

• There are documents confirming the qualifications and certification of personnel (list of personnel scheduled to work under the contract and copies of documents confirming the qualifications of personnel)

• Frequency of workplace accidents

Contractor employees undergo new-hire training, and records are kept, prior to starting work. During the training, contractor employees are informed of the occupational safety and environmental protection requirements; environmental protection, health and industrial safety policy; and procedures for access to and movement around the enterprise site, including in vehicles.

During contract work, OMK specialists regularly inspect contractors. In the future, a database of suppliers, contractors, and workers will be created and placed on the corporate portal.

OCCUPATIONAL SAFETY


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5.4 ENVIRONMENTAL PROTECTION

OMK’S ENVIRONMENTAL PROTECTION SYSTEM IS BASED ON COMPLIANCE WITH COMMON PRINCIPLES: • fulfilling legal requirements• preventing industrial accidents and continuously reducing the adverse environmental impact

of production facilities• reducing the consumption of natural resources and energy• improving the knowledge and accountability of personnel with regard to environmental issues• developing an integrated management system which complies with international standard ISO 14001

Environmental protection efforts are coordinated by the OMK Production Safety Department. The department ensures that all enterprises comply with the programme for minimizing environmental risks, which includes oversight and internal audits of current and planned projects.

Each enterprise has its own occupational and environmental safety management programme that complies fully with the enterprise’s specifications. Implementation of the programme is monitored by the managing director. A special representative responsible for integrated systems management is appointed by order of the enterprise’s managing director. The representative monitors compliance with the requirements of ISO 14001:2004, and also reports to management on the results of the environmental management system, including making recommendations on improving it.


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5.4Three types of indicator are used to assess the performance of the environmental

safety management system within the company:

Emissions

Mass of atmospheric pollutants emitted

Waste disposalMass of waste

disposed of

DischargesMass of pollutants discharged

into water bodies

There are plans to develop standards for specific indicators per unit of product for all three waste categories.

ENVIRONMENTAL PROTECTION


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5.4Gross atmospheric pollutant emissions(thousand tonnes)

Total waste generation(thousand tonnes)

Gross discharge of pollutants into water bodies(thousand tonnes)

5.76 1,037.90

3.17

5.76 1,037.90

3.17

2016 2016

2016

2015 2015

2015

4.90 1,075.20

3.20

2014 2014

2014

6.83 1,195.50

4.92

CHANGES IN KEY ENVIRONMENTAL INDICATORS



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5.4ENVIRONMENTAL PROTECTION EXPENDITURE (RUB MILLION)

Capital expenditureRUB millions

Payments for adverse environmental impact RUB millions

Operating expenses for environmental protectionRUB millions

Fines for breaches of environmental protection lawsRUB millions

222.11

79.68

1,115.03

0.29

222.11

79.68

1,115.03

0.29

2016

2016

2016

2016

2015

2015

2015

2015

126.88

41.04

1,120.79

0.15

2014

2014

2014

2014

63.73

79.70

785.51

0.43



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5.42014 2015 2016

Mass of atmospheric pollutant emissions 6,830.27 4901.75 5,758.28nitrogen oxides (NOx) 3,347.32 1,671.848 182.13sulphur dioxide (SOx) 90.32 136.494 112.72carbon monoxide (CO) 1,760.48 1,825.154 2,001.93benzo(a)pyrene 0.01 0.0004287 0.00volatile organic compounds (VOCs) 152.02 246.663 257.54hydrocarbons (not including VOCs) 16.81 17.603 27.05solids 1,415.42 939.971 1,126.14miscellaneous 47.88 64.018 50.77

ATMOSPHERIC EMISSIONS BY OMK ENTERPRISES (TONNES)

4,650.06

234.87 70.50

244.04

Vyksa Steel Works

Chusovoy Metallurgical Works

Almetyevsk Pipe Plant

Trubodetal Plant

Blagoveshchensk Valves Plant

Breakdown of emissions by enterprise (tonnes) (2016)

558.82



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SUSTAINABLE DEVELOPMENT ¹⁴ Greenhouse gas emissions were measured at VSW in 2016. The company plans to introduce greenhouse gas measurement at all of its assets in sequence.

GREENHOUSE GAS EMISSIONSThe increase in greenhouse gas emissions was due to the inclusion of an unconsidered source: straight-flow water boilers.

In 2016, only Chusovoy Metallurgical Works calculated greenhouse gases using the method approved by Order No. 300 of the Russian Ministry of Natural Resources dated 30 June 2015. Having identified the sources of greenhouse gas emissions and measured the volumes of these emissions, it was established that steam boilers make the biggest contribution. To reduce greenhouse gas emissions at the enterprise, there are plans to install modular boilers to replace the existing steam and water boilers.

Startup and commissioning of the modular boilers and dismantling of the water boilers that are emitting greenhouse gases are planned for May 2018. This will reduce СO₂ emissions by 9,300 tonnes.

POLLUTANT DISCHARGES INTO WATER BODIESTo reduce vanadium and manganese discharges, a second ozone generation line was launched in December 2016. This has made it possible to increase the percentage of acidic wastewater that is treated with ozone from 30% to 60%.

The following measures are planned in 2017 to reduce vanadium and manganese discharges:• Use ozone generation line No. 2 for ozone treatment of acidic wastewater (generator B was launched

in December 2016)

• Sign a contract for research into the development of new technology or adaptation of existing technology for final treatment of wastewater (with the company Ecoservice)

• Consider the possibility of using groundwater instead of fresh water for the needs of the ferroalloy smelting shop

• Purchase lime with active calcium oxide to neutralize acidic wastewater and improve the efficiency of joint precipitation of manganese and vanadium

• Look into the possibility of using the plant’s chemical dispenser at the wastewater neutralization stage

Greenhouse gas emissions from CMW¹⁴ (thousand tonnes) (in СO₂ equivalent)

89.19

89.192016

2015 84.77

G4-ЕN15

5.4 ENVIRONMENTAL PROTECTION


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5.4Waste on hand at beginning of year 19,615.3Identified and itemized in current period 873.6Waste generated during year 1,156.6Received due to reorganization of another legal entity 0.00Waste received from third parties (with and without transfer of ownership) 109.3

received from Company third parties 109.3Waste utilized during year 1,111.5

used by third parties 869.6Waste neutralization and processing 356.7

by third parties 26.9Total waste sent to landfill 253.3

by third parties 80.3Ownership transferred 855.9Waste on hand at end of year 19,231.8Waste transferred to third parties 937.0total transferred to Company third parties 413.1

The area of disturbed land was reduced in 2016 as a result of the transfer of the rock (limestone) excavation and processing section of the limestone extraction and processing quarry to a new legal entity, Bely Kamen.

TOTAL MASS OF WASTE BY TYPE AND DISPOSAL METHOD (THOUSAND TONNES) Waste on hand

Beginning of year(thousand tonnes)

End of year(thousand tonnes)

19,615.3 19,231.8 ↓ 2%

↓ 51.4%One of the Company’s key objectives in the area of waste management is to increase the percentage of waste that is recycled and processed. The set of measures implemented made it possible to increase the percentage of recycled and processed waste from 35% to 40% in 2016 (minus scrap metal generated).

Total disturbed land(hectares)

91.42016

2015 187.9

2014 194.1

G4-ЕN23



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↓ 3%

5.4Enterprise Certificate 2016 auditVSW ISO 14001:2004

and OHSAS 18001:2007Compliance audit of integrated management system

BVP ISO 14001:2004 Certification auditCMW ISO 14001:2004 Compliance auditTrubodetal Plant ISO 14001:2004 Introduction and certification auditAPP ISO 14001:2004 Introduction and certification audit

Internal audits of departments are conducted according to a set schedule. The results of the internal audits are registered with SAP, announced at a video conference, and posted on the information portal.

Work to mitigate the environmental impact from the operation of company facilities will continue in 2017–2018. For example, for 2017 the company has set a goal of reducing the total human impact on the environment by at least 3%.

This parameter will be measured using an integrated indicator that takes account of the changes in atmospheric pollutant emissions, discharges of pollutants into water bodies, and waste disposal in comparison with 2016.

CERTIFICATION OF ENTERPRISES ACCORDING TO INTERNATIONAL ENVIRONMENTAL MANAGEMENT STANDARDS

For 2017, the company has set a goal of reducing the total human impact on the environment by



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5.4COMPENSATION FOR ADVERSE IMPACT OF DISCHARGES FROM CMWThe discharge of process wastewater from CMW into the Chusovaya River, Usva River and Belokamenka Creek has an adverse impact on the water bodies, bioresources, and their habitat. The enterprise makes regular payments to the Russian Federation government for the adverse environmental impact associated with pollutant discharges into water bodies.

In addition, beginning in 2014, the enterprise has made annual compensation for the damage caused to aquatic bioresources by releasing 18,555 pike fry weighing up to eight grams or releasing 97,968 grayling fry weighing up to three grams into the Chusovaya River. The fry are raised by Topol, a local fishery in Gorshki.

In 2014 the fish were released into the Chusovaya River near the villages of Vetlyany and Shalashnaya; in 2015, they were released into the Sylva River near the villages of Gari and Shatovo. No compensation measures were undertaken in 2016 due to work on a new assessment of the damage caused to aquatic bioresources.



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5.4VSW• Completion of renovation and commissioning of second part of solid industrial

and domestic waste disposal site

• Installation of a ladle drying system with removal of harmful products of combustion

BVP• Landscaping of plant sanitary protection zone

CMW• Introduction of separate collection of waste

and purchase of necessary equipment

• Commissioning of second ozone generation line to process waste containing manganese and vanadium

TRUBODETAL• Introduction of separate collection and recycling of waste paper,

cardboard, and used batteries: 150 kg of batteries and 9.6 tonnes of paper and cardboard were collected and recycled

APP• Introduction of separate collection of waste

ENVIRONMENTAL SAFETY MEASURES AT OMK ENTERPRISES



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5.4Enterprise Indicator

VSW

• Reduce total mass of waste generated, excluding nonferrous and ferrous metals, by 10% or more than 40,000 tonnes/year

• Reduce gross pollutant discharges with wastewater into reservoirs by 5% – more than 45 tonnes/year

• Renovate filter and ventilation equipment at five fixed emission sources to comply with standards

BVP• Reduce unit value of disposal (transfer for disposal) by at least 5%

• Reduce gross atmospheric pollutant emissions from arc steelmaking furnaces by at least 5%

CMW

• Achieve specific discharge of pollutants with wastewater from outlet No. 3 into the Usva River within the set standards: vanadium: 0.13 kg/tonne; manganese: 0.14 kg/tonne of the vanadium pentoxide produced

• Arrange for commercial metering of wastewater discharges into the Usva River

• Achieve specific value of vanadium pentoxide production waste (dewatered sludge from neutralization of wastewater by slaked lime) of no more than 2.4

Trubodetal • Reduce waste disposal volume by introducing a system for separate collection of plastic waste, as well as sanding and grinding wheels with subsequent transfer of such waste for processing

TARGET INDICATORS FOR 2017



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5.5 ENERGY CONSUMPTION

ENERGY CONSUMPTION BY BUSINESS UNITIndicator Unit of measurement 2014 2015 2016Electricity consumption (VSW) MWh 626,359.25 637,218.90 527,390.66Natural gas consumption (VSW) thousand m³ 203,547.00 202,263.70 187,430.64Electricity consumption (Trubodetal Plant) MWh 20,265.01 1,5921.40 15,627.98Natural gas consumption (Trubodetal Plant) thousand m³ 16,853.00 9,647.00 8,728.56Electricity consumption (BVP) MWh 42,455.93 43,804.60 37,610.05Natural gas consumption (BVP) thousand m³ 7,178.23 6,591.20 6,779.95Electricity consumption (APP) MWh 29,564.33 26,582.91 21,433.33Natural gas consumption (APP) thousand m³ 4,741.80 3,998.60 4,108.15Electricity consumption (CMW) MWh 87,178.44 62,261.10 58,188.52Natural gas consumption (CMW) thousand m³ 82,649.08 51,234.86 48,487.64

WATER CONSUMPTION (THOUSAND M³)Parameter Unit of measurement 2014 2015 2016Water intake from all sources, including: million m³ 14.5 10.1 9.4

water intake from underground sources million m³ 4.5 4.1 3.7water intake from surface sources million m³ 9.6 5.5 5.1water supply from water supply networks of other entities million m³ 0.4 0.5 0.57

Volume of recycled and reused water million m³ 352.8 368.5 352.7Total volume of water used million m³ 367.3 378.6 362.1Percentage of recycled water supply % 96.04% 97.33% 97.41%

Actions to improve energy efficiency are taken in compliance with the regulation ‘Procedure for the Development, Endorsement, and Oversight of Energy Saving Programmes’.

G4-ЕN3


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TOTAL ENERGY SAVINGS YEAR ON YEARBusiness unit Investment report

Actual expenditure (RUB million)Cost effectiveness report

Impact (RUB million)Summary energy

efficiency indicators for 2014

Summary energy efficiency indicators

for 2015


for 2016


for 2014


for 2015


for 2016VSW 347.94 11.69 27.63 37.16 7.62 43.67CMW 7.45 16.55 18.00 408.22 27.33 51.29APP 10.36 0.54 0.00 11.42 3.15 1.16Trubodetal Plant 3.23 0.70 0.29 15.49 1.71 2.62BVP 6.10 1.27 12.59 2.90 3.43 15.51Other 10.31 2.2 2.47 1.70 1.82 8.12Total over the year 385.38 32.96 60.98 476.89 45.05 122.37

Total for 2014–2016 479.31 644.31

5.5 ENERGY CONSUMPTION


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5.6 DEVELOPING THE REGIONS IN WHICH WE OPERATE

An active social policy is an integral part of OMK’s strategy. The company views social programmes as long-term investments in the stability of the local communities in the regions where it operates. OMK strives to ensure a decent standard of living for all OMK employees, build relationships with state authorities and partners from businesses large and small, and forge long-term relationships with NGOs.

Measures implemented

Tournaments and competitions; infrastructure development

• Battle of the Champions (Russian Martial Arts Association)• Plant Olympics• Construction of sports venues in cities where the company operates

Support for athletic organizations, associations, and initiatives

• Metallurg, Volga, and CMW football clubs• Sport Against Narcotics programme (VSW)• Prizes for remarkable sporting achievements (VSW)• Charitable assistance to fitness and popular sports institutions

in regions where OMK operates

Assistance to children’s institutions and vulnerable segments of the population

Charitable support for disadvantaged children, young people, and senior citizens in regions where OMK operates

Assistance to religious and spiritual organizations

Assistance to the Vyksa bishopric of the Russian Orthodox Church and support for the construction of St. Mary’s Church in Chusovoy (Perm Territory)

Support for educational programmes and institutions

Careers guidance, awareness raising, promotion and use of new technologies, tools and techniques in education and training.

Support for culture Support of projects aimed at restoring cultural heritage sites and popularizing current trends in contemporary culture and modern art

Social entrepreneurship

Innovative activity aimed from the outset at solving or mitigating social problems on the basis of self-sufficiency and sustainability. Social entrepreneurs are people whose aim is to transform society by filling in the gaps that are overlooked by the government and traditional business. They are representatives of micro, small or medium-sized businesses who see a social problem, realize how it can be solved, and do just that, using their business skills and potential within the legal framework.

OMK REGIONAL DEVELOPMENT PRIORITIES

G4-SО1


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5.6‘START YOUR OWN BUSINESS’ COMPETITION

1.85million roubles

million roubles

Total programme budget

Grant pool for ‘Start Your Own Business’ competition in 2016

Expanding social entrepreneurship is a new direction for OMK social investment. OMK ran the first ‘Start Your Own Business’ programme in 2016 in Chusovoy (Perm Territory). The aim of this OMK initiative is to seek out business ideas that promote job creation and improve the quality of life in Chusovoy.

The ‘Our Future’ Regional Social Programmes Fund and the Perm Territory Ministry of Energy and Trade are partners in this initiative. A programme designed to support potential social entrepreneurs was developed, consisting of an educational unit (training courses on social entrepreneurship), the ‘Start Your Own Business’ grant competition, fairs featuring social ideas, an accelerator programme to support competition winners, and an inter-regional conference on social entrepreneurship.

Thirty-six applications were submitted for the competition, and 20 projects were chosen as winners. Nine of the winning projects entered the Perm Entrepreneurship Development Fund accelerator programme.

The social entrepreneurship development programme is due to be rolled out to Blagoveshchensk in the Republic of Bashkortostan in 2017.

An equally important aim of the ‘Start Your Own Business’ competition was to create a discussion and networking platform for residents of Chusovoy, who are united by their desire to improve the quality of life in the region. Thanks to the social entrepreneurship programme in Chusovoy, new leisure facilities have appeared: a pay-per-minute café, cycling club, Montessori children’s club, the ‘Free Sandbox’ (a space for young mothers and children to relax in), a gym for senior citizens in the village of Sely, and ‘smart trainers’ for senior citizens.

Another success story is the social entrepreneurs’ ‘Recycle Plastic’ projects to set up a system for collecting and recycling polymers.

The Nadezhda roller skating rink is open for children and adults, the ‘Ecotourism Without Borders’ project (floats in the Chusovaya River) has been launched, and young people in Chusovoy can practice mental arithmetic at the Alph@ educational club. A cleaning company’s first clients received help cleaning their apartments. The clients were pensioners, veterans, low-income and large families on the lists of social services and the CMW Veterans’ Council.

‘Second Home’, the first animal hospital in Chusovoy, was opened.

The Perm Territory Ministry of Industry, Business and Trade provided a RUB 850,000 subsidy to social entrepreneur Anton Gorokhov, who started an initiative for separate refuse collection in Chusovoy. His ‘Recycle Plastic’ project was one of the winners of the competition organized by the Ministry. 3.0

DEVELOPING THE REGIONS IN WHICH WE OPERATE


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5.6RESULTS OF CHARITY WORK AND SPONSORSHIP IN 2016

431 Allocated to charitable and sponsorship projects

million roubles

Completed projects

Charitable projects

Sponsorship projects (all regions)

Volunteer projects

35 — OMK Partnership

24 — as part of OMK Partnership

13 projects

1 — Victors’ Ball

46 — outside grant competition



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5.6Organization of a venue for workshops at the ‘Spiritual Bazar’ charity fair in Moscow in partnership with the non-profit Development Group

Participation in organization of the 10th National Forum ‘Health of the Nation – The Foundation of Russia’s Prosperity’ in partnership with the National Health League charitable foundation

Victors’ Ball in partnership with the Maris Liepa Foundation and the Central Museum of the Great Patriotic War 1941–1945

The ‘Start Your Own Business’ social entrepreneurship support programme in Chusovoy in partnership with the ‘Our Future’ fund for regional social programmes and the Perm Entrepreneurship Development Fund

Partnership with the Prospect Foundation to expand non-profit organizations in regions where the company operates

The OMK Partnership grant competition in partnership with local administrations, regional ministries and resource centres for non-profit organizations: 35 projects (23 non-profits and 12 municipal and national government institutions)

PARTNER PROJECTS1

2

3

4

5

6

OMK Deputy Board Chair Natalya Eremina with World War II veterans at the Victors' Ball



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5.6VOLUNTEERING

6,4009,000

15

2,450 70

employees volunteered in 2016

OMK employee volunteers (total)

More than 9,000 OMK employees are volunteers. They represent more than 35% of the total company workforce.

Volunteers in the OMK Partnership competition

Volunteer events in 2016

¹⁵ More than 35% of the total company workforce



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220

5.6

OMK employees

are regular donors

BLOOD DONATIONThe corporate blood donor movement continued to expand in 2016.

OMK employees gave more than 390 litres of blood in 2016, including 140 litres from employees in the Moscow office. There were 21 blood drives in 2009–2016 in the Moscow office alone. The company got its partners involved too, including Metallinvestbank employees and representatives of the Russian Martial Arts Association.

Two hundred and twenty company employees are regular donors.

OMK PARTNERSHIP COMPETITIONWe continued our long-term programme to support social initiatives, the OMK Partnership social and charitable projects competition, in 2016. Employees of OMK enterprises, non-profit organizations, and government and municipal institutions from the regions in which the company operates were invited to participate. Four workshops on social project management, fundraising, and project promotion for potential grant recipients were held during preparations for the competition.

The purpose of the competition is to create opportunities for introducing innovative technologies to develop the regions where the company operates and to involve employees in social projects at their own initiative and on a voluntary basis.

The objectives are to improve the quality of life in cities where OMK operates, to develop a systematic approach to solving social problems in the regions, to improve the effectiveness of social investment, to ensure maximum transparency in the selection of priority projects, and to submit the projects’ outcomes to a qualitative evaluation.



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Region Applications received

Support provided

Grant fund (RUB million)

Grant fund distribution by region (RUB million)

Competition project beneficiaries

AlmetyevskBlagoveshchenskVyksaChelyabinskChusovoyMoscow

256 59 projects: 35 from organizations 24 from employees

9.3

Almetyevsk — 0.7Blagoveshchensk — 1, .6 Vyksa — 3.2 Chelyabinsk — 1.7 Chusovoy — 1.95 Moscow — 0.15

30,000 people

5.6

In 2016, an agreement was signed with the Prospect Foundation which supports civic engagement in small towns and rural areas and is the operator of the presidential grants competition. Four winning projects from the OMK Partnership competition received a total of RUB 5.5 million in presidential grants.

APPLICATIONS FOR OMK PARTNERSHIP COMPETITION

>900,000 ≈6

5.5

roubles million roubles

million roubles

Co-financing by OMK business partners

Total co-financing for beneficiaries

Total presidential grants received by OMK Partnership winning projects



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5.6Founded in 2008 at the initiative of OMK shareholders and employees, OMK Participation is funded by contributions from company managers and employees. The foundation’s board of trustees is chaired by Irina Sedykh. In 2016, the OMK Participation Foundation organized several events to support disadvantaged and seriously ill children and to develop educational and medical procedures, culture, and art.

SAY “YES” TO A NEST BOX!As part of the traditional spring Saturday clean-up at Patriarch’s Ponds in Moscow, OMK Participation, assisted by volunteers, hung unusual nest boxes in Bulgakov Square, which were painted by patients of the Nikolai Blokhin Children’s Cancer and Haematology Research Institute.

“WHO’S RUNNING? EVERYBODY!”United Metallurgical Company and OMK Participation held a series of charity runs called “Who’s Running? Everybody!” to support the foundation’s patients. About 100 people ran 2,300 metres in Moscow; they included employees, partners and friends of OMK, representatives of Metalloinvest and KPMG, students from MISiS, and ordinary Muscovites who just love sport. More than 700 volunteers, including employees of the Vyksa Steel Works, turned up at the starting line in Vyksa. Local races were also held in other regions where the company operates.

SHOW AT NIKULIN CIRCUS ON TSVETNOY BOULEVARDThis event, traditionally organized by OMK Participation at Moscow’s oldest circus and now in its fourteenth year, brought about 2,000 people together. These included more than 900 children from large and low-income families, patients of the Nikolai Blokhin Children’s Cancer and Haematology Research Centre, students from the Inclusive Molecule special school and the Revival social rehabilitation centre, members of Support, an organization for disabled people, and children of OMK employees.

ACTIVITIES OF THE OMK PARTICIPATION CHARITABLE FOUNDATION IN 2016



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ART RAVINE FESTIVALThe sixth Art Ravine urban culture festival was held in Vyksa in Nizhny Novgorod Region. The festival was organized by United Metallurgical Company and the OMK Participation charitable foundation and sponsored by the Russian Ministry of Culture.

It hosted more than 10,000 visitors over three days. Dozens of workshops on dance, parkour, cooking and various styles of art were held at special venues all over Vyksa. There were also tricking demonstrations by Russia’s top practitioners and fitness, BMX and other contests. World kickboxing champion Jaber Rami, four-time world taekwondo champion Ri Yong Il, chef Francesco Castorina, graphic and fusion artist and sculptor Andrey Bartenev and others shared their skills. The Trickster and Praktika Theatres staged performances, and the music programme included rock group Jonny Online and folk singer Inna Zhelannaya.

The festival opened with a social event entitled ‘A Journey Back into the Ages’, which had children drawing illustrations for a book on the history of Vyksa. Chapters of the book were read aloud by famous residents of the city and visitors to Art Ravine. Two new street art paintings were also created: artists adorned 350 square metres of surface on the sides of buildings 20 and 3 in the Central neighbourhood with their designs. The Art Yard project opened renovated playgrounds and swings on the shores of Lebedinka Lake.

'EVERY LITTLE CHRISTMAS TREE HELPS'This event has been held since 2012 for children undergoing treatment at the Nikolai Blokhin Children’s Cancer Research Centre. In 2016, it lasted for two weeks, with OMK employees and partners getting involved. All funds raised went towards the purchase of a BF-XP60 OES bronchofibrescope, 15 infusion pumps and five perfusion pumps to treat patients at the centre.

5.6 DEVELOPING THE REGIONS IN WHICH WE OPERATE


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5.6OMK employees held more than 40 charity events in Moscow, Chusovoy, Chelyabinsk, Almetyevsk, Vyksa and Blagoveshchensk with the active support of the OMK Participation charitable foundation, which has become a partner in the #GivingTuesday movement.

Charity fairs were key to the #GivingTuesday drive. A Red Fair was held in Moscow at MISiS National University of Science and Technology and OMK’s Moscow office. The fair was enthusiastically supported by students and lecturers from the university, OMK employees, and partners Techsnabexport and Metallinvestbank. All the money raised will be used to purchase medical equipment for the children’s ward at the Nikolai Blokhin Children’s Cancer Research Centre in Moscow, of which OMK Participation is a partner. At the fair, anyone who wished could paint Christmas tree ornaments which volunteers then used to decorate the cancer centre during the annual charity event ‘Every Little Christmas Tree Helps’.

In Chelyabinsk, the foundation and volunteers from the Trubodetal Plant organized ‘Cubic Warmth’, a fair selling homemade baked goods and handicrafts. All the money raised was put towards decorating the children’s ward at the Chelyabinsk Cancer Centre for New Year.

Urban festivals and workshops were held in Vyksa and Almetyevsk for children with special needs and children from large, low-income, and disadvantaged families. In Blagoveshchensk, OMK Participation and volunteers from the Blagoveshchensk Valves Plant decorated the city library with New Year handicrafts ready for ‘Every Little Christmas Tree Helps’, an event for young people run by the Blagoveshchensk society for disabled children.

for #GivingTuesday40 events

#GIVINGTUESDAY

Also as part of the #GivingTuesday movement, more than 70 employees from OMK’s Moscow office and company partners participated in the blood drive at the Federal Biomedical Agency’s Blood Centre. OMK employees and representatives of Metallinvestbank and Techsnabexport gave blood alongside sporting heroes from the Russian Kyokushin Federation (a martial arts organization): Russian Cup winner Beka Kurtsikidze, undisputed world champion Ashot Zarinyan, reigning world champion Tariel Nikoleishvili, and other famous athletes.

Inspired by another OMK Participation initiative, during the #GivingTuesday ‘Going Public Week’ from 22 to 29 November, more than 150 OMK employees and friends of the foundation took photos and posted them on the initiative’s website and social media with their stories about what they had done to make a difference. OMK’s Moscow office took an unconventional approach to the idea of going public: an artist created a scribing wall filled with sketches of the employees and their good deeds.



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5.6Prizes

OMK

Third place in the category ‘For supporting and developing social entrepreneurship’ in a competition held by the Russian Union of Industrialists and Entrepreneurs (RSPP), Russian Business Leaders: Dynamics and Responsibility 2016

‘I Am A Citizen’ Prize from the Civic Chamber of the Russian Federation

First place in the category ‘Best Programme Promoting the Development of Non-profits, Volunteerism and Philanthropy in Regions where the Company Operates’ (for the OMK Partnership competition) in the Corporate Charity Leaders competition 2016

Second place in the category ‘Best Programme Conducted in Partnership with Another Business’ in the Corporate Charity Leaders competition 2016

Second place in the ‘Champions of Good Deeds’ competition for the programme to develop corporate volunteerism in the company

Listed by the RSPP as one of the best companies for ‘Responsibility and Openness’ and ‘Sustainable Development’

VSW

Winner of the Nizhny Novgorod Phoenix prize for corporate volunteerism

Third place in the category ‘For Participation in Solving Social Problems in the Regions and Expanding Corporate Charity’

‘Philanthropist’ certificate for active charity work in Nizhny Novgorod Region

BVP Prime Minister of the Government of Bashkortostan Rustem Mardanov declared the OMK Partnership competition a “model of systemic charity” and recommended that this best practice be rolled out across the region

Trubodetal

Winner of a ’Ten Good Deeds’ prize in the ‘Company of Good Deeds’ category

Winner of the ‘Changing World’ competition for social achievements organized by the Chelyabinsk Regional Legislative Assembly

CMW ‘Volunteer of Russia 2016’ badge of public recognition in the category ‘Socially Responsible Business Partner for Volunteer Initiatives’



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5.7 RESPONSIBLE PROCUREMENT

OMK is a private company, and therefore its procurement operations are not subject to regulation by Russian Law 223-FZ. Procurement is governed by internal regulations. OMK’s supply policy is determined by fundamental procurement principles: transparency; collegiality; competence; competitiveness; responsibility; and support of its own producers.

OMK’s objective is to ensure timely fulfilment of orders required for production with the optimum combination of quality of the physical resources, labour and services procured, reliability of supply, and economically justified costs.

Corporate procurement is by a two-level system:

The procurement office of the parent company provides planning, methodology, control, development,

and evaluation of procurement activity.

Processing is carried out by the enterprises’ procurement offices.

G4-12 DMA


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5.7Foreign purchases are made in Austria, the Netherlands, Japan, Germany, and other countries.

The company is actively expanding import substitution in procurement by its production enterprises. In 2016, OMK continued its policy of developing its strategic partnership with domestic suppliers of primary materials: slabs, sheets, steel billets, and anti-corrosion coatings.

In addition to the long-term cooperation between OMK and NLMK with regard to the supply of steel slabs for the Thick-Plate Mill 5000 at VSW, work with Metalloinvest on the supply of steel billets with particular specifications for the production of solid railway wheels continued in 2016.

Close cooperation with a Russian partner has made it possible to substitute imports of a large percentage of insulation coatings; now, up to 70% of coated pipes are manufactured by OMK using polyethylene produced by a Russian company, Metakley.

The switch to strategic sourcing and category management in procurement was made in 2016. The demand for physical resources, labour and services is divided into categories, for which cost management strategies are developed for the entire life cycle. This is a new tool for OMK which is already making it possible to identify previously hidden reserves where savings can be made and systematically improve production efficiency.

After doing a thorough analysis of the market, the costs for each category and the challenges of production, it is possible to switch to a multi-year strategic partnership with suppliers. It is important to note that the trust at the heart of the partnership is based on economic indicators that are mutually profitable, transparent and understood by all parties, a past history of working together successfully, and common strategic objectives.

74.393%

-21%Share of procurement from Russia exceeds

billion roubles

Total procurement of feedstock, materials and equipment in 2016

RESPONSIBLE PROCUREMENT


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For suppliers, a strategic partnership with OMK means a stable, long-term relationship, an opportunity to develop their products and services together with OMK, and increased brand recognition by supplying products for such important projects as Nord Stream 2, Power of Siberia, and so on.

For OMK, increasing the number of strategic partners ensures a reliable and efficient supply chain, and that gives us confidence that we can fulfil our obligations to our customers.

The objective of the new system for assessing suppliers and contractors is to improve procurement efficiency by applying advanced, systemic tools for qualification and certification and for managing suppliers’ development.

The main advantages are:

A uniform supplier qualification and certification assessment system for all OMK enterprises. Suppliers are assigned a rating.

Working only with qualified and certified suppliers makes it possible to use risk, knowledge and change management tools.

Supplier development within the framework of special programmes aimed at lowering costs in the supplier value chain while guaranteeing the required specifications and qualities, reducing turnaround time, and improving reliability.

The project is currently at the stage where a pilot qualification and certification assessment is being introduced as part of the development of strategies for several categories. The system automation requirements are also being formalized.

In addition to the systemic advantages, the savings over several years will amount to tens of millions of roubles.

5.7

1

2

3

EXAMPLES OF LONG-TERM COOPERATION WITH RUSSIAN SUPPLIERS3M RussiaSupplier of anti-corrosion materials for coated pipes. A long-term partnership with development of new materials in response to OMK customer demand. Formula pricing for materials enables both parties to plan costs.

RKhI Vostok-Service + Metall ProjectStrategic cooperation in carrying out refractory work on steelmaking units. Over a three-year period of joint work, the resistance of steel pouring ladles was increased by half as much again, reducing refractory consumption and thus cutting costs.

TulachermetA strategic agreement for the supply of steelmaking pig iron. Tulachermet is a major independent producer of pig iron, while OMK is the largest consumer of pig iron on the domestic market. A five-year contract reduces the risk of failure to deliver supplies.

RESPONSIBLE PROCUREMENT



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KEY ABBREVIATIONS USED IN THE OMK ANNUAL REPORT 2016:

APP — Almetyevsk Pipe Plant

BVP — Blagoveshchensk Valves Plant

VSW — Vyksa Steel Works

VPS — Vyksa Production Site

MMTUR — Mining and Metallurgical Trade Union of Russia

CRM — Casting and Rolling Mill

TPM-5000 — Thick-Plate Mill-5000 at VSW

OGP — oil and gas pipes

R&D — research, development and experimental design work

PPE — personal protective equipment

LDP — large diameter pipes

CMW — Chusovoy Metallurgical Works

APPENDIX А

OIL AND GAS PIPES AND TUBES DIVISION DETAILED STOCK LIST

• Hot-rolled sheet steel in coils and sheets for large and medium diameter pipes, also 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

• Straight-seam and single-seam electrically welded pipes for gas, crude oil, refined product, and water pipelines, heating systems, and development of oil and gas fields. Strength class: up to X70. Diameter: 159–530 mm. Wall thickness: 4–12.7 mm. Maximum capacity: up to 1 million tonnes per year

• Water and gas pipes and general-purpose pipes for water and gas pipelines, heating systems, construction, and agriculture. Diameter: 12–133 mm. Wall thickness — 0.8–6.0 mm. Maximum capacity: up to 300,000 tonnes per year

• Hollow sections for construction, heavy industry, furniture manufacturing, and other industries. Cross section: from 10х10 to 300х300 mm and from 15х10 to 300х200 mm

• Casing pipes for development of oil and gas fields and well construction. Diameter: 140–245 mm. Wall thickness: 5.2–11.1 mm. Maximum capacity: up to 400,000 tonnes per year

APPENDIX B



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APPENDIX C

Section of standard Indicator Definition page/comments

Strategy and analysis G4-1 statement from the most senior decision-maker of the organization about the relevance of sustainability to the organization and the organization’s strategy for addressing sustainability

43

Organizational profileG4-3 name of the organization 1

G4-4 primary brands, products, and services 6

G4-5 location of the organization’s headquarters 5

G4-6 countries where the organization operates 5

G4-7 nature of ownership and legal form 1

G4-8 markets served 8

G4-9 scale of the organization 8

G4-10 number of employees 63

G4-11 percentage of total employees covered by collective bargaining agreements 100%

G4-12 supply chain 107

G4-13 significant changes regarding the organization’s size, structure, or ownership No

G4-16 membership of associations and/or national or international advocacy organizations 61

GRI G4 STANDARD DISCLOSURES



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Section of standard Indicator Indicator page/comments

Identified Material Aspects and Boundaries

G4-17 entities included in the organization’s consolidated financial statements 5, 55

G4-18 process for defining the report content and the aspect boundariesAccording to strategic areas for development approved by Management Board

G4-19 list of all material aspects 17, 57

G4-20 material aspects for all legal entities included in report 19, 20

G4-21 material aspects outside the organization 57

G4-22 restatements of information provided in previous reports No

G4-23 significant changes from previous reporting periods in the scope and aspect boundaries No

Stakeholder engagement G4-24 list of stakeholder groups 19, 31, 57

G4-25 basis for identification and selection of stakeholders with whom to engage 20

G4-26 organization’s approach to stakeholder engagement 57

Report profile G4-28 reporting period 31.12.2015-31.12.2016

G4-29 date of most recent previous report May 2016

G4-30 reporting cycle annual

G4-31 contact point 111

G4-32 GRI report preparation option Using standard

G4-33 policy and current practice with regard to seeking external assurance for the report Data in the report are subject to an internal audit. External assurance not conducted

APPENDIX C



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Section of standard Indicator Definition page/comments

Governance G4-34 governance structure of the organization 33

Ethics and integrity G4-56 organization’s values, principles, standards, and norms of behaviour 15

Disclosures on management approach DMA

strategic development 17

corporate governance 31

sustainable development 57

supply chain 107

Indicators G4-EN3 energy consumption within the organization 96

G4-EN15 direct greenhouse gas emissions 90

G4-EN23 total weight of waste 91

G4-LA6 type of injury and rates of injury 78

G4-LA9 average hours of training per year per employee 59

G4-LA12 composition of governance bodies and breakdown of employees per employee category 59

G4-SO1 operations with implemented local community engagement 98

APPENDIX C



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CONTACT INFORMATION

ОМКBuilding 2, 28 Ozerkovskaya Nab. ,Moscow, 115184 RussiaTel: +7 (495) 231-77-71Fax: +7 (495) 231-77-72 Email: [email protected] Website: www.omk.ru

CONTACT INFORMATION

VYKSA STEEL WORKS45, Ul. Bratiev Batashevykh,Vyksa, Nizhny Novgorod Region, 607060, RussiaTel: +7 (8 800) 250-11-50Fax: +7 (831-77) 3-76-05Email: [email protected]

ALMETYEVSK PIPE PLANT35, Ul. Industrialnaya,Almetyevsk, Republic of Tatarstan, 423450, RussiaTel: +7 (85-53) 45-89-47 Fax: +7 (85-53) 45-90-26 Email: [email protected]

TRUBODETAL PLANT23, Ul. Chelyabinskaya,Chelyabinsk, 454904, RussiaTel: +7 (351) 280-09-41Fax: +7 (351) 280-12-13Email: [email protected]

CHUSOVOY METALLURGICAL WORKS13, Ul. Trudovaya, Chusovoy,Perm District, 618200, RussiaTel: +7 (34256) 6-33-33Tel/Fax: +7 (34256) 6-35-71Email: [email protected]

BLAGOVESHCHENSK VALVES PLANT1, Ul. Sedova,Blagoveshchensk, Republic of Bashkortostan, 453430, RussiaTel: +7 (34766) 2-19-85Fax: +7 (34766) 2-13-78, 2-17-32Email: [email protected]

G4-31

annual report 2o16ar2016.omk.ru/eng/files/omk_ar2016_eng.pdfthe omk annual report for 2016 includes...

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