LAKSHMI 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.

For 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.

The 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.

Yet 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.

This 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 Chicago.

His 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?

INDIAN STEEL FAMILY

Lakshmi 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.

As 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 steelmaking.

So 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.

LAKSHMI MITTAL CONQUERS INDONESIA

Lakshmi 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.

But 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.

He 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.

CARIBBEAN ISPAT

'It 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.

Over 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.

KING OF STEEL SCHMOOZES KAZAKHSTAN

The 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.

An 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.

Once 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.

And 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.

INDIA OFFERS A HUGE RSEOURCE OF SKILLED MANAGERS

But 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.

Take 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 East.

But 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.

In 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.

ISPAT INTERNATIONAL GETS LISTED

Mittal 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.

Investor 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.

MITTAL CONQUERS AMERICA - INLAND

A 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.

Inland 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.

Mittal 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.'

MITTAL AND THE SIDEX CONTROVERSY

Today 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.

The 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.

When 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.

Shortly 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.

Blair 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.

Rumours 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.

Investigations 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.

Mittal's 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.

MITTAL'S EXPANSION PLANS CONTINUE

The 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.

Mittal 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).

Despite 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.

The 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.

So, 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.

UN-FAMILY LIKE BUSINESS

If 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 in Bosnia.

Meanwhile, 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.

When 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.

But 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.

Mittal 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.

As 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.