OMK Eng 2-2

Moscow, 2006
www.omk.ru
ANNUAL REPORT
Uni te d Me tallurgical C omp any
Table of contents
1. INTRODUCTION
Message from Chairman of the Board of Directors 2005 Events: Major Achievements and Projects 4 1
Message from Chairman

of the Board of Directors
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2. COMPANY PROFILE
Group Structure Group Strategy Key Financial and Performance Indicators 12 8 9
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3. PIPE-ROLLING BUSINESS
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4. WHEEL-ROLLING BUSINESS
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5. METALLURGICAL BUSINESS
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6. PRODUCT QUALITY. TECHNOLOGIES AND INNOVATIONS
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7. PERSONNEL DEVELOPMENT. SOCIAL RESPONSIBILITY.
Message from Anatoly Sedykh, Chairman of the Board of Directors of United Metallurgical Company
The year 2005 became significant and meaningful for OMK. We were fulfilling the tasks contained in our long-term development program by pursuing large-scale modernization, installing new production lines, mastering new promising products, and implementing high quality standards. The principal task of the OMK Pipe-Rolling Division is to meet requirements of Russian energy and transportation companies operating in the fuel and energy sector. These companies are in the process of implementing large-scale projects aimed at the construction of main pipelines and the development of the largest oil and gas fields. Over the past three years, including 2005, OMK has invested in pipe production more than $500 million. The manufacture and sale of pipes of various sizes and grades increased by 10 percent as compared with 2004; it is planned that we will achieve a 40-percent increase in 2006. In April 2005, Vyksa Steel Works put into operation a line for manufacturing 1,420 mm single-seam longitudinal welded pipes with a wall thickness of up to 48 mm, rated for pressures of up to 250 atm. This production line is
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8. FINANCIAL STATEMENTS
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equipped with multilayer external and internal coating facility, and its annual capacity is 570 thousand tonnes. This package of technologies is unique for the Russian and FSU pipe industries. We currently supply large-diameter pipes to Gazprom, Transneft, LUKOIL, TNK-BP, and other companies for the construction of the North European Gas Pipeline, Eastern SiberiaPacific Ocean Oil Pipeline, as well as for the development of Vankorskoye, Varandeyskoye, Kovyktinskoye, Talakanskoye, and other fields. We believe that offshore field development will become the most important direction of the Russian fuel and energy sector development in the near future. And now, Vyksa Steel Works is mastering the manufacture of large-diameter pipes for subsea pipelines. The Company has already acquired experience of making pipes for offshore applications; specifically, in October 2005, we completed the deliveries of pipes for the subsea section of the Varandeysky oil terminal pipeline.
United Metallurgical Company
Annual Report 2005
Introduction. Message from Chairman of the Board of Directors

OMK actively develops the manufacture of railroad wheels by constantly implementing innovative solutions in production processes and upgrading the equipment. In 2005, OMK produced 800 thousand wheels, whereas the design capacity is 560 thousand. This is a record-breaking result in the global wheel rolling industry. Our specialists developed and set up the production of several wheel models with improved service life and increased loads. These are our intellectual and financial investments in the strategic partnership with Russian Railways. In 2005, the OMK Metallurgical Division continued to implement its facility modernization programs, improving efficiency, optimizing production costs, and adopting environmental protection technologies. Gubakha Coke completed the first stage of the overhaul repair of coke-oven battery No. 1-BIS, whose commissioning will make it possible to double the output. It should be noted that Chusovoy Metallurgical Works has mastered the manufacture of a promising product, Vanadium-80. In 2005, the production and sale of automobile springs, varied rolled products, ferrovanadium, and coke remained at the 2004 level. OMK was successful in the borrowed capital market. In 2005, the Company floated the first issue of United Metallurgical Company bonds. During the bidding process, demand for OMK bonds was 1.8 times as much as supply. The year 2005 ended with OMKs high financial results: revenues increased by 32% as compared with 2004; profits, by 37%. The growing results are due to the commissioning of new advanced production facilities, harmonization of marketing policy with manufacture, implementation of engineering solutions that did not require any increase in operating personnel, and optimization of business processes. The development of United Metallurgical Company is in line with the principal targets contained in industrial policies of the Russian economy: modernization of production, raising of social and environmental standards, implementation of cutting-edge technology, settlement of import substitution issues. The Companys task is not limited to the achievement of the highest possible financial results. OMK, as a strategic partner of the countrys key economic sectors, also contributes to the development of Russian industry. In 2005, OMK made several steady steps toward its strategic goal: achieving the industrys highest labor efficiency results by 2010, insuring long-term competitive advantages in the main businesses, and becoming the most efficient company in the Russian ferrous industry. We intend to become a world level company! And this is more than only a hope; this is a reality that we are building. A. M. Sedykh Chairman of the Board of Directors OMK
OMK is successful at developing Vyksa Steel Works facility for manufacturing mediumdiameter pipes. In the gas and oil pipe segment, we carried out a large-scale modernization and rehabilitation of production facilities, which allowed us to improve labor efficiency and increase output. Vyksa Steel Works is also planning to supply a full range of casing pipes with sealed threads designed for well completion. As part of medium-diameter pipe production development, OMK began the construction of the Casting and Rolling Complex near the town of Vyksa, Nizhni Novgorod Region, in June 2005. The Facility will employ the 21st centurys technologies. The commissioning of equipment under the Projects Phase 1, having a capacity of 1.2 million tonnes of rolled products with special properties, is scheduled for late 2007. This will allow us to provide our own raw materials for medium- and small-diameter pipe production at Vyksa Steel Works and Almetyevsk Pipe Plant.
The Media About Us
Anatoly Sedykh: We Are Not in Pursuit of Anyone.

It took OMK only two years to independently construct its own modern production line for 1,420 April 27, 2005, Maria Rozhkova mm pipes at Vyksa Steel Works. Moreover, in several years, OMK will be less dependent on Russian steelmakers: Vyksa Works will have a casting and rolling facility around $500 million worth. As for alliances, Mr. Sedykh is no longer interested in them. He wants to create a well-balanced metallurgical group-and absolutely independently. Mr. Sedykh told the Vedomosti about his plans.
Only several years ago, United Metallurgical Company (OMK) placed its hopes on entering into alliances with Chelyabinsk Tube Rolling Plant and Severstal. However, in 2002, the owners of Chelyabinsk Tube Rolling Plant decided to form their own group, and the plant left OMK. Almost simultaneously, OMK and Severstal abandoned the Alliance 1420 project for the joint production of large-diameter pipes. But OMKs co-owner and permanent chief Anatoly Sedykh did not give up. It took OMK only two years to independently construct its own modern production line for 1,420 mm pipes at Vyksa Steel Works. Moreover, in several years, OMK will be less dependent on Russian steelmakers: the Vyksa works will have a casting and rolling facility around $500 million worth. As for alliances, Mr. Sedykh is no longer interested in them. He wants to create a well-balanced metallurgical group-and absolutely independently. Mr. Sedykh told the Vedomosti about his plans. Unlike your competitors-Chelyabinsk Tube Rolling Plant and Pipe Metallurgical Company (TMK)-you are not striving for expansion of operations, not buying new assets; instead, you are trying to develop what you own. Why? Youre correct, we are not going to acquire new pipe manufacturing assets in the near future. We are a metallurgical company rather than a pipe manufacturer. Unlike TMK and Chelyabinsk Tube Rolling Plant, we are a company with a complete metallurgical cycle. And we consider it to be our serious competitive advantage. Our production is not limited to pipes; we have a quite wide range of products. Our goal is to create a well-balanced company. There are different understandings of leadership criteria. While somebody aspires to capture a large market share and become number one in terms of production volume; others, like OMK, aspire to create the industrys most efficient company and use it to become the leader. What are the fundamental principles of the OMK strategy? We abide by four principles. First, its concentration of production. And, unlike Pipe Metallurgical Company and Chelyabinsk Tube Rolling Plant, not inside a single company, but inside a single business unit. For example, we put a 1,420 mm pipe production line into operation at an active large-diameter pipe workshop. Now, the two lines operate on one and the same production site. However, the workforce didnt change. This approach allows us to considerably improve the efficiency of use of the enterprises infrastructure. The same formula is applied to the rehabilitation of the other production units. We are building a new coke-oven battery at Gubakhinsky Coke: this will enable us to double the production; the plant will annually produce 1.5 million tonnes of coke. In addition, this is extremely important in a social aspect, because OMKs wage level is directly linked to labor efficiency. Our employees have already understood that the more labor efficiency, the more compensation. The second principle is vertical integration. OMK has all necessary cast iron and coke. We are the largest steel strips consumer in Russia; the company purchases more than one million tonnes of steel strips a year. It would be very logical to make this steel on our own. When the
casting and rolling facility is put into operation, well be provided with our own steel strips for small and medium-diameter pipes. And in a year, OMK will also be completely provided with its own coal. Another principle is well-balanced diversification of production. We believe that being limited to pipe production is risky, because the pipe market has business cycles. A company can be stable only if having a wide range of products. Pipes currently account for slightly more than 50 percent of OMKs sales. The rest is other products: rolled section steel, cast iron, ferrovanadium, automobile springs, shape steel, railroad wheels . . . . And the fourth principle is the implementation of state-of-the-art technology. We are not interested in the purchase of any obsolete or worn-out production assets, because the efficiency of process solutions is becoming number one in the world. Within the next four years, the company will invest over $1 billion in production assets. What do you lack to create the vertically integrated company that youve just described? We dont have sufficient sheet rolling; but we are working on it: the company will build a casting and rolling facility in 2.5 years. And this will be the most advanced sheet production in Russia and, possibly, in the world. You said that you were a metallurgical company rather than a pipe manufacturer. Meanwhile, youve invested most funds in pipes . . . . Yes, but last year. This year, our main investment project is connected with satisfying the companys demand for sheet steel by providing OMK with its own sheets. Above all, we need the casting and rolling facility to satisfy the demand of our pipe manufacturing division; meanwhile, steel sheets are a separate commodity item. The facility personnel will exceed 1,000 employees, and its output will be 1.2 million tonnes a year. Labor efficiency at the casting and rolling facility will be several times as high as that of Russian manufacturers of similar products. Besides, the wheel rolling business is of principal importance to the company. OMK and Russian Railways signed a unique contract for the supply of around five million railroad wheels in the amount of over $1.2 billion until 2010. This will cover 60 percent of the demand of Russian Railways for wheels. Last year, we
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Introduction. Message from Chairman of the Board of Directors

Gazprom is ready to buy 100,000 tonnes of pipes from us this year. What is the possible payback period for your investments? Three years at least. Severstal is currently carrying out a similar project. However, its Kolpino plant will only be put into operation in several years. Do you think that they are late or they still have a chance of finding themselves in that right time youre talking about? Will the large-diameter pipe market be growing for a long time? During the next four or five years, the pipe market situation will be favorable for manufacturers. There will be enough space in the market for Severstal too. They are a very serious competitor. Severstal has its own plates. But this is not the decisive factor. Indeed, when it comes to price competition, it turns out that competing products arent pipes, but-for example-Severstal-made sheets and sheets that we buy from another supplier. To make gains in this situation, Severstal will have to supply sheet steel at cut prices, thus subsidizing its pipe production. I dont think theyre building the Kolpino plant for these purposes. You were once going to produce largediameter pipes in association with Severstal. Do you regret that you parted from them later? Perhaps, such an alliance would reduce the payback period. On the other hand, it took us only two years to independently complete this project. When youre on your own, you clearly understand that the time has come for action, you have to make a decision. When youre a partner of somebody with a different mentality, decision making is a slower process. You have to prove something to your partner, persuade your partner, then bargain . . . . The process takes a longer time, you lose time. Thats why Im very cautious about alliances. The casting and rolling facility will use scrap as raw material. How will you tackle the raw material problem? There is no such problem. In my opinion, the fact that the facility is located near Vyksa is optimal for such production. Indeed, this area is rich in metal-processing companies; Central Russia is abundant in scrap. Weve recently established a company called OMK-EkoMetall that will be engaged in scrap picking in this area. This company will procure around a million tonnes of scrap metal a year. Will the commissioning of the casting and rolling facility satisfy your demand for sheet steel completely? As for small and medium-diameter pipes, yes. But in the case of large-diameter pipes, well buy plates from outside suppliers. Do you plan to increase your pipe output? Including the output of our new production line, we should reach 1.4 or 1.5 million tonnes next year. The current leader in pipe exports is TMK. Does OMK plan to increase its exports? This is not a championship, and we are not in pursuit of anyone. However, well be stepping up our exports. Our companys goal is to export 30 percent of output by 2008-2009. The Russian pipe market is not bottomless. Ours is probably one of the largest markets in the world, but it has limits. Moreover, the Russian metallurgical and pipe industries have serious competitive advantages. Are you going to buy anything from abroad? For instance, from CIS countries? No. We have a large enough investment program in Russia. Speaking about how to make our investments more efficient, we believe that Russia is the most attractive to us. At present, annual pipe consumption is about 5.5-6 million tonnes, whereas OMKs capacity is 2.5 million tonnes. With 100-percent capacity utilization, we can theoretically corner a market share close to 40 percent. Besides, its important that these products will come from one and the same plant. Therefore, costs will be at the minimum level. To increase a market share, its not necessary to buy assets. For example, Chelyabinsk Tube Rolling Plant purchased Pervouralsky Novotrubny Works. They are virtually alike in terms of equipment and technology. Will they be able to utilize all of this capacity? Perhaps, they will face a problem: which facilities should be closed? But even if a part of these facilities is closed, TMK, OMK, or Interpipe can make similar products, and its not for sure that such closure will strengthen their market positions. Do you share the fashion for the globalization and consolidation of the metallurgical industry? Each specific case should be considered separately. The worlds largest steelmaking company, Mittal Steel, is pursuing an understandable strategy. This strategy consists in the purchase of undervalued assets in developing countries. [Mittal Steel owner Lakshmi] Mittal estimates that these very regions will have the largest demand for metal products in the near future. China is demonstrating impressive economic growth, which contributes to the global situation with metals in international markets. Prices are becoming higher. Mittal expects the same situation to develop in other countries. But the purchase of assets in developed countries, especially unprofitable assets, is not quite comprehensible to me. Maybe, Mittal Steel intends to use this to promote its own products in sheltered markets. Perhaps, this is simply diversification of political risks. It would be incorrect to say that globalization is only either good or bad. Would an amalgamation of, for instance, OMK and TMK be a wild idea? This alliance wouldnt bring about any synergy. Instead, we would first have to come to the antimonopoly agency and try to persuade them to authorize the merger; after that, we would have to justify our prices there. Even if we set aside ethical considerations, the mechanisms existing in Russia now wouldnt let this merger take place. Is OMK a profitable company now? In 2004, our consolidated revenues reached $1.43 billion, the net profit was $186 million. As compared with 2003, the revenues were increased by $500 million, and the net profit was doubled. Such growth is due to our well-balanced diversification and concentration of production. If our only product was pipes, such development would be impossible. The pipe-rolling business is not the most profitable. The cost of sheet steel accounts for 70 percent of the prime cost of pipes. What helps us is that our pipe-rolling enterprises have a wide product range. Spring has come, but none of the pipe or oil producers have made any complaint to ministries against metal makers about increased metal prices. What has changed since last year when the discussion about it was particularly serious? Indeed, we cant see the springtime aggravation. [Laughing.] In fact, the change is as follows. Of course, the prices keep on increasing. But last years increase was dramatic. Just imagine: oil companies, with everything accounted for in their budgets, suddenly saw pipe prices double. There was no clear understanding about why it was going on. It looked like somebody grabbed the opportunity to raise the price and somebody cashed in on the situation. At that time, consumers didnt understand that it was the ontic reality, that the Chinese demand for metal increased considerably. Steelmakers couldnt satisfy that demand. A serious imbalance arose, and there was a sharp rise in metal prices. Nobody was prepared for that. Now, everyone understands that it was the ontic reality. And when a price rise is several percent rather than a doubled figure, it doesnt worry anybody as much as it did at that time; moreover, budgets contain adequate figures. Indeed, gas and oil prices have shown a more impressive uptrend. Does this bear any relation to the fact that metal producers began working under long contracts? Last year, EvrazHolding entered into a one-year contract with TMK. I reply for our company only: OMK has quarterly contracts. The prices have now become stable. Will the prices come down soon? I dont think soon. Some correction is possible; however, I dont see any global factors that would show a possible reduction in metal prices in the near future. The efforts to reach an agreement with Ukraine on quotas ended in success. Are you content with everything? The agreement reached with five Ukrainian pipe plants provides that their sales in Russia should be limited to 395,000 tonnes a year. But this agreement doesnt cover largediameter pipes. The issue relating to these pipes has not been settled yet. We would be content with quotas at last years level: 230,000 tonnes. With slight proportional growth. We dont demand more severe restrictions. We understand that, in Soviet times, the Ukrainian pipe industry was directed at supplying products to the Soviet oil industry and that it is currently extremely difficult to make drastic changes. However, the Russian pipe industry is also in a difficult situation. Its important that the Russian government support us. Indeed, almost all companies in the pipe industry are local economic mainstays. How did you go into the metallurgical business? I graduated from the Moscow State Institute of Steel and Alloys; I have been in the metallurgical industry for all of my life. In 1991, I went into this business: my partners and I launched the production of ferroalloys near Moscow. We earned some money and began to think over the purchase of metallurgical assets. The first purchase was Chusovoy Metallurgical Works in 1996-1997; then Vyksa Steel Works, Shchelkovo Metallurgical Works, Gubakha Coke, and Almetyevsk Pipe Plant.
upgraded our wheel production, developed a new wheel. Its service life was extended to 12 years from seven, while the wheel price became only moderately higher. I believe that Russian Railways set a good example for natural monopolies and showed how they should cooperate with Russian manufacturers. IPOs, Eurobonds, and other instruments of raising money in the market-arent they suitable for you? You have ruble bonds, but I have never heard that you are planning to enter Western capital markets . . . . An IPO is the sale of shares. In our opinion, the company has been undervalued by investors yet, and this method of raising money is too expensive for OMK. Its not time to sell our shares still. Currently, were not interested in Eurobonds either. We have enough money for investments. We finance our projects by using our own funds and bank loans. In 2004, the share of borrowings in our investment program did not exceed 15 percent. Loans will reach 60 percent of the financing package of the casting and rolling facility. Weve cooperated with Sberbank for a long time; in addition, we obtained export credit loans for the purchase of equipment. You say that youre undervalued by investors; and what is your own valuation of OMK? I wouldnt like to answer this question. The amount of investments in the construction of the foundry and rolling facility will be about $500 million. You spent about $200 million on the setup of 1,420 mm pipe production. These are expensive projects; arent you afraid that they may fail to pay back? What if these pipes are found not to be in demand? Indeed, Gazprom gave you no guarantees . . . . Im sure that the 1,420 mm pipe production line is launched at the absolutely right time. Imagine that we signed a fixed-price contract with Gazprom two or three years ago: what would we do now? Skelp price are constantly on the increase. Thats why secured contracts involve great risks today. Of course, we discussed the issue with Gazprom. And we agreed that, if our prices are at the market level, Gazprom would buy pipes from us. Legally, this is not a binding contract, but a moral obligation. However, Im sure of the sales of largediameter pipes. Pipes are in enormous demand now: activities of Transneft and Gazprom overlapped. Several large-scale projects simultaneously started in Russia, CIS countries, Iran, where they need 1,420 mm pipes as early as now. Therefore, I think that pipe demand will be exceeding supply during the next two years. As early as now, we have orders for more that this line can actually produce. And weve been engaged in the casting and rolling facility project since 2002. The construction is to begin in early May; weve already entered into a contract agreement with Gama Endustri, Turkey. The reason why this project is important for OMK is not limited to higher prices of metal products. First of all, its about pipe quality. High quality pipes chiefly require high quality steel sheets. Domestic steelmakers cant offer such quality yet. This is not because they make low quality products. In the pipe manufacturing context, they simply occupy the lower quality segment. Their area of specialization is medium-quality rolled steel. The production of 1,420 mm pipes will start this summer. Have you concluded your first contract?
Annual Report 2005
Introduction. 2005 Events: Major Achievements and Projects
2005 Events: Major Achievements and Projects

January
Vyksa Steel Works held the second awarding ceremony of the Ivan and Andrey Batashev Foundation. Vyksa Steel Works put into operation a unit for local heat treatment of weld seams under the Electric-Weld Pipe Workshop 3 rehabilitation project.
February
The Vyksa Steel Works casing pipe workshop put into operation a new line for applying coatings to pipes. This allowed improving the efficiency of the casing pipe workshop and will enable the Works to enter the market of oil well tubing with phosphated couplings.
March
United Metallurgical Company and Danieli & C. Officine Meccaniche SpA, Italy, signed a contract for supply equipment for the construction of the Casting and Rolling Complex in the Nizhni Novgorod Region. Vyksa Steel Works was awarded the Banner of Honor of the Governor of the Nizhni Novgorod Region in the category For High Investment Activity. Chusovoy Metallurgical Works was recognized as an excellent supplier of KAMAZ, the main consumer of automobile spring-foils.
April
Vyksa Steel Works put into operation Russias first line for manufacturing 1,420 mm singleseam longitudinal welded pipes with a wall thickness of up to 48 mm, rated for pressures of up to 250 atm. The annual capacity is 570 thousand tonnes. This package of technologies is unique for FSU countries. OMKs organizational and financial participation resulted in opening the educational building of the local branch of the Moscow State Institute of Steel and Alloys (MISIS) in Vyksa, Nizhni Novgorod Region.
May
The Federal Financial Markets Service of the Russian Federation (FFMS) registered the issue of certified interest-bearing inconvertible bearer bonds (Series 01) of United Metallurgical Company (OMK) floated by way of public offering.
June
United Metallurgical Company held a ceremony in the Vyksa District, Nizhni Novgorod Region, on the occasion of the beginning of construction of the OMK Casting and Rolling Complex. Vyksa Steel Works hosted the second (summer) stage of sports events for OMK enterprises employees OMKiada 2005. Chusovoy Metallurgical Works conducted panel games within the framework of the corporate festival OMK Youths 2005. United Metallurgical Company floated its first issue of bonds. During the bidding process,
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1
July
demand for OMK bonds was 1.8 times as much as supply
Chusovoy Metallurgical Works held the environmental conference Dialog About Smoke. The conference discussed environmental issues relating to Chusovoy and formulated top-priority tasks in the environmental protection area. Vyksa Steel Works dispatched to Gazprom the first commercial batch of 1,420 mm pipes produced at its TESA-1420 line.
August
Vyksa Steel Works redeemed its bond issue. Gubakha Coke completed the first stage of the overhaul repair of coke-oven battery No. 1-BIS Chusovoy Metallurgical Works signed a tripartite agreement with Perm Territory medical and insurance organizations for the arrangement of medical recreation activities for the Works personnel under the Corporate Health Program.
September
At the Magistral-2005 exhibition, OMK made a presentation of the wheel with enhanced rim hardness made by Vyksa Steel Works. Vyksa Steel Works put into operation a line for applying two or three-layer polyethylene / polypropylene external coatings to 508-1,420 mm pipes.
October
OMK completed the deliveries of pipes for the subsea section of the Barents Sea pipeline connecting the Varandeysky oil terminal with the Arctic marine terminal. Vyksa Steel Works dispatched the first thousand of tonnes of 1,420 mm pipes for the construction of the land section of the North European Gas Pipeline. OMK summarized the results and conducted a business game under the 100 Best Managers Program; the final stage of the program was held on the Maldives.
December
A ceremony was conducted on the occasion of the opening of the North European Gas Pipeline (NEGP). Chairman of the Russian Government Mikhail Fradkov and Chairman of Gazproms Management Committee Alexey Miller wrote their signatures on a Vyksa-made pipe. At the construction site of the OMK Casting and Rolling Complex in the Vyksa District, Nizhni Novgorod Region, the builders erected the first pillar of the scrap preparation shop building. Gubakha Coke entered the final stage of the overhaul repair of coke-oven battery No. 1-BIS: prefiring installation. The coke-oven battery was brought into the drying and heating process.
November
Vyksa Steel Works put into operation a line for applying friction-reducing internal coatings to 273-1,420 mm pipes. Chusovoy Metallurgical Works launched the production of high-grade ferrovanadium. The first tonnes of ferrovanadium products containing 80% of vanadium were obtained.
Annual Report 2005
The Media About Us
Vyksa Makes 1,420 mm Pipes

which did not require large-scale investments. Then, Khartsyzsk Tube Works (without ceasing to produce 1,420 mm double-seam thin-wall pipes) had its upgraded Electric-Weld Pipe Workshop 2 make single-seam longitudinal welded pipes with diameters of up to 1,067 mm. In 2001, Khartsyzsk began the construction of a new line for manufacturing 711-1,220 mm single-seam pipes having wall thicknesses of up to 32 mm and rated for pressures of up to 100-120 atm; the pipe design incorporated an internal corrosion-resistant coating. In November 2002, the Khartsyzsk Tube Works position in the 1,420 mm market segment took a blow from Pipe Metallurgical Company (TMK). TMKs Volzhsky Pipe Plant launched the manufacture of 1,420 mm spiral welded pipes with a 18.7 mm wall thickness, meant for use in a cold climate and rated for pressures of up to 84 atm (at present, this is a working pressure of most of Gazproms main pipelines). However, as early as June 2003, Khartsyzsk Tube Works made its first 1,220 mm pipe having a 20.5 mm wall; then, its 1420 mm double-seam pipe with a 24.9 mm wall. Vyksa Steel Works embarked on the course of modernization too (its Electric-Weld Pipe Workshop 4 could have made pipes with sizes reaching 1,020 mm and wall thicknesses of up to 32 mm as early as 1996), but OMK chose to create versatile and flexible manufacture of large-diameter pipes designed for use in extremely severe conditions. In fact, Russias oil and gas production projects whose beginning is planned for the near future provide for the construction of highcapacity pipelines through tundra in permafrost conditions (Yamal, Vankor-Dickson, Usa-Indiga), through vast mountainous areas and waterlogged lands (Taishet-Pacific Ocean), under water (Shtokmanovskoye field, North European Gas Pipeline). In such conditions, it is economically feasible to reduce the number of pump and compressor stations and increase pumping pressure. By upgrading the production of large-diameter pipes at Vyksa Steel Works, OMK focused on higher quality of metal used for pipes, larger wall thicknesses, as well as the possibility of making both single-seam and double-seam pipes and applying factory-made external and internal multilayer polymer coatings to pipes. Built in 2003-2004, the new production line of VSW-Electric-Weld Pipe Workshop 4 (see Project 1420)-includes a unique stage-by-stage molding press that is capable of producing 5301,420 mm pipes with a wall thickness of up to 48 mm. This product range includes single and double-seam pipes rated for working pressures of up to 250 atm; the pipe diameter is in accordance with the customers requirements: for instance, 1,420 mm for Gazprom, 1,220 mm for Transneft. As a result, the efficiency of Vyksas new line for manufacturing large-diameter pipes will not be critically dependent on any monopolistic consumer of certain pipe sizes. OMKs President Anatoly Sedykh told the press conference organized after the Project 1420 launching ceremony that he did not see any problem connected with the sale of VSWs new
V. 2005.
Russian pipe producers are ready to accept any orders from Gazprom and Transneft
In early April, Vyksa Steel Works (VSW), part of United Metallurgical Company (OMK), put into operation Russias first production line for single-seam longitudinal welded pipes with sizes ranging from 508 to 1,420 mm and wall thicknesses of up to 48 mm. The new equipment of Electric-Weld Pipe Workshop 4 can annually produce up to 500 thousand tonnes of large-diameter pipes rated for pressures of up to 250 atm (25 MPa) with internal and external corrosion-resistant coatings. VSWs new products can be used for the construction of pipelines in hard-to-reach areas and subsea pipelines. Formerly, pipes rated for pressures exceeding 9.8 MPa were bought from foreign suppliers; to all appearances, import has now become unnecessary. However, according to OMKs President Anatoly Sedykh, Russian companies still require more large-diameter thick-wall pipes than the output of the new production line. But this situation will change by the end of 2006, when Severstal launches a similar line at Izhorskiy Pipe Plant.
In the 1970-80s, at the time of construction of the transcontinental pipelines intended to supply gas from Urengoy and Yamburg to Western Europe, it was decided to increase their capacity by enlarging the pipe diameter to 1,420 mm. Those so-called Russian-size pipes were delivered to Gazprom from Germany by Europipe, a subsidiary of the steelmaking giant Mannesmann; Europipe was able to produce pipes of 400-2,800 mm in diameter and with wall thicknesses ranging from 4.5 to 400 mm. Gazproms demand for pipes was also satisfied by ILVA, Italy, and Sumitomo and Nippon Steel, Japan. To reduce the dependence on imports, the USSR launched its own manufacture of 1,2201,420 mm double-seam pipes at Khartsyzsk Tube Works as long ago as 1974. However, Khartsyzsk pipes could not compete with imported products because they had much thinner walls and did not have factory-made pipe insulation. Besides, the production of 1,420 mm multilayer pipes that was started at Vyksa Steel Works in 1982 turned out to be a failure and was closed in the end. Therefore, Gazprom and Transneft continued to buy imported pipes for their facilities constructed in the north. It was not until the 1998 crisis, when imports from Europe and Japan became too expensive, that state-owned pipeline monopolists approved development programs providing for import substitution with respect to large-diameter pipes. Domestic manufacturers of large-diameter pipes (Volzhsky Pipe Plant, Chelyabinsk Tube Rolling Plant, and Vyksa Steel Works) and Khartsyzsk Tube Works, Ukraine, interpreted the decisions made by Gazprom and Transneft as a signal to modernize their production.
On the way to the optimal decision

As the first step, all plants built facilities for applying external corrosion-resistant coatings,
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Supply Structure for LargeDiameter Pipes in the Russian Market
Vyksa Steel Works 22% Volzhsky Pipe Plant 20% Vyksa Steel Works 20% Imports (incl. Khartsyzsk Tube Works) 32%
products. Even the current demand of Gazprom and Transneft for high quality pipes will be much higher than the capacity of the new production line (up to 500 thousand t/y) in the near future. As early as 2005, Gazprom is ready to buy around 100 thousand tonnes of Vyksa pipes of 1,2201,420 mm in diameter: deliveries will begin in June after the certification of the new manufacture. Transnefts Taishet-Pacific Ocean oil pipeline will require approximately 2.8 million tonnes of 1,067-1,220 mm pipes, out of which around 1.3 million tonnes will be needed as early as 20062007. According to Mikhail Polonsky, Director General of Stroyneft (a subsidiary of Transneft), Vyksa Steel Works with its new products ranks among the most probable suppliers of pipes for this huge project. Gazprom and Transneft projects are naturally attractive to other Russian and
Project 1420
The idea of constructing a production line for single-seam longitudinal welded pipes with sizes ranging from 508 to 1,420 mm and wall thicknesses of up to 48 mm on the base of Vyksa Steel Works Electric-Weld Pipe Workshop 4 appeared in the spring of 2001 and, at first, was considered for implementation within the framework of an alliance with Severstal. In 2001, VSW created a working group, conducted research, and began to prepare a construction site for the new 400-meter-long pipe-molding shop. In addition, OMK agreed with SMS Meer, Germany, upon the design and manufacture of main equipment for the new production line. In accordance with the contract confirmed in 2003, SMS Meer delivered to VSW a plate-edge beveling machine, flanging press, hydraulic press, assembling and welding mill, expanding mill, and a unique custommade stage-by-stage molding press. In addition to SMS Meer, the equipment for the new production line was supplied by several European and CIS producers. For the delivery of 3.2-4.5 m x 11.3-12.3 m rolled sheets, Dneprovagonmash, Ukraine, made 200 special flatcars having pneumatically-actuated turntables and allowing sheets to be transported on the tilt within the dimensions of CIS and Baltic rolling stock. At the first stage (in 2003), without stopping the active production line for 1,020 mm pipes, the new production area for sheet preparation was constructed. In February 2004, Vyksa Steel Works launched the commercial production of pipes with diameters of 508-1,067 mm and wall thicknesses of up to 32 mm. October 2004 saw the beginning of the installation of the stage-by-stage molding press. On March 12, 2005, the first skelp was molded; it was X65 grade, 1016 mm in diameter and had a 19.1 mm wall. Formally opened on April 8, the new line can produce up to 570 thousand tonnes of pipes with diameters reaching 1,420 mm. This increased the total capacity of VSW Electric-Weld Pipe Workshop 4s production of large-diameter pipes to 1.5 million tonnes.
2003 .
Imports (incl. Khartsyzsk Tube Works) 40%
Volzhsky Pipe Plant 17%
2004 .
Annual Report 2005
Chelyabinsk Tube Rolling Plant 23%
Chelyabinsk Tube Rolling Plant 26%
Company Profile. Group Structure
Group Structure
United Metallurgical Company (OMK) is a group of industrial companies operating in the ferrous industry. OMK is a leading Russian manufacturer of metal products for energy, transportation, and production companies.
Pipe-Rolling Division
Vyksa Steel Works (Nizhni Novgorod Region) the leader in the Russian and CIS pipe production; a supplier of large-diameter single-seam longitudinal welded pipes for land and subsea sections of main pipelines, as well as medium-diameter pipes for hydrocarbon production and transportation, as well as for public utility pipelines. The total output of pipes of various sizes and grades exceeds 2 million tonnes a year. Almetyevsk Pipe Plant (Tatarstan) a manufacturer of steel pipes with high-quality external and internal coatings; a key supplier to the Volga area fuel and energy sector. Trubodetal (Chelyabinsk) one of the largest producers of fittings for 57-1,420 mm pipelines in Russia and CIS countries.
Metallurgical Division
Chusovoy Metallurgical Works (Perm Territory) one of the Urals oldest ferrous metallurgy companies with a complete process cycle of metal production. Major product groups: rolled section steel, automobile spring-foils, ferrovanadium. Gubakha Coke (Perm Territory) the leading coke producer in the Urals area. Schelkovo Metallurgical Works (Moscow Region) Russias unique producer of precision steel bands used for picture tube shadow masks.
Casting and Rolling Division

Under construction. Beginning of the Project: June 2005; commissioning of Phase 1: December 2007. OMK Casting and Rolling Facility (Vyksa, Nizhni Novgorod Region) production of high-quality hot-rolled steel coils (thickness: 1-12.7 mm) for small and medium-diameter pipes (21-530 mm) with high application properties. The annual capacity of equipment to be put into operation under the Projects Phase 1 will be 1.2 million tonnes.
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Company Profile. Group Strategy

development of this product group consists in the development of exports, the introduction of new products, and the improvement of technology, namely, the transition to the continuous casting of steel for wheel blanks. The main strategic initiatives of the Companys Metallurgical Division are primarily connected with the implementation of projects aiming to insure energy and raw material security and optimize the existing production. The well-balanced diversification of OMKs metallurgical production is based on the introduction of new product types and the improvement of process solutions. Chusovoy Metallurgical Works, Russias only enterprise with a complete cycle of ferrovanadium production, has developed and is mastering the technology for manufacturing the Vanadium-80 high-grade ferrovanadium, which makes it possible to enhance the Companys competitive strength in the world ferrovanadium market. In the automobile spring-foils segment, OMKs top-priority task for 2006-2010 is to continue to be the leader in the Russian market. Within this product group, Chusovoy Metallurgical Works plans to launch the production of small-plate spring-foils in 2006, which will increase the output of automobile spring-foils, expand the product range, and improve the product quality. One of the largest projects of the OMK Metallurgical Division started in 2005 is the repair of a coke-oven battery at Gubakha Coke. This will increase the annual production of the Companys own coke to 1.3 million tonnes. The OMK investment activities planned for the near years are aimed at the implementation of strategic projects related to insuring the Companys raw material security, constructing the casting and rolling complex designed for the manufacture of OMKs own steel sheets, and enhancing product competitiveness and technology.
Group Strategy
OMK aspires to become one of the most efficient metallurgical companies in Russia.
It is of principal importance to United Metallurgical Company to achieve profitable growth in its business, balancing its goals against the interests of its shareholders and employees, customers, governmental and local authorities, and the entire society. The OMK Group is making active progress and striving to become the leader in all key markets. The following principles underlie the Companys strategy:
Vertical integration of the OMK enterprises Concentration of production and investment on a limited number of production sites with the maximum potential Well-balanced diversification of production Implementation of state-of-the-art technology and equipment; constant search for and practical use of more advanced process solutions Increased share of controlled costs Development of the Companys personnel potential The above principles of business management enable the Company to achieve high labor efficiency and control its costs to the maximum extent. Within the scope of this strategy, the Companys management focuses on improving the competitive advantages of products, building up professional management systems at the OMK enterprises, identifying and realizing the enterprises inner potential, creating and implementing investment programs aimed at technical development, studying and adopting the worlds best practices in the field of management, engineering, and technology. The key event for the Companys PipeRolling Division in 2005 was the commissioning of a unique line for manufacturing large-diameter pipes at Vyksa Steel Works. The new production line is designed for the manufacture of single-seam longitudinal welded pipes with corrosion-resistant external and internal coatings, with sizes ranging from 530 to 1,420 mm and wall thicknesses of up to 48 mm. The design capacity is more than 570 thousand tonnes. Pipes produced by the new line withstand pressures reaching 250 atm and are intended for main oil and gas pipelines, which is in full compliance with all requirements of the major consumers of such products: Gazprom, Transneft, ExxonMobil, Royal Dutch/Shell and other Russian and foreign companies. In addition, the large wall thickness and the ability to withstand high pressures allow Vyksa pipes to be used for the implementation of offshore development projects. The year 2005 saw the beginning of the construction of the Companys own casting and rolling facility. The Casting and Rolling Complex (CRC) will be built at the village of Motmos, Vyksa District, Nizhni Novgorod Region. The CRC will be the worlds first facility specializing in the manufacture of rolled products meant for pipes with special properties. The CRC will produce 1-12.7 mm hot-rolled steel coils intended for 21530 mm pipes to be made by Vyksa Steel Works and Almetyevsk Pipe Plant. The CRC capacity will be 1.2 million tonnes of steel coils a year, which will fully cover OMKs demand for rolled steel necessary for the manufacture of small and mediumdiameter pipes. Besides, on completion of this project, OMK will be able to concentrate its pipe production and rolled steel production within a single manufacturing complex. OMK is a leader and one of the worlds largest manufacturers in the market of solidrolled railroad wheels for passenger and freight cars. The Company has a long-term contract with Russian Railways for the supply of about 5 million wheels in the total amount of $1.2 billion until 2010. The strategy relating to the
Construction of Foundry and Rolling Facility, December, 2005.
Annual Report 2005

Sakhalin 1 and Sakhalin 2 are the largest projects in terms of the amount of direct foreign investments in the Russian oil industry. The estimated total production under these projects is more than 400 million tonnes of oil and 900 billion cubic meters of gas, which requires large investments in the infrastructure, specifically the construction of main pipelines with the total length exceeding 2,000 km. United Metallurgical Company (OMK) decided to participate in the Sakhalin 1 and 2 Projects in 2000 after scrutinizing technical requirements for the pipelines planned for construction on Sakhalin Island. OMK made presentations in the offices of the project operators, Sakhalin Energy and Exxon Neftegas, on Sakhalin and held meetings with local authorities. At first, we encountered a preconception on the part of foreign companies as to Russian pipe manufacturers product quality and experience. For instance, Sakhalin Energy told us that Vyksa Steel Works (VSW), like the other Russian pipe plants, stood little chance of participating in the Sakhalin 2. That was due to previous, often negative experience of Western companies cooperating with Russian manufacturers, but updated information about engineering capabilities of domestic companies was not available at the time. Meanwhile, in 1998-2000, after changes in ownership of Russias major pipe plants, the new owners began to rehabilitate and modernize their production facilities and master new products. In 2000, VSW put into operation a new line for applying external corrosion-resistant coatings; similar lines were commissioned at Volzhsky Pipe Plant and Chelyabinsk Tube Rolling Plant, which allowed domestic oil and gas companies and Transneft to stop importing large-diameter insulated pipes for main pipelines. In early 2001, the Administration of the Sakhalin Region and Starstroy conducted a seminar for potential contractors of the Sakhalin 2 Project. The seminar enabled Sakhalin Energy specialists to become more aware of Russian pipe manufacturers potential. In the summer of the same year, Shell conducted an audit of Vyksa Steel Works and its management company, OMK. The audit showed that, in general, VSWs technical capabilities are sufficient for filling an order for the supply of oil pipes under the Sakhalin 2 Project. The main condition for the technical qualification of Vyksa Steel Works as a bidder was to implement corrective measures and produce a trial batch of pipes in accordance with Sakhalin Energys specifications.
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Maturity Test
Warmup
Before bids were invited in August 2002, VSW had done a lot of work to meet the criteria established by the potential customer. For example, the then existing automatic ultrasonic weld inspection units for acceptance tests did not satisfy the project requirements. The problem was settled by replacing three of the units with Krautkremer equipment that insures 100% weld and weldaffected zone inspection for large-diameter pipes meant for main pipelines. At the same time, we replaced obsolete manual ultrasonic weld inspection units and installed additional equipment for 100% X-ray and TV inspection of weld ends. To make welding conditions more stable, Vyksa Steel Works replaced power supply units on welding mills with ESAB equipment, installed laser weld tracking devices, and implemented a package plan aimed at the use of new welding consumables. In addition, we put into operation new equipment for incoming and acceptance
Participation in complex oil and gas projects, such as the development of the Sakhalin shelf, provides Russian companies with unique opportunities to XI. 2005. improve their competitive strength, including in international markets, and gives a new impetus to development. This is of special relevance to pipe manufacturers whose principal customer in Russia is the fuel and energy sector (about 60%). Against the backdrop of oil production boom in recent years, the pipe industry has become on of the most dynamic segments of the Russian economy. However, Russian pipe manufacturers need to develop export operations to reduce risks relating to a possible diminution in domestic demand. To withstand fierce competition in the global market, it is not enough to make good pipes; it is also necessary to know the rules of the game. Problems that pipe companies may encounter while entering international markets are well seen in the case of OMKs participation in the Sakhalin 1 and 2 Projects.
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of the Sakhalin 1 Project, we were awarded a contract for the supply of pipes for 176 km out of the 232-km pipeline, or 70% of the total scope of delivery. VSW delivered 34.5 thousand tonnes of pipes with an outside diameter of 610 mm and a wall thickness of 12.1 mm. The steel used for the pipes complied with all requirements for the manufacture of pipes with three-layer corrosionresistant external coatings according to ISO 31833. Besides, we met additional requirements of the customer, specifically we conducted mechanical tests of parent metal and welds on both transverse and longitudinal specimens, tests of mechanical properties after strain ageing of pipes, and crack tip opening displacement (CTOD) tests. In the case of Sakhalin 2 Project, the consortium of OMK and Mitsui was awarded a contract for the supply of pipes for the construction of a 647-km oil pipeline. OMK delivered 43 thousand tonnes of pipes, which accounted for 50% of the total length of the pipeline. The steel was X65 grade, had a three-layer corrosion-resistant external coating according to API Spec 5L, and met additional requirements of the customer. It is noteworthy that OMK was the first in Russia to produce, cause to be certified, and deliver pipes rated for working pressures of up to 125 atm and designed for use in seismic areas to which belong Sakhalin Island. Participation in projects like the Sakhalin projects enabled OMK to make a breakthrough in its development. First, participation in large international projects had a positive effect on the improvement of production processes, as well as the issues relating to occupational safety and corporate culture. Second, in the process of filling the orders, we acquired essential experience of cooperating with foreign auditors from ordering companies (SEIC, ENL, Nippon Steel) and third party inspections, such as Moodys International and Tuboscope. Third, we actually feel growth in the personnel potential-the potential of VSW employees and OMK managers. And fourth, participation in these projects raises the rating of Russian manufacturers and encourages the development of fullscale export programs. In this context, an important factor is the inclusion of Russian companies on the authorized supplier list of the largest transnational corporations, such as Shell and Exxon, and the willingness of other customers to certify large-diameter pipe production for further inclusion on the authorized supplier list. requirements, it is necessary to expand the range of steel grades and change production conditions, which will require no fewer efforts on the part of steelmakers. Below is a tentative list of tasks to be jointly fulfilled by steel works, pipe plants, and the industrys design institutes: Enhance the chemical composition and production technology for K52-K60 grade steels with a view to improving their performance characteristics Develop and commercialize K65 grade steels and pipes and conduct industrial tests of K70K80 grade products Develop and master production technology for steels and thick-wall pipes for subsea pipelines Develop and commercialize steels and pipes for the transportation of sulfurous gases Develop and master production of cold resistant steels and pipes for extremely low operation temperatures of -60C Find new methods for enhancing pipe steel strength and cold resistance Create technologies insuring the production of high-purity rolled metal with a low level of surface defects Until these tasks are fulfilled, we will be compelled to contemplate buying metal from foreign suppliers so as to produce pipes according to the highest world standards. Moreover, we began the construction of the Foundry and Rolling Facility in the summer of 2005 to make our own skelps. The construction of the Facility is OMKs largest investment project. After its commissioning, OMK will have a complete steelmaking cycle: it will be able to obtain high-quality raw materials and, therefore, make high-quality medium-diameter pipes. However, the construction of the Foundry and Rolling Facility resolves only the issues relating to rolled metal quality, the issues relating to large-diameter pipes remain open.
inspection of both black pipes and corrosionresistant coatings. Vyksa Steel Works developed and implemented a computer-aided system for large-diameter pipe production control intended for production sequencing and information support for technical services and personnel. Inspection points were equipped with networked computer terminals capable of issuing all necessary documents on completion of each production step. According to BP auditors, this is currently the best system used by a large-diameter pipe manufacturer in Russia and the CIS. Specialists of Severstal and the Central Research Institute for Ferrous Metallurgy (TsNIIchermet) under the supervision of Sakhalin Energy auditors did a lot of work to develop the steel sheet production technology of the required quality. Formerly, it was thought that none of the Russian steelmaking plants was able to stably produce X65 steel in accordance with additional requirements of high complexity projects. VSW, together with Severstal, made six trial batches of pipes during a year, and test results made it possible to assert Russia could make such metal too. The upgrading of VSWs facilities was supported by Sakhalin Energy specialists and Mitsui (OMK signed an agreement with Mitsui for cooperation in pipeline projects). As a result, VSW improved its production processes and the reliability and quality of its products, which in its turn enabled Vyksa Steel Works to pass an ExxonMobil audit in 2002 and, finally, become approved for participation in the Sakhalin 1 Project.
Too early to relax

While implementing pipe production modernization programs, we encountered several serious problems, the most significant of which is the quality of steel sheets. And, in principle, this explains why many biddings abroad (especially, in the Middle East) establish requirements for metal to be used for pipes: metal should not be made in Russia. The quality of Russian sheet steel is far poorer than that of steel made in Japan, Germany, and, unfortunately, even Ukraine. It is more and more difficult to compete in the international market each year and, without steelmakers and pipe manufacturers combining their efforts, unreal. To satisfy the long-term demand of the fuel and energy sector, it is necessary to construct new generation pipelines having 60-70 years of standard operation time, not 30-40 years as we have now. In particular, this will decrease investments in the development of gas fields and considerably reduce gas transportation costs. To extend pipeline operation time, it is necessary to implement innovations not only in pipe production, but also in steelmaking. We estimate that the amount of investments in the upgrading of Russian pipe companies within the next three years will exceed $700 million. Due to ever-growing pipe performance
Double effect
OMK participated in four biddings under the Sakhalin 1 and 2 Projects and became the preferred bidder in all of the four events. In the case
Annual Report 2005
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Company Profile. Key Financial and Performance Indicators
Key Financial and Performance Indicators

1. Performance Indicators
Pipe output (thsd t) 1097 Railroad wheel output (thsd pcs) 806 Ferrovanadium output (thsd t) 2.254 Automobile spring-foils output (thsd t) 63.5 Rolled section output (thsd t) 411 Coke output (thsd t) 627
2. OMKs Share
in Russian Consumption of Its Main Product Groups, % (2005)
Share in Russian pipe market 16% Share in Russian railroad wheel market 69% Share in Russian ferrovanadium market 18% Share in Russian automobile spring-foil market 73% Share in Russian rolled section market 2%
(millions of rubles)
40 173
54 697
3. OMK Group Financial Indicators
2004
2005
12 279
9 025
7 683
5 435
5 700
7 465
Revenues EBITDA Net profit Investments
Balance Sheet Structure

(millions of rubles)
ASSETS Noncurrent assets Current assets LIABILITIES Equity Long-term liabilities Short-term liabilities Balance
2004 11 501 18 683 2004 15 278 2 836 12 070 30 184
2005 16 600 31 555 2005 23 160 9 053 15 942 48 155
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Pipe-Rolling Business
In 2005, the OMK Pipe-Rolling Division produced around 1.1 million tonnes of pipes of various sizes and grades. OMKs share in the Russian pipe market exceeded 16%.
Vyksa Steel Works produces steel pipes with sizes ranging from 15 to 1,420 mm and wall thicknesses of up to 48 mm. Vyksa Steel Works pipes have two or three-layer corrosion-resistant polyethylene coatings.
for corrosion-resistant pipe coatings. The manufacturing process includes multiple-stage nondestructive examination of all pipes, including eddy-current, automatic and manual ultrasonic, mechanical, and 100% hydraulic testing. Mechanical properties of pipe base material and weld seams are determined during elongation, impact, flattening, and bending tests.
Precision of geometrical dimensions as compared with seamless pipes (fewer variations in wall thickness, less out-of-roundness, etc.) Pipe lengths; possibility of manufacturing 11.8 m pipes of any diameter within the product range Possibility of producing thin-walled pipes, which allows less metal consumption during well construction
Pipes for water and gas supply lines and general-purpose pipes
with sizes ranging from 15 to 108 mm are designed for the construction of gas and water supply lines, heating systems, and various structures. The pipe production process includes nondestructive examination to SEP 1925 standards and mechanical and hydraulic testing. Almetyevsk Pipe Plant produces pipes with sizes ranging from 10 to 219 mm and, upon request, with double corrosionresistant coatings. All of OMKs pipes are produced in accordance with ISO 9001:2000 and API quality standards. OMKs major customers include leading Russian and foreign companies: Gazprom, LUKOIL, Transneft, Surgutneftegas, TNKBP, Sibneft, Rosneft, Bashneft, Tatneft, ExxonMobil, Royal Dutch/Shell, Amiri Nassab Commercial (Iran), Exploreco Energy Inc (U.S.A.), etc. OMK pipes are supplied to the U.S.A., United Kingdom, Germany, Bulgaria, Poland, Iran, Azerbaijan, Kazakhstan, Uzbekistan, and other countries. OMK is a frequent participant and winner of prestigious international biddings. In 2005, as the preferred bidder, the Company began the supply of 1,420 mm pipes to Gazprom for the construction of the North European Gas Pipeline under Phase 1 of this Project.
Electric-welded pipes with sizes ranging from 508 to 1,420 mm

are designed for the construction of main gas, oil, and oil product pipelines rated for working pressures of up to 12.5 MPa, including subsea pipelines. High mechanical properties of pipe base material and weld seams allow these pipes to be used for pipeline construction in varied climatic regions, including far north areas. Single-seam longitudinal welded pipes with sizes ranging from 508 to 1420 mm and wall thicknesses ranging from 7 to 48 mm are made of K38-K60 strength grade steels, including north version products. Pipes can also be made for working pressures reaching 250 atm.
Casing pipes
with sizes ranging from 114 to 245 mm are designed for gas and oil field construction, as well as for the construction of wells, separation of oil-bearing and gas-bearing formations, prevention of water encroachment of production horizons, and casing of well walls and heads. To insure compliance with the world standards, the workshop was provided with advanced equipment made by the worlds leading manufacturers: Nippon Steel Corporation forming mill, pipe-welding machine, and sizing mills; Toshiba equipment for local heat treatment; DBM rotary piercer; Mitsubishi ultrasonic flaw detector. As a result, Vyksa Steel Works welded casing pipes have the following unquestionable advantages:
Pipes for oil and gas pipelines and generalpurpose pipes

with sizes ranging from 114 to 530 mm are designed for the construction of oil and gas pipelines, oil product pipelines, process and field pipelines (including pipelines in Siberian and far north areas), water pipelines, heating systems, various structures, as well as for gas and oil field construction. In 2005, the Company put into operation a new line for pipe finishing and a new line
Vyksa Steel Works. Pipes Shipped to Customers

(thsd t)
2004 . Large-diameter pipes 335.0 Pipes for oil pipelines 209.0 Casing pipes 187.5 Pipes for water and gas supply lines 65.6 Thin-walled pipes 86.0 TOTAL 882.0
2005 . 380.7 223.2 215.5 56.9 86.5 967.5
Almetyevsk Pipe Plant. Pipes Shipped to Customers

(thsd t)
2004 . Pipes for oil and gas pipelines 54.7 Shaped pipes 17.0 Pipes for water and gas supply lines 3.9 Thin-walled pipes 17.6 TOTAL 93.3
2005 . 57.8 18.7 8.5 16.5 101.6
Source: Metal-Courier: Metal-Expert Steel Pipes; Issue No. 2, 2006
Annual Report 2005
13
The Media About Us
Russia to Have Large Pipes
United Metallurgical Company (OMK) is launching a new line for manufacturing large-diameter pipes.
Vyksa Steel Works (VSW), part of OMK, is nearing completion of the Project 1420 aiming to produce large-diameter pipes. VSW will become Russias first plant to 05.04.2005. manufacture 1,420 mm single-seam longitudinal welded pipes that will be in full compliance with Gazproms requirements for main gas pipelines. The company believes that major consumers of new products, in addition to Gazprom and Transneft, will include gas companies from CIS countries, first of all, Uzbekistan and Kazakhstan, as well as from non-CIS countries. Therefore, European and Ukrainian 1,420 mm pipe producers will have a serious Russian competitor.
United Metallurgical Company is a leading domestic manufacturer of products for energy, transportation, and production companies. OMKs Pipe-Rolling Division comprises Vyksa Steel Works and Almetyevsk Pipe Plant; OMKs Metallurgical Division comprises Chusovoy Metallurgical Works, Gubakha Coke, and Schelkovo Metallurgical Works. OMK products account for over 20% of all pipes consumed in Russia, including more than 30% of large-diameter pipes, over 60% of railroad wheels and automobile springs. In 2004, the OMK enterprises produced around one million tonnes of various size pipes, 430 thousand tonnes of rolled metal products, and over 750 thousand railroad wheels. Vyksa Steel Works revenues in 2004 increased by 1.4 times as compared with 2003 to reach 26,627 million rubles; the profit increased by 12% to 2,695 million rubles, including an 11% increase in the net profit reaching 2,027 million rubles. OMKs major customers include such leading Russian and foreign companies as Gazprom, LUKOIL, Transneft, Surgutneftegas, Rosneft, Yukos, ExxonMobil, Royal Dutch/Shell, General Electric, Samsung, LG-Philips, Thomson. Russian companies have faced an issue relating to the production of large-diameter pipes over the past 40 years. The issue arose when the Soviet Union began creating a powerful oil and gas sector oriented to the export of raw materials. At present, around 70% of 1,420 mm pipes are imported from Ukraine; around 30%, from Europe. European pipes are of high quality, but expensive. Ukrainian pipes are cheap, but their quality leaves much to be desired. Meanwhile, customers decisive factors are both pipe quality and pipe competitiveness. That is why OMK engaged the best specialists and the worlds leading equipment suppliers to participate in the Project 1420. Im sure that our pipes will satisfy all quality requirements of the customer, and their prices will be competitive, said OMK President Anatoly Sedykh. The VSW project for the production of large-diameter pipes is called 1420. But this does not mean that the project will include only the manufacture of 1,420 mm pipes. The new production line purchased for VSW is designed not only for the manufacture of 1,420 mm for Gazprom. When this line is put into operation, Vyksa Steel Works will be able to make pipes with sizes ranging from 508 to 1,420 mm and wall thicknesses of up to 48 mm, i.e. a full range of large-diameter single-seam longitudinal welded pipes. It is planned that VSW will begin the commercial supply of pipes produced at the new line in May-June 2005. The annual design capacity is 500 thousand tonnes of 1,420 mm pipes. VSW will be capable of manufacturing large-diameter pipes rated for pressures of up
to 250 atm. The amount of investments in the project implementation is $170 million. VSWs new products is to a considerable extent meant for Russian large oil and gas companies: Gazprom, Transneft, etc. Russias largest gas concern is currently spending huge money on imported pipes. The point is that Russian companies have not made any offers meeting Gazproms requirements, said Aleksandr Razuvaev, Head of the Analytic Department of Megatrustoil. When such offers are available, Gazprom as a state company will have to support Russian manufacturers. Gazproms management itself has said about it more than once. For instance, in April 2004, OMK and Gazprom signed a memorandum of intent providing for the possible purchase of OMK pipes from 2005. Meanwhile, Gazprom is not the only one to be interested in Russian-made 1,420 mm pipes complying with world standards. When the new production line is put into operation, OMK will be able to participate in Russias large-scale pipeline projects whose beginning is scheduled for the near future. For example, VSWs new products can be used for pipelines transporting oil and gas to China and Southeast Asia. That is to say, this project will be efficient in any case. Besides, VSWs new products are in demand in the global market. Some Japanese companies have already displayed interest in them. Very promising are shelf development projects that will use high-pressure pipes, said Anatoly Sedykh, speaking about the companys plans. By the way, foreign companies interest in OMK products is not accidental. This company is Russias only supplier of pipes for the international shelf-development Sakhalin 1 and Sakhalin 2 Projects whose operators are Shell and ExxonMobil. In addition, Vyksa products are good enough for US oil and gas companies: OMK has annually been increasing the supply of its pipes to the North American marker over the past several years. Irina Lozhkina, an analyst of Prospekt, is sure that the Project 1420 is undoubtedly commercially successful. On completion of the project, Vyksa Steel Works revenues may increase to $1.2 billion from its current $950 million, she said. To enhance profitability and increase the companys profit are the principal objectives of another projects implemented by OMK. A short time ago, United Metallurgical Company signed a contract with Danieli & C. Officine Meccaniche SpA, Italy, for the delivery of equipment for a foundry and rolling facility to be constructed in the Nizhni Novgorod Region. The new facility will supply rolled metal to the pipe production of Vyksa Steel Works and Chusovoy Metallurgical Works. Its hot and flat-rolled steel coils will be used for the manufacture of pipes having diameters from 21 to 530 mm. The annual capacity of the foundry and rolling facility is 1.2 million tonnes of steel coils. This will allow OMK to reduce its dependence on rolled steel suppliers. The project implementation will take 30 months. The Danieli & equipment will cost more than $250 million, and the total amount of investments in the project is over $500 million. The construction of OMKs own foundry and rolling facility is an extremely forward-looking step, said Irina Lozhkina. Thanks to the new facility, OMK wont be dependent on high skelp prices that contribute a lot to reducing profits of pipe manufacturers. Therefore, lower pipe production costs will enhance their profitability, which will considerably raise the companys profits.
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Wheel-Rolling Business
Wheel-Rolling Business
Vyksa Steel Works produces more than 140 wheel types with diameters ranging from 710 to 1,098 mm Since 1973, Vyksa Steel Works has manufactured about 15 million railroad wheels The Vyksa Steel Works share in the Russian total output of railroad wheels exceeds 69% In 2005, wheels were exported to 11 countries Railroad wheels comply with the requirements of domestic and international standards: International Union of Railways (UIC) standard American Association of Railroads (AAR) standard Indian and Korean railroad standards
mm and not less than 300 at a depth of 50 mm from the tread surface Homogeneous, highly dispersed perlitic structure (without martensite or bainite) More than a four-fold reduction in contacting and fatigue damage of wheel rims Service life extended at least by 1.5 times Reduced costs relating to the machining, purchase, and maintenance repair of the rolling stock
Wheels with curved disks

At least a 1.8-fold reduction in radial stresses At least a 1.6-fold reduction in stress intensity Improved stress pattern evenness without substantial local stress concentrations Wheel flange and entire wheel rim forced from the rail when circular mechanical loading is applied Disk fatigue strength increased by at least 1.5 times Axle loads increased from 23.25 to 30 t Wheel travel increased by more than 15% as compared with traditional wheels with 320-360 HB rim hardness Reduced repair and operation costs In 2005, Vyksa Steel Works shipped 800 thousand wheels, which is 50 thousand more than in 2004. The commissioning of German-made Lisinger sawing equipment in 2005 considerably reduced the consumption index. Source: OMKs estimate based on statistics of the State Customs Committee and the Ministry of Railway Transport of the Russian Federation.
Vyksa Steel Works operates a quality management system certified to ISO 9001:2000. OMK is the leader in the production of solid-rolled railroad wheels (its share in the Russian market exceeds 60%). The wheel-rolling shop of Vyksa Steel Works is the worlds largest wheel-rolling facility. In 2005, the Company substantially increased the sales of its wheels thanks to the contract signed in 2004 with Russian Railways for the supply of 4.8 million railroad wheels until 2010 in the total amount of $1.2 billion. In addition to Russian Railways, traditional buyers of OMK wheels include the largest international corporations, such as General Electric and Samsung. Vyksa Steel Works pays special attention to the manufacture of wheels because of great responsibility for rolling stock safety. The wheel-rolling facilities of Vyksa Steel Works are
equipped with up-to-date production machinery, including two Wheelabrator, Canada, shot-blasting machines for the hardening of wheel disks, apply multiple-stage technical control and various inspection tools, including eddy current, ultrasonic, and magnetic-particle testing and hardness control for wheel rims. Upon request, wheel machining lines before and after heat treatment may produce wheels with any required tread area profile, surface cleanliness, dimensional accuracy, and mechanical properties. The equipment of the wheel-rolling facilities is remarkable for its high level of automation and mechanization; Vyksa Works has developed and applies a technology for the production of a wide range of solid-rolled wheels with different disk configurations (conic and curvilinear), including wheels all of whose elements are machined.
Vyksa Steel Works carries out purposeful work to improve the specifications and quality of railroad wheels. The new wheel products include as follows:
Wheels with shot-blast hardened disks

Wheel disk fatigue strength increased by at least 30-40% Absence of fatigue cracks throughout the service life Wheel fatigue failure prevention, higher wheel safety and reliability for loads of up to 30 t/axle
Wheels with 320-360 HB rim hardness

Carbon, 0.55-0.70 not less than 320-360 at a depth of 30
Railroad wheel output

(thsd pcs)
2004 755
2005 806
Annual Report 2005
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Metallurgical Business
Automobile spring-foils The production includes: manufacture of blank spring sheets, heat treatment, sheet surface hardening, spring assembly. Chusovoy Metallurgical Works produces all types of spring-foils delivered to CIS manufacturers of trucks, passenger cars, buses, and trolleybuses. Chusovoy Metallurgical Works has been recognized as an excellent supplier by Russian leading automobile plants. Rolled steel All steel is processed in two rolling-mill shops. The rolling-mill shops are equipped with an 800 blank preparation mill, a 550 medium-section mill, and 250 and 370 small-section mills. Chusovoy Metallurgical Works produces over a hundred fifty types of steel sections mostly used as structural steel and for automobile spring-foils.
Gubakha Coke
has a complete coke-chemical cycle, specializes in the processing of coal, and comprises the Coal Preparation Shop, Coke Shop, Coal Tar Processing Shop, and the By-product Recovery Shop. Gubakha Coke manufactures the following products: Furnace coke of the fractions + 40 mm, 2540 mm, and + 25 mm; nut coke of the fraction 10-25 mm; and breeze coke of the fraction 0-10 mm. Chemical coking products derived from processed coal tar that is recovered from coke gas: pitch for electrodes, coke-chemical raw materials for technical carbon production, refined naphthalene, oils for different applications (including sleeper impregnation oil); the construction of benzol production facilities is under way.
Schelkovo Metallurgical Works

is Russias unique steel manufacturer using state-of-the-art engineering solutions developed by leading Russian and Western European designers. Shchelkovo Metallurgical Works manufactures the following products: High-accuracy cold-rolled steel bands with ultralow carbon content and customer-specified mechanical and magnetic properties. Thicknesses range from 50 to 700 m. The mechanical and magnetic properties and the quality of metal surfaces meet the customers severest requirements and are suitable for a variety of applications. In 2005, Shchelkovo Metallurgical Works produced 13.303 thousand tonnes of cold-rolled steel bands. This figure includes 3.412 thousand tonnes of section steel (steel for inner magnetic shields and shadow masks) and 9.891 thousand tonnes of generalpurpose products. The highly stable quality characteristics satisfying the worlds best production standards are insured by: Skilled personnel Quality control starting from the metal smelting process Integrated electronic system for production control Cutting-edge technology State-of-the-art equipment Highly automated production Solid relationships with partners At present, Shchelkovo Metallurgical Works is creating its quality management system in accordance with ISO 9000. Major consumers of OMKs metal products include KamAZ, GAZ, Severstal, Evraz, Azovstal, UAZ, UralAZ, Siemens, Samsung, Thompson, LG Philips Displays, and Micro Precision Technologies B.V.
The OMK Metallurgical Business comprises Chusovoy Metallurgical Works, Schelkovo Metallurgical Works, and Gubakha Coke.
Some of OMKs commodity items enjoy a considerable share in the Russian metal product market. In 2005, the Metallurgical Division produced over 2 thousand tonnes of vanadium, 63 thousand tonnes of automobile springfoils, 411 thousand tonnes of rolled section steel, and 627 thousand tonnes of coke. In 2005, output of semiproducts increased by 17.7%; reinforcing steel, by 7.5%; spring bands, by 10.0%; ferrovanadium, by 11.7%. Sales of automobile spring-foils increased by 7.0%. The reduction in output of certain rolled products is due to a change in the sales structure toward the most profitable product types.
Vanadium cast iron, Spec. 14-2R-360-2002, Grade V, used for alloying of special grades of steels, as well as iron and steel castings Vanadium cast iron, complex-alloyed, Spec. 14-2R-360-2002, Grade VHT, used for alloying of special purpose iron and steel castings Refined cast iron (semiproduct carbonized), Factory Standard 115-28-2003, used for alloying of special purpose iron and steel castings Conversion vanadium pig iron, Spec. 14-2R360-2002, used for alloying of special purpose iron and steel castings Ferrovanadium An iron and vanadium alloy made in electric furnaces by the silicoalumothermal method of technical vanadium pentoxide recovery, designed for alloying of steel and cast iron. Chusovoy Metallurgical Works manufactures a wide range of ferrovanadium products with varied content of vanadium and admixtures, as well as nitrogen and siliconcontaining alloys: Nitrated ferrovanadium designed for vanadium and nitrogen-alloying of quickcutting, low-alloyed, stainless, and frostresistant steels Vanadium pentoxide designed for production of titanium alloys, vanadium catalysts and other chemical agents Under OMKs general investment program aimed at the development and commercial production of modern products and materials, Chusovoy Metallurgical Works began the manufacture of Vanadium-80 in late 2005.
Chusovoy Metallurgical Works

has a complete metallurgical cycle with blastfurnace, steel-smelting, ferroalloy, rolling, and spring production processes and manufactures high-quality metal products. Cast iron Over the past several years, the blast-furnace smelting technology has been significantly improved. Chusovoy Metallurgical Works has mastered several grades of cast iron having varied compositions for use in alloying of special purpose steels, as well as iron and steel castings. Chusovoy Metallurgical Works specialists developed the fundamentals of a technology for smelting of vanadium-containing and complexalloyed cast iron taking account of specific features of titanium and vanadium oxide recovery.
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Chusovoy Metallurgical Works Products Manufactured and Shipped (thousands of tonnes)

Semiproducts: Wheel steel ingots Reinforcing steel Angle section steel, channel bars and beams, steel beams Special shaped steel Spring bands: Vanadium contained in ferrovanadium Automobile spring-foils Gross output Sales of finished products Output Gross output Gross output Gross output Gross output Sales Gross output Sales 2004 623,6 221,0 14,5 147,7 101,1 41,3 134,6 67,6 2,075 62,4 2005 734,0 441,5 6,362 158,9 87,3 22,7 142,0 74,3 2,25 66,7
Annual Report 2005
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Product Quality. Technologies and Innovations

In March 2005, Quality Management Institute, Canada, conducted an annual audit of Vyksa Steel Works for compliance with ISO 9001:2000. The audit results showed that the Vyksa Steel Works Quality Management System (QMS) was effective. Certificate CERT-0011401802084 confirming that the Vyksa Steel Works QMS is in accordance with ISO 9001:2000 is valid until December 9, 2006. Vyksa Steel Works
In March 2005, Quality Management Institute, Canada, conducted an annual audit of Vyksa Steel Works for compliance with ISO 9001:2000. The audit results showed that the Vyksa Steel Works Quality Management System (QMS) was effective. Certificate CERT-0011401-802084 confirming that the Vyksa Steel Works QMS is in accordance with ISO 9001:2000 is valid until December 9, 2006. In September 2005, an annual audit of the railroad wheel production confirmed its compliance with the M-107/208-2004 standard of the American Association of Railroads (AAR). In December 2005, the Vyksa Steel Works QMS was audited for compliance with the AAR M-1003 standard. The audit confirmed that Vyksa Steel Works complied with the AAR requirements (Certificate QA-VYK issued to Vyksa Steel Works is valid until December 15, 2006). QMS audits for compliance with GOST R ISO 9001-2001 conducted in January and October 2005 confirmed that the Vyksa Steel Works QMS complied with all of the requirements. Within the scope of product certification in the Transsert voluntary certification system, the Vyksa Steel Works QMS was certified in April 2005 for compliance with GOST R ISO 90012001. Following the audit, Vyksa Steel Works was granted Level Two Certificates No. 356/2 and No. 1043.356/2; the latter is valid until June 30, 2006. These certificates allow Vyksa Steel Works products to be supplied to Transneft. With a view to defining whether the Quality Management System and pipe production conform to their requirements, Vyksa Steel Works was audited by Sakhalin Energy (January and August 2005), TNK-BP (February 2005), and Agip KCO (June 2005). In October 2005, Vyksa Steel Works pipes were certified as complying with the requirements of regulatory documents in the Ensertiko voluntary certification system of the electricity industry (Certificates No. SP0214311005 and No. SP0215311005, valid until October 31, 2008). These certificates allow Vyksa Steel Works products to be supplied to RAO UES of Russia. Vyksa Steel Works made up a certification schedule for railroad wheels according to Spec. TU 0943-170op-01124323-2004 CurvilinearDisk Solid-Rolled Wheels with Enhanced Rim Hardness for New-Generation Railroad Cars; the certification is planned to be completed in May 2006.
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In 2005, within the scope of steelsmelting development, Vyksa Steel Works: replaced the existing steel-teeming ladles with ladles of higher capacity, which increased the height of the freeboard necessary for efficient open-hearth steel degassing; adopted the casting into molds with feeder heads lined with heat-insulating inserts. This reduced the consumption index from 1.417 to 1.402 for the production of wheels under Spec. TU 0943-157-01124328-2003; adopted the casting of metal with an argonprotected stream, which reduced gas content of finished wheels; within the scope of wheel-rolling development, Vyksa Steel Works: installed sawing equipment consisting of two high-efficiency saws. This stabilized wheel dimensions owing to reduced variances in blank weights and decreased the consumption index; upgraded Tempering Furnaces No. 1 and No. 3. This allowed wheel pairs to consist of wheels having equal physical and mechanical properties and reduced residual stresses in railroad wheels; put into operation a unit for defining crack resistance (K1S) of wheel steel. Vyksa Steel Works purchased and installed a unit for wheel fatigue strength testing, which guarantees additional wheel quality between certification audits due to periodic factory inspections of main characteristics; continues to master the production of wheels with curvilinear (S-shaped) disks. Forty wheels are undergoing running trials at the testing ring. The All-Russian Research Institute for Railway Transport (VNIIZhT) conducted benchmark fatigue tests of three wheels and confirmed that wheels with S-shaped disks have higher fatigue strength as compared with flat conic disks. This will make it possible to assemble car trucks with axle loads of 25-30 ton-force, increase wheel travel, and reduce repair and operation costs of Russian Railways. In 2005, Vyksa Steel Works made preparations for the production of passenger car wheels all of whose elements are machined; within the scope of pipe-rolling development, Vyksa Steel Works: put into operation a TESA-1420 electricweld pipe unit (design capacity, 570 thousand tonnes per year), which allowed Vyksa Steel Works to increase its production capacity and expand its market outlets for large-diameter pipes intended for Gazprom and Transneft; put into operation the APT-2 line for applying corrosion-resistant external coatings to 508-1,420 mm pipes (design capacity, 3.2 million square meters per year); put into operation the AVPT-1 line for applying corrosion-resistant internal coatings to 273-1,420 mm pipes (design capacity, 3.2 million square meters per year); put into operation the APT-3 line for applying corrosion-resistant external coatings to 57-530 mm pipes (design capacity, 3.2 million square meters per year); Vyksa Steel Works mastered the manufacture of the following new pipe products: pipes with an outside diameter of 1,420 mm and wall thicknesses of 15.7, 18.7, 20.5, 21.6, 23.2, 24.9, 25.8, 26.7, and 31.9 mm, made of K-60 and X-70 strength grade sheet steel received from Russian and foreign suppliers (Severstal, Dillinger, Posco, Nippon Steel), with three-layer corrosionresistant external coatings and friction-reducing corrosion-resistant internal coatings for the construction of the North European Gas Pipeline;
pipes with a diameter of 1,067 mm and wall thicknesses of 17, 20, 21, and 25 mm, made of K-60 strength grade steel, with three-layer corrosion-resistant external coatings for the Eastern Siberia-Pacific Ocean Project; corrosion-resistant pipes with diameters of 219, 273, and 325 mm and wall thicknesses of 8-10 mm, made of 13KhFA low-alloyed steel, and pipes with diameters of 114-159 mm, made of 20KSKh steel; casing pipes with a diameter of 177.8 mm and wall thicknesses of 8.05 and 9.19 mm, with round thread to API Spec. 5ST; thin-walled pipes in 8 standard sizes: 25251.5, 30301.5, 40402.0, 40201.5, 40202.0, 40202.5, 40251.5, and 40252.0. This allowed Vyksa Steel Works to expand its market outlets for small-size pipes; pipes with diameters of 273 and 325 mm, with three-layer corrosion-resistant external coatings; skills were mastered in a technology for applying corrosion-resistant external coatings to 530 mm pipes at the APT-3 line; trial batches of double-seam pipes with a diameter of 1,420 and wall thicknesses of 15.7 and 18.7 mm. The Scientific-Research Institute
of Natural Gases and Gas Technologies (VNIIGAZ) recommended the use of these pipes for oil and gas pipelines together with single-seam pipes; a trial batch of heavy-duty casing pipes made of 22 GF steel, which confirmed the possibility of welding of N80 casing pipes; casing pipes with OTTM thread.
at least 5,000 tonnes of coal to be unloaded daily, and completely exclude hard manual work. Gubakha Coke mastered a system for trapping and degradation of ammonia that completely eliminates NOX emissions, reduces naphthalene emissions, and provides deep purification removing suspended particles from coke gases.
Gubakha Coke
Gubakha Coke entered the final stage of the overhaul repair of coke-oven battery No. 1-BIS. The coke-oven battery was brought into the drying and heating process. When put into operation, battery No. 1-BIS will enable Gubakha Coke to increase its coke production to 1.3 million tonnes. Gubakha Coke is in the process of implementing a large investment project aimed at the technical upgrading of its Coal Preparation Shop. This work includes the installation of a car dumper, electric coal thawer, departments of preliminary and final coal breaking, and other facilities of the Coal Preparation Shop. The mechanization of car unloading will significantly improve the shop performance efficiency, with
Chusovoy Metallurgical Works

Chusovoy Metallurgical Works mastered and began the full-scale production of Class A500S heat-strengthened reinforcing bars made of 3sp steel according to STO ASChM 7-93. Chusovoy Metallurgical Works began the full-scale production of offset bulb flat section No. 14B for shipbuilding. Chusovoy Metallurgical Works mastered and began the production of two types of URAL automobile springs made of steels with reduced hardness penetration by the surface hardening method. Chusovoy Metallurgical Works launched the production of high-grade ferrovanadium. The first tonnes of ferrovanadium products containing 80% of vanadium were obtained.
Annual Report 2005
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Personnel Development. Social Responsibility
Competitors of Top-100 Managers of OMK, October, 2005.
Personnel Development
OMK considers its personnel to be the key resource of the Company and the most important component of its competitive advantages and basis for future development. In 2005, the main efforts in the personnel development area focused on: Personnel Training, Development, and Performance Evaluation Personnel Motivation
management. The training program ended with a business game that provided foremen with an opportunity to demonstrate their potential and acquired knowledge. In addition, Phase I of the Personnel Reserve Formation program was implemented in 2005. Vyksa Steel Works provided development training for 66 reservists: heads of directorates, deputy heads of production departments, and heads of departments. Chusovoy Metallurgical Works formed a personnel reserve for all levels of management based on expert evaluation, developed evaluation criteria, and selected tools for reservist evaluation. Chusovoy Metallurgical Works developed training and development programs for such managers for 2006. Under the Personnel Training, Development, and Performance Evaluation program, the corporate center-United Metallurgical Companytogether with Vyksa Steel Works, Chusovoy Metallurgical Works, Schelkovo Metallurgical Works, Almetyevsk Pipe Plant, and Gubakha Coke, implemented the project aiming to develop the OMK Uniform Corporate Model of Competences. The Model consists of managerial and functional competences and is the main tool for selecting, evaluating, and developing personnel. OMK developed the Technology of Manager Evaluation for Newly Acquired Companies. As requested by managers, Vyksa Steel Works and Chusovoy Metallurgical Works evaluation centers evaluated over 500 job applicants for vacant positions and candidates for the personnel reserve. Under the Personnel Motivation program, in 2005, Vyksa Steel Works, Chusovoy Metallurgical Works, Almetyevsk Pipe Plant, and Schelkovo Metallurgical Works implemented a personnel incentive system based on Key Performance Indicators (KPI). This incentive system clearly defines the interrelation between performance results and compensation. In 2005, Gubakha Coke performed all preliminary work for the incentive system to be implemented as of the beginning of 2006. In 2005, Vyksa Steel Works and Chusovoy Metallurgical Works developed criteria of an affiliation with key personnel, approved the Regulations for the Key Personnel Selection System, selected and approved key personnel, agreed on approaches to the key personnel motivation systems (individual systems for each group of key employees and critical personnel). The Personnel Motivation program also included the improvement of the remuneration system. For instance, Vyksa Steel Works reorganized its wage schedule for workers; this resulted in reducing the number of scales of wages from 17 to 4. United Metallurgical Company traditionally places special emphasis on personnel development, pursues this policy in a comprehensive manner, and uses the most advanced tools and the worlds best practices.
The Personnel Training, Development, and Performance Evaluation program included the provision of occupational training, additional professions, and advanced training for 9,871 persons at training centers of Vyksa Steel Works and Chusovoy Metallurgical Works, and other steelmaking training centers. During the year, more than 2,000 managers and specialists completed training programs and advanced professional and managerial training programs. In 2005, the Company implemented a modular program for top management development. The purpose of the program is to provide training in the field of cutting-edge technology of business process and personnel management and define efficiency based on financial and technical performance results. The training is based on the study and analysis of global experience of successful companies. The program consists of seven modules and defense of graduate projects following the training. Program participants completed five modules in
2005. The completion of the entire program and the defense of projects are scheduled for the second quarter of 2006. The 100 Best Managers Program selected the most efficient managers on a competitive basis. Strategic business game under this program allowed like-minded managers to show their abilities, create successful teams for the modeling and achievement of strategic corporate goals. For the purpose of forming corporate solidarity and mobilizing employees to attain production objectives, Vyksa Steel Works (VSW) organized and conducted the team building game VSW Team within the corporate culture management program; the number of participants in the game exceeded 80 persons. In 2005, Vyksa Steel Works and Chusovoy Metallurgical Works opened the Foreman and Team Head School. 285 foremen acquired knowledge and practical skills in management, economics, quality management, and personnel
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The Media About Us
Batashev Foundation Awards 2004

On January 27, the Vyksa recreation centre hosted the second awarding ceremony of the Ivan and Andrey Batashev Foundation. founded in 2003, the Batashev Brothers 1 / 2006 Foundation rewards employees for their outstanding achievements in production and research activities and their considerable personal contribution to company development. Prizes and awards are given according to annual performance results.
For the second year in a row, departments of Vyksa Steel Works (VSW) choose their best specialist in eight categories. The Organizing Committee headed by Mr. Anatoly Sedykh, President of United Metallurgical Company (OMK), selects three nominees for each category. The names of the eight best specialists according to annual performance results are announced at the awarding ceremony held in the Large Hall of the Vyksa Recreation Center. Batashev metal, Vyksa metal. For almost a quarter of a millennium, these words are a symbol of the highest quality. That was true in the distant times of Empress Elizabeth of Russia; that is also true nowadays, when descendants of those legendary masters work in the Vyksa workshops. Everybody who comes to Vyksa notes that people here appreciate and revere the history of their town . . . . And especially, they respect the town founders, who are praised in books, monumentalized in bronze . . . . And for two consecutive years, they are pictorialized on medals and badges for prizewinners of the Foundation named after them! In 2004, the regional and nationwide industrial chronicle was supplemented with our achievements, such as a new record in the production of railroad wheels (750 thousand a year) and the supply of pipes for Sakhalin oil pipelines. To a large extent, these achievements were due to the companys record-breaking investment program: last years investments in production were about $200 million. And still, the main capital is considered by the company to be not its technologies but people: its personnel in general and each individual contributing to the prosperity of the company and, therefore, the hometown. To become a nominee of the Batashev Foundation is a great honor for any employee of VSW. Employees themselves note greater renown of prizewinners and nominees among their colleagues and respect from management rather than material incentives . . . . A Batashev prize is a reward for professionalism, said Aleksandr Isaykin, Vice President of OMK and Executive Director of VSW, speaking at the opening of the awarding ceremony. In such days, we feel proud that we take part in the work of a company with so many years of its history. We understand that any prize is more than just an evaluation of nominee performance. This is an evaluation of performance of the entire company. That the prizewinner is awarded a prize is
important; but that it takes place in public is no less important. Personal achievements of employees rewarded for actual work rather than for any formal reason are what they themselves and the collective are proud of. If this is the case, a celebratory entourageinvited TV anchors, a laser show, pop starslooks harmonious. This is our holiday! The event was ended with a two-hour performance by entertainer Oleg Gazmanov. After the ceremony, journalists asked OMKs President Anatoly Sedykh about the prospects for further development of this unique tradition . . . . Of course, Vyksa has some advantages: a very rich history-247 years-and such outstanding founders-the Batashev brothers. But I think that we are certain to apply this experience of rewarding the best specialists to other companies of the group. We even have an idea of establishing an OMK award to be granted in the head office to the best specialists working for the company, said the President of OMK.
Annual Report 2005
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Social Responsibility
United Metallurgical Company settles social responsibility issues in a comprehensive manner, thus contributing to humanitarian and economic development of the Russian Federation.
Social responsibility for OMK is: Business in line with the long-term interests of the country and society Desire to share its success with the regions where it operates and participation in the development of the local social infrastructure Positive effect on the society not only through its business results, but also by implementing social investment and charitable programs Value system based on regarding its successful business and care for its employees and their families as an organic unity United Metallurgical Company is Russias largest manufacturer of metal products for energy, transportation, and production companies. OMK makes industrial products in conformity with generally accepted world standards, insures that orders are placed with many Russian manufacturers, contributes to the economic and social progress of related industries. The Company implements a large-scale investment program aimed at industrial development, equipment modernization and rehabilitation, creation of new production facilities, working environment improvement, and job creation. OMK enhances its business efficiency: the Companys revenues increased by 32% and its net profit rose by 37% in 2005. The OMK enterprises paid to budgets of different levels and extrabudgetary funds more than 4.3 billion rubles in 2005. The Companys major assetsVyksa Steel Works and Chusovoy Metallurgical Works-are the local economic mainstays and the largest taxpayers in the Nizhni Novgorod Region and Perm Territory. OMKs social responsibility with respect to its personnel is based on the following three fundamental principles: creating conditions for remuneration growth, providing comprehensive support for health care, developing the leisure and sport sphere. OMK is the industrys leader in increasing wages and salaries: in 2005, wages and salaries at Vyksa Steel Works increased by 32%; at Chusovoy Metallurgical Works, by 20%. This was possible due to growth in production efficiency. OMK makes extensive use of financial incentives for professional achievements. Since 2003, Vyksa Steel Works has maintained the Ivan and Andrey Batashev Foundation (the Batashev brothers are the founders of Vyksa Steel Works). The Foundations awards are one of the main elements of the incentive system created at Vyksa Steel Works and used for the motivation of employees who make considerable personal contributions to corporate development and attain outstanding success in production and research activities. The Ivan and Andrey Batashev Foundation is an important part of OMKs corporate culture based on paying respect to labor, as well as preserving and developing Russian metallurgical traditions. Besides, awards of the Prince Galitzine Foundation, named after the founder of Chusovoy Metallurgical Works, will be granted in 2006. OMK is attentive to health care and preventive care for its employees. In 2005, Chusovoy Metallurgical Works conducted an outpatient examination of its personnel. Personnel of all of the OMK enterprises is provided with constant extended medical care services; the enterprises fully finance their health establishments, carry out regular immunizations of their employees. OMK has medical insurance programs. The high-quality level of medical care produces a direct economic effect. According to the 2005 results, Vyksa Steel Works and Chusovoy Metallurgical Works achieved a significant reduction in occupational injuries and illnesses. The Company forms the healthy lifestyle culture on a consistent and comprehensive basis, actively develops the sports and healthcare infrastructure, regularly finances cultural and sport events. OMK invests money in the maintenance of cultural centers, museums, recreation centers, preventative clinics. In 2005, the Company spent more than 500 million rubles for these purposes. OMK financed a great number of sports events and festivals and held corporate competitions. The largest of them is the OMKiada games, whose summer stage was held in Vyksa in July. OMK implements a large-scale environment protection program at its main production facilities. During the second half of 2005, OMK, together with the World Banks International Financial Corporation (IFC), audited the environmental and industrial safety of all its enterprises. The audit results formed a basis for a package of measures aimed at the modernization, rehabilitation, and new construction of waste treatment and environment protection facilities at Vyksa Steel Works, Chusovoy Metallurgical Works, and Gubakha Coke. This program will be implemented in 2006-2010, which will considerably reduce technological environmental impact and minimize production impact on the health of employees and local residents. OMK places high emphasis on the social development, social support, and occupational training for youths. In 2005, the Company held over 100 events aiming to involve youths in scientific and technological development, use the intellectual potential of students, identify the best students for the purposes of further employment. The Company allocates considerable financial and organizational resources for charitable programs providing support for unprivileged population groups, maintaining and developing cultural and spiritual traditions, providing assistance for the Russian Orthodox Church and other confessions with respect to the reconstruction of cultural and spiritual heritage monuments. Jointly with the Administration of the Vyksa District and the Legislative Assembly of the Nizhni Novgorod Region, OMK implements a program dedicated to the 250th anniversary of Vyksa Steel Works in November 2007. At present, the town is creating the historical and architectural complex Batashev House, restoring a recreation center, building a new town hotel, overhauling the Metal-Makers Cultural Center, and restoring the unique facilities created by the famous Russian engineer V. G. Shukhov. OMKs total financial participation in the program will exceed 1 bln. rubles. United Metallurgical Company balances its business goals against the interests of society, that is why the Companys social responsibility is an important and high-priority goal of its corporate development.
Corporate Olympics OMKiada, June, 2005.
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The Media About Us
Named After Prince Galitzine

A red caftan dating back to the times of the first miners in the Urals is now appraised at $30,000
On November 30, Chusovoy Metallurgical Works made a presentation of its corporate award named after Prince S. M. Galitzine. The award is
4 / 2005
Historical data
Galitzine was the first mining industrialist in the Urals to have the heart to construct a plant of the Western European type. In the 1870s, Russia did not have experience of building such plants; therefore, the Prince decided to engage French engineers, who at the time had already acquired some experience of working in the Urals. The site chosen for the plant was very favorable: at the Chusovaya station, a junction point of two railroads (Perm-Tyumen, Chusovaya-Berezniki), and at the confluence of three rivers: Chusovaya, Vilva, and Usva. It took a short time (two years) to build the 19th centurys most advanced steelmaking facility in the Urals (blast furnace, open-hearth furnace, rolling mill). At that time, no other plant in the Urals was comparable to the Chusovoy plant. In 1883, the facility was formally put into operation. Chusovoy workers had higher wages that the average in the Urals. The Chusovoy open-hearth furnace and rolling mill shops became ones of the first in the Urals to introduce an eight-hour working day; workers were provided with housing. During WWI, the plant founded by Prince Galitzine was considered to be one of the Urals most powerful and advanced enterprises able to carry out the most responsible defense-related missions.
in commemoration of the founder of the works Prince Sergey Mikhailovich Galitzine who
126 years ago built the 19th centurys most powerful and advanced facility Chusovoy Steelmaking Plant.
Following the Batashev Brothers Award established two years ago at Vyksa Steel Works, Chusovoy steelmakers now have their own award named after the founder of their plant. The names of Andrey and Ivan Batashev are highly esteemed in Vyksa and legendary to local residents. The name of Prince Sergey Mikhailovich Galitzine is to the same extent renowned in Chusovoy. The ceremony establishing the award was held at the Recreation Center of Chusovoy Metallurgical Works. Traditionally, as any important event, the opening of the ceremony was accompanied by the corporate anthem, and the corporate banner was taken to the scene. Before the presentation, Chusovoy managers and workers present at the event were shown a documentary video with highlights about Chusovoy Metallurgical Works performance in the expiring year 2005. These include production record-breaking, implementation of new technologies, jubilees, received awards, commemorative dates . . . . Anatoly Karpov, Executive Director of Chusovoy Metallurgical Works, told the attendees about the corporate award named after Prince S. M. Galitzine. He said, Now, award seekers can make a start. We are sure that this new type of personnel incentive will be to the benefit of further development of our company. The award will be paid by the Galitzine Foundation established by Chusovoy Metallurgical Works and United Metallurgical Company (OMK). The first awards for the performance in 2005 will be granted in February. One a year, the best employees will be rewarded for their work. The winner of the first prize will receive a sum equivalent to $30,000; the winner of the second prize, $5,000; the winner of the third prize, $1,000. The third prize comprises 16 categories: the winners will be selected among workers (blastfurnace operators, steel smelters, ferroalloy smelters, rolling mill operators, automobile spring makers, repairers) and among engineers (best engineer, businessman, project managers, functional manager). Other categories include the Best Mentor and the Best Young Worker. At the end of the presentation, OMKs Director for Personnel Svetlana Nikolashina said, To provide support for creative and talented employees is a corporate tradition of United Metallurgical Company. A similar award has already been granted by Vyksa Steel Works for two years; we find it very important that the award, first of all, encourages people to develop. Nadezhda Vladislavova and her brother Aleksey Vladislavov, lineal descendants of Sergey Mikhailovich Galitzines daughter, were invited to the presentation. At present, Nadezhda Vladislavova is a rector of the Moscow Psychological University, and Aleksey Vladislavov is a scriptwriter. The presentation was also attended by historian Nina Kuzmina, an author of books about Sergey Mikhailovich Galitzine. The descendants of the founder of the plant said that they were sincerely touched by the interest taken by Chusovoy steelmakers in the history of their family. The Galitzine award is in line with the companys corporate traditions. It evidences the continuity of principles of the founders of the Vyksa and Chusovoy plants. This continuity is based on the statesmanlike approach to production development: Russia must have only the best and most advanced things. Commemorating Prince Galitzine, as a Russian patriot and professional steel manufacturer, the Foundation fulfills its principal task: to encourage the most enterprising and advanced employees of Chusovoy Metallurgical Works who have made a remarkable contribution to the development of the Works and the Group in general. One of the main components of labor motivation is to make a public acknowledgement of employee achievements before colleagues. This powerful incentive has already been employed by Vyksa Steel Works; now that the Galitzine Foundation has been established, the same incentive is available to Chusovoy Metallurgical Works. Meanwhile, the Galitzine award has undoubtedly its historical roots. Long before Sergey Mikhailovich Galitzine was born, corporate awards had also been granted in the times of the first miners in the Urals. Virtually all Ural plants in the 18th century granted red caftans to the most hard-working and diligent employees according to annual performance results. The caftan owners had certain social privileges; law-enforcement officers were benevolent toward them even, according to historical chronicles, in pubs. It is certain that Galitzine award winners will likewise be esteemed employees of OMK and citizens of the town of Chusovoy.
Annual Report 2005
23
Financial Statements
Financial Statements
of the Groups Major Companies (Vyksa Steel Works and Chusovoy Metallurgical Works)
Balance Sheet as of January 1, 2006 Vyksa Steel Works Open Joint-Stock Company
Assets 1 Item Code 2 As of Beginning of Accounting Period 3 As of End of Accounting Period 4
I. NONCURRENT ASSETS Intangible assets Fixed assets Construction-in-progress Income-bearing investments in tangible assets Long-term financial investments Deferred tax assets Section I TOTAL 110 120 130 135 140 145 190 3 580 5 064 512 3 413 159 740 981 4 406 9 226 638 8 413 8 848 701 2 454 552 620 272 4 403 11 936 341
II. CURRENT ASSETS Inventories including: raw materials, materials and other similar assets livestock work-in-progress costs finished products and goods for resale goods dispatched deferred expenses other inventories and costs Value added tax on assets purchased Accounts receivable (amounts falling due after more than 12 months from balance sheet date) including: buyers and customers Accounts receivable (amounts falling due within 12 months from balance sheet date) including: buyers and customers Short-term financial investments Cash Other current assets Section II TOTAL 240 241 250 260 270 290 11 392 006 4 836 307 1 630 028 111 400 1 298 210 7 037 326 3 637 652 2 066 271 395 777 17 438 990 230 231 220 856 413 1 239 350 211 212 213 214 215 216 217 2 770 989 314 106 660 599 489 529 54 453 3 932 983 674 349 1 511 447 463 927 117 560 210 4 289 676 6 700 266
BALANCE
300
20 618 644
29 375 331
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Financial Statements. Vyksa Steel Works Open Joint-Stock Company
Liabilities 1
Item Code 2
As of Beginning of Accounting Period 3
As of End of Accounting Period 4
III. CAPITAL AND RESERVES Authorized capital Treasury shares Incremental capital Reserve funds including: statutory reserves reserves formed in accordance with constitutive documents Targeted financing and proceeds Undistributed profit (uncovered loss) Section III TOTAL 432 450 470 490 0 4 811 768 11 217 554 0 7 789 491 13 992 091 431 90 581 90 581 410 411 420 430 376 440 350 5 939 115 90 581 376 440 350 5 735 929 90 581
IV. LONG-TERM LIABILITIES Loans and credits Deferred tax liabilities Other long-term liabilities Section IV TOTAL 510 515 520 590 1 143 398 317 707 60 061 1 521 166 4 897 100 350 075 25 019 5 272 194
V. SHORT-TERM LIABILITIES Loans and credits Accounts payable including: suppliers and contractors accounts payable to personnel debts to extra-budgetary public funds tax payables other accounts payable Debts to members/founders with respect to their earnings Deferred revenue Reserve for future expenses Other short-term liabilities Section V TOTAL 630 640 650 660 690 1 869 7 879 924 1 298 0 10 111 046 621 622 623 624 625 2 354 448 72 915 26 973 319 812 1 375 212 2 543 132 111 156 35 776 610 620 3 935 611 3 942 444 6 044 472 4 065 276
BALANCE
700
20 618 644
29 375 331
Statement of Assets Accounted for Off-Balance Sheet Fixed assets leased including leasing agreements Inventory items accepted for safekeeping Goods accepted for commission sale Written-off debts of insolvent debtors Security for obligations and payments obtained Security for obligations and payments provided 910 911 920 930 940 950 960 2 895 13 803 4 805 466 1 764 37 818 6 170 337
Annual Report 2005
25
Liabilities 1
Item Code 2
Depreciation of housing facilities Depreciation of off-site service facilities and other similar facilities Intangible assets obtained for use Materials for processing
970
1 401
1 521
980 990 1000
76 706
76 706
Profit and Loss Statement for 2005 Vyksa Steel Works Open Joint-Stock Company
Indicator Description 1 Item Code 2 Accounting Period 3 Same Period of Previous Year 4
Earnings and Expenses Resulting from Ordinary Activities Net earnings from sale of goods, products, work, services (exclusive of VAT, excise taxes and other similar dues) Cost value of goods, products, work, services sold Gross profit Selling expenses Management expenses Sales profit/loss 030 040 050 020 (25 995 831) 12 029 414 (55 71 879) (1 242 568) 5 214 967 (19 264 617) 7362770 (2 705 703) (1 199 683) 3 457 384 010 38 025 245 26 627 387
Other Earnings and Expenses Interest receivable Interest payable Revenues from participation in other organizations Other operating earnings Other operating expenses Nonoperating earnings Nonoperating expenses 060 070 080 090 100 120 130 43 679 (711 641) 0 11 327 211 (11 485 609) 7 041 667 (7 615 928) 4 586 (436 592) 3 13 941 560 (13 987 920) 4 730 523 (5 014 302)
Profit/Loss Before Tax Deferred tax assets Deferred tax liabilities Current profit tax Other similar taxes and dues Extraordinary proceeds (expenses) Profit tax for previous year
140 141 142 150 151 152 153
3 814 346 (48) (32 883) (872 260) (100 005) 0 (34 613)
2 695 242 (522) (244 504) (388 021) (35 358) 17 0
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Net Profit/Loss of Accounting Year
160
2 774 537
2 026 854
FOR REFERENCE Permanent tax liabilities (assets) Basic earnings (loss) per share Diluted earnings (loss) per share 200 201 202 119 382 1,474 1,474 51 276 1,077 1,077
Details of Specific Profits and Losses

Indicator Description Item Code Accounting Period Profit 1 2 3 Loss 4 Same Period of Previous Year Profit 5 Loss 6
Penalties, interest fines, and liquidated damages admitted or payable in accordance with court (arbitration) decision Profit/loss of previous years Indemnity for losses arising from nonperformance or improper performance of obligations Exchange rate differences arising from foreign exchange operations Deductions to assessed reserves Accounts receivable and accounts payable written off due to expired period of limitation 260 481 24 015 570 240 229 033 291 223 4 578 603 4 586 623 230 45 247 20 117 442 53 118 210 220 3 880 20 133 95 872 103 309 7 564 294 95 633 24 112
Annual Report 2005
27
Financial Statements. Audit Report of Vyksa Steel Works Open Joint-Stock Company
AUDIT REPORT ON THE FINANCIAL (ACCOUNTING) STATEMENTS of Vyksa Steel Works Open Joint-Stock Company for 2005 Auditor: Name: NND-Audit Closed Joint-Stock Company Location: 603006, Nizhni Novgorod, ul. Zagorskogo, 14 State Registration: registered with the Committee on State Property Management of the Nizhni Novgorod Registration Chamber (KUGI NRP) on August 27, 1998, under No. N/438 License: E 000070 of April 10, 2002, issued by the Ministry of Finance of the Russian Federation; valid for 5 years A member of the Institute of Professional Auditors of Russia Auditee: Name: Vyksa Steel Works Open Joint-Stock Company Location: 607060, Nizhni Novgorod Region, Vyksa, ul. Lenina State Registration: registered on November 06, 1992, under No. 5 We have audited the attached financial (accounting) statements of Vyksa Steel Works Open Joint-Stock Company for the period from January 1 to and including December 31, 2005. The financial (accounting) statements of Vyksa Steel Works Open Joint-Stock Company consist of the following statements: Balance Sheet; Profit and Loss Statement; Appendices to the Balance Sheet and the Profit and Loss Statement; Explanatory Note. The preparation and submittal of these financial (accounting) statements are the responsibility of the executive body of Vyksa Steel Works Open Joint-Stock Company. Our responsibility is to express an opinion on the reliability of these statements in all material aspects and the compliance of the auditee's accounting with the laws of the Russian Federation. The audit was conducted in accordance with: Federal Law No. 119-FZ "On Auditing" of August 07, 2001; Federal Auditing Rules (Standards) approved by Resolutions of the Government of the Russian Federation No. 696 of September 23, 2002, and No. 228 of April 16, 2005; auditing rules (standards) of the Institute of Professional Auditors of Russia; internal auditing standards and methods; regulatory documents of the authorities governing the activities of the auditee: Federal Law No. 129-FZ "On Accounting" of November 21, 1996; Regulations for Maintenance of Accounting Records and Accounting Statements in the Russian
28
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Financial Statements. Audit Report of Vyksa Steel Works Open Joint-Stock Company
Federation approved by Order of the Ministry of Finance of the Russian Federation No. 34n of July 29, 1998; Regulations for Accounting 4/99 "Accounting of an Organization" approved by Order of the Ministry of Finance of the Russian Federation No. 43n of July 06, 1999; and Order of the Ministry of Finance of the Russian Federation No. 67n "On Organization Accounting Forms" of July 22, 2003. The audit was so planned and conducted as to acquire reasonable confidence that the financial (accounting) statements did not contain any material misstatements. This was a sampling audit including a test-based examination of the evidence confirming the figures contained in the financial (accounting) statements and the disclosure of information on financial and economic activities therein, an evaluation of the accounting principles and rules applied to the preparation of financial (accounting) statements, a review of basic estimated figures obtained by the auditee's management, and an evaluation of submission of the accounting statements. We believe that the audit gives us sufficient grounds to express an opinion about the reliability of the financial (accounting) statements and the compliance of the accounting procedure with the laws of the Russian Federation. In our opinion, the financial (accounting) statements of Vyksa Steel Works Open Joint-Stock Company provide, in all material aspects, a true and fair view of its financial standing as of December 31, 2004, and the results of its financial and economic activities for the period from January 1 to and including December 31, 2005. April 14, 2006 T. B. Kuznetsova Director NND-Audit
Ye. A. Mizikovsky Audit Manager Auditor, Professor Auditor Qualification License to Conduct General Audits No. K004689 issued in pursuance of the Resolution of the Central Certifying and Licensing Audit Commission of the Ministry of Finance of the Russian Federation dated May 25, 2000; valid for an indefinite period
Annual Report 2005
29
Financial Statements. Chusovoy Metallurgical Works Open Joint-Stock Company
Balance Sheet as of December 31, 2005 Chusovoy Metallurgical Works Open Joint-Stock Company
Assets 1 Item Code 2 As of Beginning of Accounting Period 3 As of End of Accounting Period 4
I. NONCURRENT ASSETS Intangible assets Fixed assets Construction-in-progress Income-bearing investments in tangible assets Long-term financial investments Deferred tax assets Section I TOTAL 110 120 130 135 140 145 150 151 190 667 1 535 423 272 692 0 1 878 37 770 101 658 101 658 1 950 088 647 1 567 481 422 848 0 2 128 43 664 160 259 160 259 2 197 027
II. CURRENT ASSETS Inventories including: raw materials, materials and other similar assets livestock work-in-progress costs finished products and goods for resale goods dispatched deferred expenses other inventories and costs Value added tax on assets purchased Accounts receivable (amounts falling due after more than 12 months from balance sheet date) including: buyers and customers Accounts receivable (amounts falling due within 12 months from balance sheet date) including: buyers and customers Short-term financial investments Cash Other current assets Section II TOTAL 240 241 250 260 270 290 708 579 357 436 155 117 16 317 12 288 3 246 260 1 248 520 631 656 941 682 176 090 22 091 4 474 194 230 231 13 167 0 14 880 0 211 212 213 214 215 216 217 220 1 011 665 0 306 399 332 006 278 062 65 767 0 346 893 1 140 552 0 320 590 204 235 24 170 184 751 0 196 633 210 1 993 899 1 874 298
BALANCE
300
5 196 348
6 671 221
30
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Liabilities 1
Item Code 2
III. CAPITAL AND RESERVES Authorized capital Treasury shares Incremental capital Reserve funds including: statutory reserves reserves formed in accordance with constitutive documents 432 433 Undistributed profit (uncovered loss) Section III TOTAL 470 490 367 010 2 388 344 855 205 2 890 794 0 0 431 31 540 57 234 410 411 420 430 512 855 0 1 476 939 31 540 512 855 0 1 465 500 57 234
IV. LONG-TERM LIABILITIES Loans and credits Deferred tax liabilities Other long-term liabilities 510 515 520 521 Section IV TOTAL 590 288 172 1 967 025 150 225 137 947 0 1 788 764 178 261 0
V. SHORT-TERM LIABILITIES Loans and credits Accounts payable including: suppliers and contractors accounts payable to personnel debts to extra-budgetary public funds tax payables other accounts payable Debts to members/founders with respect to their earnings Deferred revenue Reserve for future expenses Other short-term liabilities 630 640 650 660 661 Section V TOTAL 690 2 519 832 1 813 402 0 2 130 9 0 0 2 066 0 0 621 622 623 624 625 575 092 46 336 3 196 54 694 315 330 424 264 58 330 14 671 126 967 72 038 610 620 1 523 045 994 648 1 115 066 696 270
BALANCE Statement of Assets Accounted for Off-Balance Sheet Fixed assets leased including leasing agreements Inventory items accepted for safekeeping Goods accepted for commission sale Written-off debts of insolvent debtors Security for obligations and payments obtained
700
5 196 348
6 671 221
910 911 920 930 940 950
0 0 0 0 84 833 142 614
0 0 152 326 0 85 706 931 683
Annual Report 2005
31
Liabilities 1 Security for obligations and payments provided Depreciation of housing facilities Depreciation of off-site service facilities and other similar facilities Intangible assets obtained for use
Item Code 2 960 970
As of Beginning of Accounting Period 3 1 640 704 85
As of End of Accounting Period 4 2 743 785 139
980 990 1000
0 0
0 0
Profit and Loss Statement for 2005 Chusovoy Metallurgical Works Open Joint-Stock Company
Indicator Description 1 Earnings and Expenses Resulting from Ordinary Activities Net earnings from sale of goods, products, work, services (exclusive of VAT, excise taxes and other similar dues) Cost value of goods, products, work, services sold Gross profit Selling expenses Management expenses Sales profit/loss 020 029 030 040 050 (9 204 411) 2 940 120 (973 920) (773 681) 1 192 519 (6 597 269) 2 241 402 (559 650) (652 584) 1 029 168 010 12 144 531 8 838 671 Item Code 2 Accounting Period 3 Same Period of Previous Year 4
Other Earnings and Expenses Interest receivable Interest payable Revenues from participation in other organizations Other operating earnings Other operating expenses Nonoperating earnings Nonoperating expenses 060 070 080 090 100 120 130 1 617 (257 242) 0 9 140 303 (9 199 271) 185 200 (372 037) 582 (126 247) 74 5 061 644 (5 065 043) 129 585 (294 840)
Profit/Loss Before Tax Deferred tax assets Deferred tax liabilities Current profit tax Profit tax for previous year
140 141 142 150 151
691 089 (10 742) (40 314) (137 579) 4
734 923 (22 834) (90 444) (89 366) 5 426
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Indicator Description 1
Item Code 2
Accounting Period 3
Same Period of Previous Year 4
Net Profit/Loss of Accounting Year 190 502 450 537 705
FOR REFERENCE Permanent tax liabilities (assets) Basic earnings (loss) per share Diluted earnings (loss) per share 200 22 774 0 0 26 263 0 0
Details of Specific Profits and Losses

Indicator Description Item Code Accounting Period Profit 1 2 3 Loss 4 Same Period of Previous Year Profit 5 Loss 6
Penalties, interest fines, and liquidated damages admitted or payable in accordance with court (arbitration) decision Profit/loss of previous years Indemnity for losses arising from nonperformance or improper performance of obligations Exchange rate differences arising from foreign exchange operations Deductions to assessed reserves Accounts receivable and accounts payable written off due to expired period of limitation 35 114 1 978 99 640 15 598 59 194 73 260 72 270 24 704 12 203 16 694 30 0 0 0 2 000 (1 893) 0 (14 887) 0 (1 013) 0 (9 680)
Annual Report 2005
33
Financial Statements. Audit Report of Chusovoy Metallurgical Works Open Joint-Stock Company
AUDIT REPORT ON THE FINANCIAL (ACCOUNTING) STATEMENTS OF CHUSOVOY METALLURGICAL WORKS OPEN JOINT-STOCK COMPANY FOR THE PERIOD FROM JANUARY 1 TO AND INCLUDING DECEMBER 31, 2005 To the Management and Owners of Chusovoy Metallurgical Works Open Joint-Stock Company
1. INFORMATION ON THE AUDITOR Name and form of incorporation Location Number and date of state registration certificate Licenses Tsentr Bukhgaltera i Auditora (CBA) Auditing Firm Closed Joint-Stock Company 127047, Moscow, Oruzheyny per., 15/1 626.228 of February 4, 1994
Auditor License No. E 002806 issued in pursuance of Order of the Ministry of Finance of the Russian Federation No. 297 of December 10, 2002. License to Perform Work Using National Security Information No. B 347137 of December 29, 2005, issued by the Directorate of the Federal Security Service of the Russian Federation for the City of Moscow and the Moscow Region. National Federation of Consultants and Auditors (Certificate No. 0142 of September 21, 2000) Institute of Professional Auditors of Russia (Certificate Series D No. 0316/77 of May 31, 2005)
Membership in accredited professional association
2. INFORMATION ON THE AUDITEE Name and form of incorporation Location Chusovoy Metallurgical Works Open Joint-Stock Company
Russian Federation, 618200, Perm Region, Chusovoy, ul. Trudovaya, 13 113 of August 19, 1992
Number and date of state registration certificate 3. INTRODUCTION
We have audited the attached financial (accounting) statements of Chusovoy Metallurgical Works Open Joint-Stock Company (hereinafter, the "Company") for the period from January 1 to and including December 31, 2005. The financial (accounting) statements of the Company consist of the following statements:
34
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Financial Statements. Audit Report of Chusovoy Metallurgical Works Open Joint-Stock Company
Balance Sheet (Form No. 1); Profit and Loss Statement (Form No. 2); Statement of Changes in Capital (Form No. 3); Cash Flow Statement (Form No. 4); Appendices to the Balance Sheet (Form No. 5); Explanatory Note. The preparation and submittal of these financial (accounting) statements are the responsibility of the executive body of the Company. Our responsibility is to express an opinion based on the conducted audit concerning the reliability of these statements in all material aspects and the compliance of the auditee's accounting with the laws of the Russian Federation. 4. AUDIT SCOPE The audit was conducted in accordance with: Federal Law No. 119-FZ "On Auditing" of August 07, 2001; Federal Auditing Rules (Standards) approved by Resolution of the Government of the Russian Federation No. 696 of September 23, 2002; internal auditing standards of CBA Auditing Firm Closed Joint-Stock Company. The audit was so planned and conducted as to acquire reasonable confidence that the financial (accounting) statements did not contain any material misstatements. This was a sampling audit including a test-based examination of the evidence confirming the figures contained in the financial (accounting) statements and the disclosure of information on financial and economic activities therein, an evaluation of the compliance with the accounting principles and rules applied to the preparation of financial (accounting) statements, a review of basic estimated figures obtained by the auditee's management, and an evaluation of submission of the accounting statements. We believe that the audit gives us sufficient grounds to express an opinion about the reliability of the financial (accounting) statements and the compliance of the accounting procedure with the laws of the Russian Federation. 5. AUDIT OPINION In our opinion, the financial (accounting) statements of Chusovoy Steel Works Open Joint-Stock Company provide, in all material aspects, a true and fair view of its financial standing as of December 31, 2005, and the results of its financial and economic activities for the period from January 1 to and including December 31, 2005, in accordance with the requirements of the laws of the Russian Federation as related to the preparation of financial (accounting) statements. Audit Report Date: April 14, 2006 Ye. N. Sedova Director of the Audit Department CBA Auditing Firm Closed Joint-Stock Company V. A. Gergalo Audit Manager (Auditor Qualification License to Conduct General Audits No. K003263 of April 14, 2003; valid for an indefinite period)
Annual Report 2005
35
100 Best Managers Go to Maldives
The Media About Us
100 Best Managers Go to Maldives

4 / 2005
United Metallurgical Company has summed up the results of its second One Hundred Best Managers program. The final stage, which included a business game and a cultural program, took place October 10-15 in the Maldives.
Committee. On September 6, the Committee approved the final list of one hundred best managers. The five days spent in the Maldives were full of hard work. According to Aleksandr Isaykin, Vice President of OMK and Executive Director of Vyksa Steel Works, the Metallurgical Enterprise Management business game confirmed that the competition participants were indeed the best managers of the Company. All contenders showed their professionalism and ability to work in a team. These are the most important qualities demanded by the Company from its managers, he emphasized, The Company encourages its employees to aspire for professional growth and self-improvement. In the opinion of Anatoly Karpov, Vice President of OMK and Executive Director of Chusovoy Metallurgical Works, The One Hundred Best Managers program is a very effective form of working with managementlevel employees, making managers potential grow and their team spirit strengthen. But the most important thing is that they generate concrete proposals that can have a positive impact
This trip of OMKs 100 best managers to the Maldives was preceded by intensive organizational efforts. All enterprises that are part of the Company held competitions to identify best managers on the basis of participants creative work - essays titled OMK Managers Target Characteristics and proposals for the improvement of the Companys business processes. The expert committees established at OMKs enterprises selected the best works, evaluated each contestants contribution to the Companys production success, and submitted their decisions for approval to the OMK Expert
on the performance of not only specific divisions but also the Company on the whole. The awards were given in a formal ceremony. The ceremony was attended by the Republic of Maldives cabinet members Minister of Transport Mohammed Shaid, Minister of Trade and Economic Affairs Mohammed Djalil, Minister of Tourism Mahmud Shagi and other officials. The team led by Chusovoy Metallurgical Works Director for Non-core Assets A. Adamchuk, recognized as the best strategic manager, won in the Company Leader category. I. Ponomarev, Head of the Budget Department of the Directorate on Economy and Finance of Vyksa Steel Works was voted the best leading manager; A. Lyaskovsky, Director for Power Supply and Repair of Vyksa Steel Works, the best commercial manager; S. Agarzayev, Director of the Dealing Center of Metallinvestbank, the best innovative manager; S. Filipyev, Director for Technical Development of Chusovoy Metallurgical Works, the best analytical manager; and A. Mishin, Director for Marketing and Sales of Vyksa Steel Works, the best communication manager.
36
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2006

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Moscow, 2006

Message from Chairman

United Metallurgical Company

Annual Report 2005

Introduction. Message from Chairman of the Board of Directors

The Media About Us

Anatoly Sedykh: We Are Not in Pursuit of Anyone.

United Metallurgical Company

Introduction. Message from Chairman of the Board of Directors

United Metallurgical Company

Annual Report 2005

Introduction. 2005 Events: Major Achievements and Projects

2005 Events: Major Achievements and Projects

United Metallurgical Company

Introduction. 2005 Events: Major Achievements and Projects

demand for OMK bonds was 1.8 times as much as supply

United Metallurgical Company

Annual Report 2005

Introduction. 2005 Events: Major Achievements and Projects

The Media About Us

Vyksa Makes 1,420 mm Pipes

On the way to the optimal decision

United Metallurgical Company

Introduction. 2005 Events: Major Achievements and Projects

Imports (incl. Khartsyzsk Tube Works) 40%

Volzhsky Pipe Plant 17%

United Metallurgical Company

Annual Report 2005

Chelyabinsk Tube Rolling Plant 23%

Chelyabinsk Tube Rolling Plant 26%

Company Profile. Group Structure

Casting and Rolling Division

United Metallurgical Company

Company Profile. Group Strategy

Construction of Foundry and Rolling Facility, December, 2005.

United Metallurgical Company

Annual Report 2005

Company Profile. Group Strategy

The Media About Us

United Metallurgical Company

Company Profile. Group Strategy

Too early to relax

United Metallurgical Company

Annual Report 2005

Company Profile. Key Financial and Performance Indicators

Key Financial and Performance Indicators

3. OMK Group Financial Indicators

Revenues EBITDA Net profit Investments

Balance Sheet Structure

2004 11 501 18 683 2004 15 278 2 836 12 070 30 184

2005 16 600 31 555 2005 23 160 9 053 15 942 48 155

United Metallurgical Company

Electric-welded pipes with sizes ranging from 508 to 1,420 mm

Pipes for oil and gas pipelines and generalpurpose pipes

Vyksa Steel Works. Pipes Shipped to Customers

2005 . 380.7 223.2 215.5 56.9 86.5 967.5

Almetyevsk Pipe Plant. Pipes Shipped to Customers

2005 . 57.8 18.7 8.5 16.5 101.6

Source: Metal-Courier: Metal-Expert Steel Pipes; Issue No. 2, 2006

United Metallurgical Company

Annual Report 2005

The Media About Us