Moneycontrol
Get App
you are here: HomeNewsBusiness
Last Updated : Mar 17, 2018 08:45 PM IST | Source: Moneycontrol.com

Lakshmi Mittal 's global empire: An asset or a liability in his Essar Steel bid?

With Mittal making a case for ArcelorMittal's global experience in the Essar Steel bid, here is a look into how the world's largest steelmaker has fared of late

 
 
live
  • bselive
  • nselive
Volume
Todays L/H
More

In many ways, Lakshmi Niwas Mittal’s global trek began with the acquisition of a plant in Trinidad & Tobago in 1989.

Earlier in 1976, as a 26-year-old, he set up a plant in Indonesia for his father Mohanlal Mittal. But it was far away in the Caribbean island that Mittal first sowed seeds of a global strategy, which over the next two decades made him the largest steelmaker in the world. ArcelorMittal’s presence would go on to include plants in 18 countries and offices in 60.

Thirty years since that first acquisition though, the Trinidad and Tobago unit is a part of Mittal’s global empire that doesn’t make for a pretty picture.

Close

ArcelorMittal closed the Point Lisas plant in 2016, a day after the worker’s union got a favourable decision from the courts on a pay hike. Low steel prices and increasing costs had already impacted the operations.

“Closing Trinidad was a very difficult decision to take but we had exhausted all possibilities to sustain the asset and regrettably there were no interested buyers for the asset,” an ArcelorMittal spokesperson told Moneycontrol in a written reply to queries.

The company underlined that it has exited the business in Trinidad “having taken care of all financial creditors.”

This last line is an important piece of information, especially for ArcelorMittal’s bid for Essar Steel. The past month has seen increasing focus on the company’s global operations as Mittal tries to venture into his home country, India, for the first time.

Homecoming

ArcelorMittal is in the race for Essar Steel, having submitted bids for the stressed steel company. Its only competitor is Numetal, a consortium of partners that includes Russia’s VTB Capital, and Rewant Ruia, who belongs to Essar’s founding family.

Much of ArcelorMittal’s campaign for Essar Steel has been about highlighting its global operations and experience in acquiring and turning around stressed assets.

“With our industry expertise and renowned operating prowess, we believe we are uniquely equipped to implement a successful turnaround which would be beneficial to Essar’s stakeholders,” said Mittal on February 12, minutes after his company formally submitted bid for the Indian company.

“We believe our technical experience and management know-how, gained from many successful acquisitions and integrations, will ensure success for the various steel and pelletising operations at Essar,” added his son Aditya Mittal, who in March was promoted as President of ArcelorMittal.

But there was a hitch. An amendment in India’s Insolvency and Bankruptcy Code (IBC) had debarred promoters of defaulting companies from bidding for the stressed assets.

While ArcelorMittal had seemingly cleared its way after exiting Uttam Galva, which had defaulted on its loan repayments, there were murmurs in the industry that the global steelmaker also had outstanding payments in its Point Lisas plant.

But that is not so. “ArcelorMittal Point Lisas Limited in Trinidad is undergoing a voluntary liquidation process.  It does not have any loans from any bank, and the banks have not declared it as a NPA or initiated any proceeding against that company. Section 29A(c) relates to NPAs of banks. There is absolutely no basis on which the NPA qualification test under Section 29A can be extended to a voluntary liquidation process where no banks are involved. Any suggestion to the contrary is false,” the company had said in a mailed statement to Moneycontrol.

Section 29A (c) pertains to a clause in the Insolvency and Bankruptcy Code.

Even if the Trinidad setback is not a hurdle for its Essar Steel bid, the focus remains on how the global business of ArcelorMittal – which was formed in the 2006 merger between Mittal Steel and Arcelor – done?

At its peak, before the commodity bust of 2008, the company’s plants were producing nearly 120 million tons of steel a year and annual sales crossed the USD 100-billion mark. For some perspective on how big Mittal’s company was, India’s total output at that time was a little more than 50 million tons a year. ArcelorMittal was producing nearly four times more steel than the second largest steelmaker in the world.

Does that dominance continue today?

Turnaround strategy

After acquiring the Point Lisas plant in Trinidad & Tobago, Mittal’s next stops were in Mexico, Canada, Germany, Kazakhstan, US and France, among others. By the turn of the 21st century, Mittal Steel had presence in nearly 10 countries.

By then, Mittal had roped in Malay Mukherjee, a rising star in Steel Authority of India. Mukherjee would become the entrepreneur’s right hand man in his global expansion.

“From a historical point of view, ArcelorMittal took over plant facilities that were owned by Government. These plants were not doing well, and were later turned around by Mittal. This was the model in Trinidad, Mexico, Kazakhstan, and even in developed markets like Germany,” Mukherjee told Moneycontrol over the phone last week.

The turnarounds were operational – increasing the capacity of the blast furnace, bringing down costs, including the manpower that was nearly always bloated in government-owned enterprises.

“In the second stage, the turnarounds centered on making the best product for the steel industry,” says Mukherjee.

This was perfected recently at a Calvert, Alabama-based plant in the US that was acquired in 2014. Though this was the largest newly constructed steel plant in the US in 40 years, the facility had failed to reach its potential. ArcelorMittal invested about USD 190 million in the facility to make specialized steel for the auto sector.

As a result, capacity utilisation increased to nearly 90 percent by 2017, from less than 70 percent two years earlier; and the plant is expected to improve its EBITDA (earnings before interest, tax, depreciation and amortisation) by USD 250 million by 2020.

Similar turnaround were done in plants in other countries including in Poland and France.

Rough times

But it hasn’t been smooth sailing all along.

Since the meltdown in the world economy in 2008, ArcelorMittal hasn’t yet produced 100 million tons of steel in a year. Competition has closed in, albeit marginally. China’s Baowu Steel Group had narrowed the gap with ArcelorMittal to about 15 million tons in 2011, but since then Mittal’s company has again increased the lead. Though ArcelorMittal's dominance is still without much of a competition, it’s not as jaw-dropping as it used to be.

And many of its units have faced trouble. In France and Belgium, where ArcelorMittal announced closure of some its facilities in 2013, the company faced vociferous protests from workers and politicians. A French minister even threatened to nationalise the company’s unit and asked ArcelorMittal to leave the country.

In the US too, the company was forced to shut some of its plants that led to job cuts.

Financially, ArcelorMittal suffered. In 2015, the company got its biggest hit since its formation in 2006. The company reported a loss of USD 8 billion in its annual performance, and a USD 15 billion debt burdened it further. From 2011 to 2015, the company had been running in losses.

Troubles came in other forms too. In 2016, the company’s South Africa was slapped with the country’s largest anti-trust fine for “anti-competitive behaviour.” The fine was USD 110 million.

Late last year, ArcelorMittal was hit by a much smaller fine, of USD 1.5 million, in its Pennsylvania unit producing coke. Though the fine was low, the reason for the fine – creating pollution and causing health problems for local residents – didn’t do much for the company’s brand.

To be fair to ArcelorMittal, most of its global peers were reeling under similar troubles. But given its global presence and numero uno position in almost every region it operates, the company and its promoter are the most visible faces of the industry.

The most damaging has been the protests following job cuts. Though Mittal himself took a pay cut - of about 40 percent in 2014 – that did little to calm the angst among workers.

From nearly 3.2 lakh employees globally in 2007, ArcelorMittal today employs less than 2 lakh people in the global operations.

Explanation

But the company argues that it has stood the test of time. And the leaner organisation is a reflection of an evolving industry.

“This is the period of Industry 4.0 – and this is also applicable to the steel industry.  We are seeing the introduction of more and more automation, such as driverless cranes and drones, and artificial intelligence,” said the company in a statement to Moneycontrol.

“This is happening in our operations today, where we have been deploying these technologies already. The manufacturing landscape will continue to evolve and change and we have to be a part of that.  Jobs in the steel industry are going to become increasingly high-tech but simultaneously, like every industry, we have to capture productivity and ensure that we remain competitive against the low-cost players,” it added.

On its lower output levels too, the company argues that the focus instead should be on its “fundamental strength.” It says: “Production may be marginally lower, but we have increased our market share, we have increased our product range, and we have reduced our net debt by $20 billion since the crisis.”

Specifically on the European operations, which were hit by job cuts, ArcelorMittal contends that it has spent USD 7 billion since 2008, to improve its position and in new products and technologies. “We do everything we can to avoid job cuts, relying on natural attrition to capture productivity improvements and trying to find a solution for every employee affected.”

Cycle turns

Fortunately for the company, the steel cycle has turned in the last one year. Backed by higher demand and better prices for its products, ArcelorMittal’s net income doubled in 2017. Its revenue grew by over 20 percent, and net debt reduced by about USD 2 billion.

The better tidings come at a good time.  Mittal is pushing for a presence in his home country, something that has proved elusive even after repeated attempts over more than 10 years. Plans for three mega projects have been a non-starter. And the 2010-investment in Uttam Galva has proved to be a costly one.

Mittal is trying his best to ensure that the Uttam Galva investment doesn’t rob him of his best opportunity - the Essar Steel auction - to make a presence in India. He and Aditya have made repeated visits to India, and have met senior officials, including Finance Minister Arun Jaitley. A possible amendment in the Insolvency and Bankruptcy Code could pave the way for ArcelorMittal’s bid.

While the eligibility question remains, Mittal and his team have given some indication of how they plan to turnaround Essar Steel.

Mukherjee, who was the company's CEO for two years following, calls Essar Steel "a wonderful asset." But the company suffers from its part-dependence on gas for fuel. Experts expect ArcelorMittal to set up an additional blast furnace to reduce the dependency on gas.

"There is ample space to expand capacity well beyond the present 9.6 million tons," a senior executive from the industry told Moneycontrol.

ArcelorMittal will also bring its global expertise, backed by the world's largest R&D unit for a steel company, to add to Essar Steel's product portfolio.

Mukherjee, now a global consultant and a Director at JSW Steel, says, “If you have all this (global experience), it’s a no-brainer that the best partner for Essar Steel is ArcelorMittal.”

Not everyone in the industry may agree with him. But Mittal himself will be glad that the steel cycle has turned, and the global environment is much friendlier than it was even a year ago.

Time to show-off your poker skills and win Rs.25 lakhs with no investment. Register Now!

First Published on Mar 17, 2018 08:45 pm
Sections
Follow us on