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Investor Presentaiton

Management's Discussion and Analysis Nine months ended September 30, 2011 The following table provides a breakdown of the cost of sales for the periods presented below: Nine-month period ended 30 September 2011 2010 Change Change in millions of U.S. dollars in millions of U.S. dollars in % Raw materials and 2,843 2,099 744 35% consumables Labour costs 495 397 98 25% Energy and utilities 305 242 63 26% Depreciation 197 163 34 21% Other costs 281 227 54 24% PRODUCTION COST 4,121 3,128 993 32% Change in finished goods and work in progress (135) (125) (10) Cost of externally purchased goods and obsolete stock and write offs 50 15 35 233% TOTAL COST OF SALES 4,036 3,018 1,018 34% The principal components of the cost of sales are discussed below. Raw materials and consumables 8% Raw materials and consumables are principle components of the pipe costs; they include scrap, coils, steel sheets, ferroalloys, steel billets and other consumables. Growth in prices for raw materials utilized in pipe production and changes in the product mix contributed U.S.$412 million to total growth of the cost of sales. All our divisions were exposed to volatility in prices for certain raw materials in the first nine months of 2011 compared to the corresponding period of 2010. In the Russian division, average purchase prices for scrap and coils increased 31% and 17%, respectively. Average prices for scrap and coils in the American division increased 23%. The average purchase price for scrap in the European division was up 25%. Our sales growth resulted in higher production volumes which contributed U.S.$221 million to the increase in the cost of raw materials and consumables. The effect of translation from the functional to the presentation currency accounted for a U.S.$110 million increase in the cost of sales. Labour costs Growth in labour costs primarily reflected increased payroll rates and changes in the Russian tax legislation in respect of the social security contributions effective from January 1, 2011, that resulted in a U.S.$67 million increase. The increase in insurance contribution rates from 26% to 34% and changes in calculation methodology also affected the labour costs in the first nine months of 2011. The effect of rehiring production workers in the American division where labour costs increased U.S.$19 million was partially offset by a U.S.$6 million decline due to a minor decrease in the headcount of the Russian division. The effect of translation from the functional to the presentation currency accounted for a U.S.$18 million increase in labour costs. Energy and utilities As a result of the growth in production volumes in the first nine months of 2011 compared to the same period of 2010, energy costs increased U.S.$28 million. 10
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