MITTAL'S RING OF STEEL
By Bob Jones (February 2004).
Reproduced from MT magazine with the permission of
the copyright owner, Haymarket Business Publications Ltd.
the past 16 years, Lakshmi Mittal, the 'Carnegie from Calcutta'
has built a fortune out of steelworks that rivals had thrown on
the scrapheap. Bob Jones charts his controversial career. The fate
of the steelworks at Nova Hut, near Ostrava in the Czech Republic,
should have been a foregone conclusion. Built at the height of the
Cold War in 1951 and hardly changed since, the New Mill (as its
name translates) was looking anything but new as its 50th birthday
loomed. Yet Nova Hut is still running today.
collapse of communism in eastern Europe had put an end to the planned
economy, depriving the newly formed Czech Republic's largest steelmaker
of its sole customer and leaving it exposed to the icy blast of
western capitalism. With obsolete plant, no money for maintenance
- never mind investment - and little notion of how to operate in
a free market, the plant and its 12,000 employees looked like an
industrial dinosaur heading for collapse.
Nova Hut is still running today. It makes a profit and will continue
to do so with only minor updates to its antiquated blast furnaces
and rolling mills. It was bought for $6 million in February 2003
(a pittance for a facility that once produced nearly 4 million tonnes
of steel a year) by a man who saw past the rusting façade
and demoralised workforce to the commercial potential.
was Lakshmi Mittal, London-based head of LNM, the world's second-largest
steel maker. His plants produced about 42 million tonnes last year,
only slightly less than Luxembourg-based multinational Arcelor did
in 2002. Nova Hut was just the latest in a long line of unwanted
plants to get the Mittal treatment. For 16 years, he has been picking
up and turning around the steel plants that no-one else wanted,
and his empire now spans the globe from Trinidad to Kazakhstan via
distinctive modus operandi has been met by both shouts of protest
and hymns of praise. For every rival who sees LNM as a crude asset
stripper, another hails him as an industrial genius, blessed with
economic second sight and an eye for a bargain that would make Del
Boy drop his Pina Colada. How does he do it, and what is the real
story behind the most powerful man in the steel business today?
Mittal comes from a wealthy Indian steel family - his father, Mohan
Lal Mittal, ran a steel business, Nippon Denro Ispat. Until the
1990s, the family's main assets in India were a cold-rolling mill
for sheet steels in Nagpur and an alloy steels plant near Pune.
Today, the family business, including a large integrated steel plant
near Mumbai, is run by Lakshmi's brothers, Pramod and Vinod, but
Lakshmi has no connection with it.
an ambitious entrepreneur developing a steel business in the years
after Indian independence in 1948, his father faced frustrations.
The country's steel industry was stitched up in a virtual duopoly:
there was Steel Authority of India Ltd, the public-sector firm that
the new state was keen to build up, and Tata Iron & Steel -
the only private business permitted a substantial presence in Indian
Mittal senior sent Lakshmi to Indonesia, where the steel industry
offered huge potential. State-owned company PT Krakatau Steel held
the monopoly on most types of finished steel, but private-sector
investment in basic construction steels was permitted. The 25-year-
old set up a bar-rolling mill, with a modest annual capacity of
65,000 tonnes, to make Rebar steel for the construction industry
- the first steel product a developing country needs.
MITTAL CONQUERS INDONESIA
soon turned to the issue of sourcing billet, a semi-finished product
that is the first step in producing construction steels. Billet,
vital for the sort of rolling mill Mittal was running, has a sizable
international trade, but availability and prices fluctuate wildly.
He was keen to end the dependency of the business on its supply.
To make his own, Mittal needed to build a meltshop where billet
could be cast from scrap, a cheaper raw material. He proved adept
at currying favour in the right places and by 1982 had gained permission
for his meltshop, securing the future of PT Ispat Indo. Today, with
a capacity of 700,000 tonnes a year, it is Indonesia's second-largest
steel producer and the largest in the private sector.
Mittal was still vulnerable in raw materials. Good-quality scrap
could be hard to source and he needed to supplement his supplies
with a substitute, direct reduced iron (DRI). Not only is very high
quality iron ore required to make DRI, so is very cheap natural
gas. Mittal went to the Caribbean to find a supplier.
struck a deal to buy DRI from the Iron & Steel Co of Trinidad
& Tobago (Iscott). But Iscott was not in a happy state and the
Trinidadian government was looking for a saviour. The politicians
in Port Louis had a contract with a German and an Austrian company
to operate Iscott and this was due for renewal. The government decided
on a competitive tender and Mittal saw his chance.
was a very big break for me to win that contract,' he says. 'The
electric arc furnace that I set up in Indonesia had the ability
to continually charge DRI via conveyors. That operating advantage
helped clinch the contract.' Mittal agreed to run Iscott for five
years and to bear the risk of any losses. Pleased with the results,
the Trinidadian government agreed to sell the plant to Mittal. Caribbean
Ispat was born, and Mittal's plan to be a global presence moved
a step closer to completion.
the next decade, he built up a DRI-based empire. Mittal bought plants
founded on this type of ironmaking in both Canada and Germany -
the latter, Hamburger Stahlwerke, had jointly managed Iscott. Turnarounds
became his speciality, although not all acqui- sitions were in such
a bad way as Nova Hut. When he took over that plant in 2002, the
employees hadn't been paid for months. Mittal became their saviour
by paying their wages and issuing them with safety equipment.
OF STEEL SCHMOOZES KAZAKHSTAN
breakthrough in volume terms came in 1991, when Mittal gained control
of a 2 million tonnes-a-year steel plant in Mexico with integrated
blast furnace. Ispat Mexicana was the cash cow that fuelled acquisitions
throughout the '90s. Four years later Mittal made an extraordinary
acquisition. After months spent schmoozing the Kazakhstan authorities,
he succeeded in buying the large integrated steelworks in Karaganda
- another Soviet-era behemoth whose geographical proximity to nowhere
made its future questionable. Karaganda was an awful place. Stalin
had sent his victims to rot there in temperatures that rise to 40
degrees in summer and sink to -50 in winter.
industry familiar with Mittal's ability to buy steel plants at the
right price watched as he flexed his political muscles. Despite
his reputation as the king of schmooze, he insists: 'I'm a steelmaker,
not a dealmaker.' But he is more than that: a good businessman in
an industry where that is a rarity. He and his son Aditya - not
yet 30, but established as heir apparent - are charming and persuasive.
They seem relaxed, but are prepared to take risks that no-one else
in the industry would be willing to assume.
a plant has been acquired, the real work starts. What impresses
Mittal's rivals is his ability to make acquisitions perform when
no-one else can. Of course, he knows how to operate a steel plant
and ensures that best practice is shared among all plants. Every
Monday at 10am, he chairs a conference call at his London HQ with
the heads of all his plants worldwide. It lasts at least an hour
and has been known to go on into the afternoon.
no-one could call him work-shy. He clocks up about 350,000 miles
a year in his private jet, inspecting the troops and chasing the
next deal. He says he enjoys the lifestyle and doesn't mind that
he rarely has the chance to enjoy his palatial home on North London's
billionaire's row - The Bishop's Avenue in Hampstead - neighbour
of oil sheikhs, soap stars and Richard Desmond, among others.
OFFERS A HUGE RSEOURCE OF SKILLED MANAGERS
there's more to LNM than Lakshmi. India has a huge resource of highly
skilled and knowledgeable engineers, working for a pittance in the
public sector. The Mittals hand-pick the best managers - even some
past retirement age - and pay them handsomely. They then have to
perform brilliantly in some unpleasant and dangerous environments.
Karaganda. When I visited the plant in 1991, the CIS was in the
depths of an unprecedented depression. In Moscow's shops all you
could buy was ice cream, newspapers, flowers and matches. Of all
the factory sites I saw, Karaganda - perhaps because it was so isolated
- was the one that had most connections with the outside world.
The telex machine in the plant's foreign trade office was buzzing
with communications from companies in Europe, America and the Far
the hotel I stayed in had little food. Located next to a polluted
lake, it had hosted the presidents of Russia, Kazakhstan and Belarus
the year before for discussions on forming the CIS. I found it hard
to believe they could have stayed in such a shabby place. The steel
plant's foreign economic relations director, a young Russian educated
in the US, came to dinner. He and I ate terrible food and swilled
vodka from the milk bottles I'd brought from the mini-bar in my
Moscow hotel room.
the car ride to the hotel, I'd noticed his Lada was fitted with
a strange box where the sunshield should have been. He told me proudly
that it was a security device, bought in Singapore for US$400, to
ensure that he wasn't being followed. He said the police were very
zealous and he didn't want to be caught drink-driving. Then he gave
a big laugh. He was murdered by the mafia three months later.
INTERNATIONAL GETS LISTED
moved to London in the mid 1990s and a $776 million IPO soon followed
- the largest in the steel industry. Mittal listed five of his seven
steel plants on the Amsterdam and New York stock exchanges under
the name Ispat International - he is thought to have cleared $400
million on the deal. But Ispats Karmet and Indo remained outside
the new group, as have many recent acquisitions.
interest in the quoted part of Mittal's group has dropped to virtually
nil because it owns some of the worst-performing producers in the
wider group in terms of return. The Mittals admit Ispat International
does not have the financial capability to be a vehicle for growth
at present, but that has not slowed growth in LNM as a whole.
CONQUERS AMERICA - INLAND
main reason for the weakness of the quoted company is an acquisition
that Mittal made in America in 1998. He had long wanted a major
flat-products plant in either Europe or the US to follow up his
Mexican success. He got his opportunity with Inland Steel, then
America's sixth-largest integrated producer and, like most of the
high-cost US integrated sector, struggling. This was Mittal's entry
to the steelmaking high table - in 2000, he was invited to speak
as a guest at the American Iron & Steel Institute's annual congress
- but it became a rare blot on his record of turnarounds.
has continued to struggle. For the first time, Mittal came across
entrenched union hostility to change. A project to scrap the blast
furnaces and convert the plant into a more flexible mini-mill operation
had to be abandoned because of union pressure.
admits he failed to anticipate the huge social costs in pensions
and healthcare that firms such as Inland have to bear in the US.
Of all his acquisitions - including that of the small Irish Ispat
plant, which he later closed - Ispat Inland has been the most disappointing.
'The US market was not under our control,' Mittal ackowledges, 'nor
was the US pension system.'
AND THE SIDEX CONTROVERSY
his main focus is on eastern Europe, where the steel industries
are still being privatised. In 2001, he notoriously enlisted the
help of Tony Blair to buy Ispat Sidex in Romania, beating French
rival Usinor - which later became part of Arcelor - in the process.
Sidex affair caused embarrassment in both Downing Street and Mittal's
Berkeley Square base. Keith Vaz, a Labour MP and government minister
of Indian extraction, was trying to drum up support for Labour among
the UK's fast-growing Indian elite. It was Vaz who, controversially,
tried to get British passports for the Hinduja brothers, the super-rich
Indians based in London who had long been subject to accusations
of corruption concerning a weapons contract with Sweden's Bofors.
Mittal and his family moved to London, they became society figures.
His daughter's recent engagement featured in the Daily Telegraph's
Mandrake gossip column. Mittal himself is number 12 in the Sunday
Times Rich List, valued at £1.3 billion. It was natural for
a networker like Vaz to be in contact with him.
after Mittal had agreed to donate £125,000 to the Labour party,
it was revealed that Blair had signed a letter to the Romanian prime
minister asking him to favour LNM over Usinor in the battle for
Sidex. French prime minister Lionel Jospin also lobbied Bucharest,
but whereas his support was for a pillar of the French industrial
establishment, Blair's was for someone whose only claim on him was
that he'd donated money to his party. Neither Mittal nor his business
interests - apart from a wire-drawing plant - were British.
was caught out by the watchful British media, spurred on by a UK
steel industry that felt Labour was doing nothing to help it. The
brickbats were aimed mainly at Blair; Mittal was only slightly ruffled,
the episode serving as a lesson that the UK press will jump on any
incident that might embarrass the Government.
also abound about commission payments made to help Mittal bring
off the extraordinary acquisition of the Kazakh Karaganda plant
from the government of President Nursultan Nazarbayev, who was busy
privatising his country's oil assets at the time and has managed
to make himself one of the world's richest men despite his country's
poverty. Nazarbayev is a former general director of the Karaganda
works, so it is not hard to see how Mittal charmed him. When the
two met they were able to talk steel - and money.
continue into the affairs of politicians, including Nazarbayev and
a former Trinidadian prime minister, Basdeo Panday, with whom Mittal
has had dealings. Panday has been accused of failing to declare
financial holdings abroad, including property in London, while a
Russian businessman, Patokh Chodiev, who acted on behalf of Mittal
in Kazakhstan, has been subject to a corruption investigation by
the Belgian authorities.
former right-hand man Johannes Sittard, who left LNM in 2001 to
work for the Chodiev group, claimed on the BBC's Money Programme
that Mittal had paid $100 million in commissions for the Kazakh
acquisition. Mittal has never publicly responded to these accusations
and accusers have yet to come up with evidence to substantiate any
wrongdoing on LNM's part.
EXPANSION PLANS CONTINUE
rumours may continue, but so does Mittal's expansion. Following
Nova Hut in 2002, he won Polish cabinet approval for the takeover
of Polskie Huty Stali - which would make LNM the region's premier
steelmaker. This privatisation has also been controversial. LNM's
bitter rival for PHS was US Steel, whose executives feel that LNM
conducts its business in a way that their own lawyers would not
allow because US Steel is a quoted company and an icon of American
industry. The Polish deal was marked by mud-slinging, with accusation
and counter-accusation from both sides, although none has yet stuck.
predicted late last year that LNM would make about 42 million tonnes
of crude steel in 2003 with revenues of about $12 billion. He claims
not to be intent on becoming No. 1 by volume of production, nor
does he like being thought of as an entrepreneur, a modern-day Carnegie
(whose own reputation for probity was called into question before
his munificent retirement).
evidence to the contrary, the family plays down any suggestion of
swashbuckling entrepreneurialism. It sees itself as a steelmaker,
plain and simple, dedicated to building a global institution and
playing a full part in the further consolidation of the steel industry.
rise has come about partly because it has seen opportunities for
acquisitions rejected by other steel producers. The firm buys plants
for which most of its rivals refuse to compete, and it buys them
very reasonably. It has to be able to see a profit in the business.
'We wouldn't buy any company that doesn't fit in with our growth
strategy, something without production, marketing or cost synergies,
or that couldn't become a low-cost producer,' explains Mittal.
HAPPENED TO BRITISH STEEL?
Corus was making £2 million a day in profit in the mid
1990s and was hailed as a model for the world steel industry.
Its lean management and low-cost production methods attracted
interest from as far away as Japan. When it merged with Hoogovens
of the Netherlands in 1999, it still operated four small integrated
plants in the UK. The economic conditions needed to sustain
such a configuration vanished when the new euro immediately
weakened. With its UK plants heavily reliant on the Continental
market, Corus suddenly found those sales unprofitable.
Corus remains in a parlous state, though there are signs of
revival under a new management team led by Philippe Varin.
The euro is stronger and Corus, under pressure from a protective
Dutch board, is having to curtail its UK operations. The blast
furnaces and meltshop at the Llanwern plant in South Wales
were shut in 2001, and the Port Talbot plant is receiving
investment instead. Of Corus's east coast plants, Scunthorpe
is to get investment. Staff at the Teesside works have been
told the plant will be hived off. Teesside must prove itself
as a stand-alone operation selling slab, the product from
which steel sheet is made. Economists say slab should be made
in low-cost developing countries, close to a secure supply
of raw materials. Neither condition holds true for Teesside,
and Mittal has shown little interest.
not every ailing steel producer is a target. Take our own Corus
Group (see box above), for example. Even when Corus's share price
fell as low as 5p last spring, Mittal appeared uninterested. Talks
have taken place, but it seems Mittal is determined not to repeat
the experience of Inland.
it is true, as some economists think, that the family-run business
is the ideal vehicle for growth, the Mittals provide a striking
example. After splitting from his brothers early on, Lakshmi has
prospered. The brothers who stayed in India have done nothing like
so well, though they are rich and among the most prominent of India's
private-sector steelmakers. A few years ago Pramod set up a home
in London. He has been trying for at least 10 years to internationalise
his business and recently took the first step, buying a coke plant
Aditya Mittal's elevation to the position of crown prince a couple
of years ago is believed to have led to the departure of Sittard,
one of the key figures in securing the Karaganda acquisition. Aditya's
main role appears to be to handle the group's dealings with financial
institutions. He is startlingly assured. At a recent Metal Bulletin/World
Steel Dynamics conference in Paris, his answers to a series of questions
were concise and cogent. The audience was clearly impressed.
his father rose to address the delegates at lunch on the same day,
he was asked how he intended to top Aditya's performance that morning.
'I don't intend to try,' said Mittal disarmingly. 'I intend to follow
him. He is the future.' He won a round of applause.
Lakshmi Mittal is only in his early fifties and his career is far
from over. The question is where he looks next to expand. So far,
he has not invested in Russia or Ukraine because of concerns over
the security of direct foreign investment in those countries. His
fears will not have been allayed by President Putin's jailing of
Yukos boss Mikhail Khodorkovsky.
has just announced his first investment in China, which makes almost
25% of the world's steel and in 2003 accounted for about 60% of
the 60 million tonne increase in global production to about 950
million tonnes. The fledgling private-sector steel business is growing
fast in that country, and Mittal will spend $100 million building
a new plant in Yingkou in northern China to finish raw steel from
his steelworks in Kazakhstan and Romania.
the steel industry consolidates, the opportunities to expand through
acquisition or merger for all steel producers become limited. The
supply of ailing works going for a song on which Mittal has based
his expansion so far - works such as Nova Hut, where costs are low
and productivity easy to boost - will not last for ever.