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.
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