Cost of sales

In 2011, our cost of sales increased 24% to $5,307 million as compared to $4,285 million in 2010. The table below presents the cost of sales by reporting segment for the periods presented:

  Year ended December 31    
  2011 2010 Change Change
  in millions of U.S. dollars in millions of U.S. dollars %
Russia 3,752 3,066 686 22%
America 1,280 1,023 257 25%
Europe 275 197 78 40%
TOTAL COST OF SALES 5,307 4,285 1,022 24%

Russia. In 2011, an increase in the average cost per tonne, reflecting higher prices for raw materials and changes in product mix, resulted in a $235 million and $186 million growth of the cost of sales of seamless and welded pipe, respectively.

An increase in the cost of sales of seamless pipe attributable to the growth of sales volumes amounted to $184 million. The cost of sales of welded pipe, however, decreased $57 million as a result of lower sales volumes of large-diameter welded pipe.

The cost of other operations increased $18 million, while the effect of translation from the functional to the presentation currency accounted for a $121 million increase in the cost of sales of the division.

America. An average cost per tonne and changes in product mix, which mainly increased as a result of growth in coil and scrap prices, considerably affected the division’s cost of sales. The cost of sales of seamless and welded pipe increased $71 million and $74 million, respectively.

Higher sales volumes of seamless and welded pipe contributed $39 million and $69 million, respectively. In 2011, the cost of sales from other operations increased $4 million.

Europe. In 2011, an increase in the average cost per tonne caused by a significant growth of scrap prices at the end of 2010, as well as changes in product mix resulted in a $21 million increase in the cost of sales. Growth in the cost of sales attributable to an increase in sales volumes of seamless pipe amounted to $8 million.

An increase in the cost of sales from other operations in the amount of $38 million primarily reflected a substantial growth in the sales volume of steel billets.

The effect of translation from the functional to the presentation currency resulted in an $11 million growth in the cost of sales.

The table below shows our total cost of sales by group of products for the periods presented:

  Year ended December 31    
  2011 2010 Change Change
  in millions of U.S. dollars in millions of U.S. dollars in %
Seamless pipe 2,837 2,200 637 29%
Welded pipe 2,192 1,875 317 17%
COST OF SALES — PIPE 5,029 4,075 954 23%
Other operations 278 210 68 32%
TOTAL COST OF SALES 5,307 4,285 1,022 24%

The following table provides a breakdown of the cost of sales for the periods presented:

  Year ended December 31    
  2011 2010 Change Change
  in millions of U.S. dollars in millions of U.S. dollars in %
Raw materials and consumables 3,721 2,972 749 25%
Labour costs 662 540 122 23%
Energy and utilities 400 336 64 19%
Depreciation 258 218 40 18%
Other costs 378 313 65 21%
PRODUCTION COST 5,419 4,379 1,040 24%
Change in finished goods and work in progress (147) (171) 24 (14)%
Cost of externally purchased goods and obsolete stock
and write offs
36 77 (41) (53)%
TOTAL COST OF SALES 5,307 4,285 1,022 24%

The principal components of the cost of sales are discussed below.

Raw materials and consumables

Raw materials and consumables are the principal components of our costs; they include scrap, coils, steel sheets, ferroalloys, steel billets and other consumables.

Growth in purchase prices and changes in the consumed raw materials structure, driven by the current product mix, contributed $472 million to the growth in the total cost of sales.

All our divisions were exposed to volatility in prices for certain raw materials in 2011 as compared to 2010. In the Russian division, average purchase prices for scrap and coils increased 25% and 17%, respectively. Average prices for scrap and coils in the American division increased 22% and 19%, respectively. The average purchase price for scrap in the European division was up 20%.

Our sales growth resulted in higher production volumes which contributed $184 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 $93 million increase in the cost of sales.

Labour costs

Labour costs growth in 2011 resulted mainly from the increase in payroll rates in all divisions of the Group, as well as from changes in the Russian tax legislation in respect of social security contributions effective from January 1, 2011 which entail an increase in insurance contribution rates from 26% to 34% and changes in the calculation methodology. The foregoing accounted for $93 million of the change in labour costs.

The growth of the American division’s headcount due to rehiring production workers accounted for a $23 million increase in labour costs; this was partially offset by a $10 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 $16 million increase in labour costs.

Energy and utilities

An increase in prices for energy and utilities consumed in production processes resulted in energy costs growth of $34 million in 2011 as compared to 2010.

As a result of growth in production volumes in 2011 as compared to 2010, energy costs increased $18 million.

In 2011 as compared to 2010, on average, the electricity and natural gas tariffs in the Russian division increased 13%. In the American division, the average electricity tariff barely changed while the average natural gas tariff decreased 6% because of the regressive tariffs system. The average electricity and natural gas tariffs in the European division were up 28% and 15%, respectively.

The effect of translation from the functional to the presentation currency accounted for a $12 million increase in energy costs.

Depreciation

Depreciation increased $40 million in 2011 as compared to 2010. The effect of translation from the functional to the presentation currency accounted for a $7 million increase. The principal share of the remaining increase relates to the reduction of estimated useful lives of some open-hearth furnaces, a pilger mill and the 2520 welded pipe mill in the Russian division due to the planned replacement of this equipment before the end of the previously assessed useful lives.

Other costs

Other costs include repair and maintenance, contracted manufacture, transportation among production sites, taxes and other expenses. Growth of other expenses was consistent with the movement in operating activity.

The effect of translation from the functional to the presentation currency accounted for a $4 million increase.

Change in finished goods and work in progress

The gradual growth of finished goods and work-in-progress balances in 2011 and 2010 reflects growing prices for raw materials and tubular products as well as increased stock driven by the growth of sales volumes.

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