Steel's Still-Growing Giant

Dec. 21, 2004
Lakshmi Mittal buys ailing steel companies and nurses them back to health. His latest purchase: Inland Steel.

When he first appeared on the scene in 1976 as the owner of a newly founded steel company, he was seen by the conservative heavyweights of the steel industry as an "exotic bird" who would coexist with their own breed but remain largely inconsequential. The "bird" in question, Lakshmi N. Mittal, since has become a household name in the steel industry, which not only is acknowledging him as a successful businessman but also is emulating his business strategy. Mittal's hawkish eyes rarely miss a good buy to add to Ispat International NV, the steel company that operates under the umbrella of his London-based LNM Group, of which he is chairman and CEO. His typical strategy has been simple: Buy ailing state-owned steel mills at bargain prices from cash-strapped governments and then downsize and modernize them. In the last two years, however, Mittal has twice taken a different tack by buying private-sector steel companies. Most recent was the $1.43 billion purchase of Inland Steel Co. from Inland Steel Industries Inc., Chicago, in July 1998. Mittal says the purchase makes Ispat International the world's seventh-largest steelmaker with annual capacity of more than 12.5 million tons and $4.5 billion in annual revenues, more than double Ispat International's previous level. Including its other steelmaking companies, LNM Group's capacity is about 19 million tons. Mittal says the acquisition met his "strategic objective of establishing in 1998 a major presence in the U.S. market, which is the most demanding market." Adds Robert J. Darnall, the former chairman, president, and CEO of Inland Steel Industries and now CEO of North American operations for Ispat International: "Combining Inland Steel Co. [renamed Ispat Inland Inc.] and Ispat International creates the world's leading global steel company, with significant competitive advantages and greater opportunity for growth." Mittal was trained under the watchful eye of his father, Mohanlal Mittal, whom he helped after school in the family-owned steel business in Calcutta. "The boy was vaccinated at a young age with the business serum . . . and steel is the stuff which he is made of," says a representative of the Confederation of Indian Industry, the apex organization of India's industry. Mittal's shopping spree always has been a systematic and strategic calculation oriented to a number of factors such as the location of the mills, which invariably are close to a port and have access to low-cost and abundant energy. Another cost-cutting measure that Mittal always bears in mind when selecting a mill for acquisition is the availability of materials. While many companies continue to use scrap metal as the basis for producing raw steel, Ispat has been using direct reduced iron (DRI), an ore that has undergone special treatment to make it suitable for the production of steel. (A ton of DRI costs less than $100 while quality scrap steel can cost as high as $160 a ton.) Because DRI has become Ispat's staple diet, Mittal has taken control of sources that supply DRI in an effort to ensure a steady flow of the feedstock to his furnaces. Analysts in Europe say that his purchase of shares in Mexico's iron mines not only catapulted Ispat into the big league of steel producers but also made it the world's largest producer and consumer of DRI -- and the world's largest producer of steel using the electric-arc-furnace continuous-casting method. With his philosophy that "enterprise knows no boundaries and can root anywhere in the world," Mittal's business strategy has been to focus on producing low-cost, value-added steel using leading-edge production technology. Mittal's greatest advantage is his globalized operation, with mills in the Netherlands, Germany, Trinidad, Mexico, the UK, Ireland, Kazakhstan, Indonesia, and Canada, in addition to the former Inland mills. In 1997 Ispat, based in Rotterdam, Netherlands, acquired two German companies, Stahlwerk Ruhrort GmbH (SRG), a steelmaker based in the Ruhr region now known as Ispat Stahlwerk Ruhrort GmbH (ISRG), and Walzdraht Hochfeld GmbH (WHG), a wire-rod manufacturer located in Duisburg. Both SRG and WHG belonged to the German industrial group Thyssen AG. Purchase price for the two German companies, which have combined annual raw-steel production of 1.5 million tons, is estimated at DM150 million (US$82 million), including assumed debt. Ispat says the takeover is expected to safeguard some 1,800 jobs at the German companies on a long-term basis. Mittal acquired the two German companies because he believed LNM Group, which already has a German subsidiary in Hamburg called Ispat Hamburger Stahlwerke GmbH (IHSW), would be able to achieve market leadership in the long-product sector in Germany and strengthen its position in the higher-value-added wire-rod market in Europe. "Ispat expects to achieve additional benefits by integrating SRG and WHG with other subsidiaries through its Knowledge Integration Program [KIP]," says Mittal. "This integration also will improve the productivity throughout the company." Observers who have watched Mittal closely say he actively has encouraged the most effective management methods such as KIP, leading to more efficient and effective systems and practices, innovative thinking, and reduced costs across all LNM Group companies. KIP involves the benchmarking of each unit against the best in the group and against the best in the world, extending across all industries. Although the two German plants lost more than $38 million for the year ended September 1997, a number of cost reductions in place returned the operations to profitability last year. The German trade union has agreed to additional head count reductions of about 300 persons during the next two to three years that should save more than $15 million annually on a pretax basis. Another area of cost reduction is a favorable hot-metal supply agreement with Thyssen that should result in savings of more than $18 million per year. Ispat also has installed a billet caster at ISRG to eliminate outside billet purchases and reduce conversion costs. The caster cost about $20 million and was expected to save about $18 million annually. "Following the completion of the programs, the blooms manufactured at ISRG will achieve a higher surface quality as a result of improvements to the finishing process," Mittal predicted. "The company also will benefit from further operational efficiencies including rationalization of the workforce, which will raise productivity and increase profitability." Ispat also has implemented "significant cost reductions" at the former Inland Steel operations, which have produced more than $35 million in annualized savings, primarily from "global purchasing synergies," a spokesperson reports. In addition, it has reduced the nonunion whitecollar workforce at Ispat Inland by 17%. Besides Ispat International, LNM Group includes Ispat Karmet and Ispat Indo, among other companies. (Ispat is derived from a Hindustani word meaning "steel.") Ispat Indo in Indonesia was Mittal's first venture. A single-site rod mill established as a greenfield project in 1976, Ispat Indo later became the country's largest privately owned steel company. Although steelmaking remains the group's mainstream business, Mittal has been diversifying into shipping and has ventured into coal, power, and oil business in Kazakhstan, where Ispat Karmet steelmaking facilities are located. Mittal has not always succeeded in his acquisition at-tempts. For instance, his efforts to buy out the Venezuelan state-owned steelmaker CVG Siderurgica del Orinoco CA (Sidor) was foiled in late 1997 by a consortium of Latin companies that bid more than $2.3 billion against Ispat's $2.06 billion. Although the "prize catch," as Sidor was being called, slipped out of Mittal's fingers, LNM sources in London say that "like any other deal, it is good at a certain price and beyond that is no longer a good deal, nor is it representative of the price for which steel assets can be bought in the world marketplace. Any price in excess of our bid would have reduced our return on invested capital, which will now be earned elsewhere. . . . [There will be] plenty of other opportunities, and we are looking in the Middle East, the Americas, the Far East, and elsewhere." All the Ispat facilities have been given ISO 9002 certification. Ispat Mexicana SA de CV and Caribbean Ispat Ltd. are the only two steel companies in the world to have received the "Company Wide Registration" award for total quality from the British Standards Institute. Only 20 other companies worldwide have been so accredited. Mittal says he doesn't intend to rest on such laurels. "Our business [goal] is to improve our operations in order to offer the best to our customers," he says.

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