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Saturday, October 30, 2004

A New Goliath In Big Steel

Businessweek covers the latest steel mill acquisition of Lakshmi Mittal in the process his group emerges as the largest steel producer in the world. Excerpts:
Mittal announced a deal that will create the world's largest steelmaker, with estimated annual revenue of $31.5 billion. The two-step transaction first unites Mittal's European companies -- Ispat International (IST ) and LNM Holdings -- in a $13.3 billion merger. The new entity, Mittal Steel Co., will then acquire International Steel Group (ISG) in Richfield, Ohio, for $4.5 billion. By enlarging Mittal's U.S. holdings with ISG, Wilbur L. Ross Jr.'s collection of once-decrepit but now revamped U.S. steel factories, the transaction unites four of the seven largest old-line U.S. steelmakers that existed in 2001 -- LTV, Bethlehem Steel, Weirton Steel, and Ispat Inland Steel. The move is almost certain to set off a new wave of global steel consolidation as competitors, such as Luxembourg's Arcelor and South Korea's Posco (PKX ), seek to match the scale and clout of Mittal Steel

Mittal has rarely made a misstep before. Like Ross, he's a big risk taker who has proven that new money can be made from an old industry. Shopping around the world whenever steel mills come on the market, Mittal has built a powerhouse that stretches from Europe to Africa and Latin America. He has been able to generate profits by using his scale to buy lower-cost raw materials and by importing modern management techniques into previously inefficient state-run mills. The consolidation will deliver better economies of scale. The new company will own three mills clustered on Lake Michigan, making it easier to centralize management, consolidate material delivery, and optimize what each plant makes. Thanks to its size, the combined company will have access to larger, lower-cost supplies of ore, coke, and coal. "We already run the lowest-cost, highest profit mills in the U.S.," says Mittal.Mittal Steel's rise opens a new chapter in the industry's consolidation. Till now, the game has been mostly regional -- with U.S. and European players tending to merge in their respective markets. Mittal's move globalizes this trend. The world's top producers have little choice but to bulk up to match Mittal Steel's post-merger output of 57 million metric tons. Moving forward, it is expected that Within five years,the highly fragmented world steel market will be dominated by six or so "super producers." Today, only Mittal Steel has entered that league.

I was amused by the tone of the article - it unduly focussed on Lakshmi Mittal's expenses of his party and family marriage rather than the very creditable acheivements of his past acquisitions , turnarounds and in creating several low cost operations in many countries - this is acheievment of sorts and his acquisition strategy has helped him form the largest steel group in the world - several good lessons are hidden inside - anycase his part expenses pale into insignificance when compared to US CEO compensation and perks enjoyed by some currently. As for the criticism that steel prices shall go up because of consolidation - elemenary business knowledge would negate this idea, any case with so many players around - it is impossible that this can happen and in a away the answer lies in Mittal's style itself -user industries would benefit by consolidating and procuring better. In a way this move would inject drive to accelarate efficiency in steel using manufacturers and the argument that steel prices would move up because of this looks totally absurd. Examples of such size abound in all industries - Oil, Minerals etc.. endless argument comes to my mind. The Rule of Three, US companies enjoying dominance in several industries,automobile clusters, entertainment industry etc etc.
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