Lakshmi Mittal was portrayed in the press as a carpetbagger. But in Kazakhstan, he is a working class heroby Anthony Robinson / April 20, 2002 / Leave a comment
Coverage of the Mittal affair may have raised important issues of political patronage and party funding, but it has completely misread the significance of Lakshmi Mittal himself. It has left the impression that he is a sleazy Indian carpetbagger who has become one of the richest men in the world through asset-stripping, bribing politicians and playing both ends against the middle.
It is true that the US-EU steel war could be embarrassingly advantageous for Mittal. The Sidex plant in Romania, which he bought with Tony Blair’s help, is not subject to a US import ban. And his US company, Ispat Inland, donated $600,000 to Stand up for Steel, the US steel lobby whose pleas for protection from imports has fallen on George W Bush’s receptive ears. But Mittal had no choice in supporting Stand up for Steel. Membership is one of the conditions enshrined in the labour contracts which all employers have to sign with the Steelworkers Union-including foreign companies such as Ispat and Arcelor, Europe’s largest steelmaker, based in Luxembourg. Ironically, Arcelor is also the leading light in Eurofer, the European steelmakers lobby which is mainly dedicated to opposing US protectionism.
But the bigger picture is that Mittal has become a central figure in the restructuring of the global steel industry-and is instrumental in shifting capacity from rich, highly regulated places like the US and the EU to lower cost zones such as Romania. That is as it should be. He has saved thousands of steel-related jobs, and entire working- class communities in Romania, Kazakhstan, Mexico and other faraway places about which the British press apparently knows little.
In 2000, the Lakshmi N Mittal (LNM) group produced 22m tons of steel from ten plants around the world. With the takeover of Sidex he now controls 27m tons of steel capacity and employs 110,000 people making and selling steel or mining iron and coal.
Some people in the steel industry say that Mittal is partly responsible for the over-capacity which has led to heavy losses and bankruptcy for so many steel companies. But the US steel industry produces too much of the wrong kinds of steel in old-fashioned plants, just the kind of plants which Mittal has proved very good at turning around in the developing world.
Mittal was one of the first to spot the advantages of flexible mini-mills and the technology of using cheaper direct reduced iron (DRI) instead of scrap. The DRI process turns iron ore into useable enriched pellets without the need for costly investment in coking plants and blast furnaces.
The 51-year-old London-based entrepreneur’s first venture, 27 years ago, was a mini-mill in Indonesia. He then proved that money could be made restructuring bankrupt nationalised (and private) steel mills elsewhere. Starting in Mexico, Mittal went on to buy plants in Trinidad, Canada, Germany and the US. He also controls Kent Wire, a British steel mesh producer.
In buying these companies Mittal’s strategy has been to acquire the assets cheaply but leave the past debts with the seller. All the companies in the above-mentioned countries are now part of Ispat International NV, a holding company registered in the Dutch Antilles. Mittal and his family own 80 per cent. But 20 per cent was floated on the Amsterdam and New York stock exchanges after an IPO (initial public offering) in 1997 at $30 per share. It has not proved a good investment and the shares are languishing at a fraction of the issue price. This suggests that it is not easy for anyone to make money making steel in Europe or America, even when, as in the LNM case, the holding company is registered in an offshore tax haven.
The harsh truth is that steel is a capital and labour intensive business which is only really profitable if capital and labour costs can be kept low and productivity increased by good technology and good management. Mittal has shown that developing or former communist countries now have a comparative advantage as steel producers over the US or Europe.
Thus the most interesting aspect of the Mittal empire is to be found in the companies in his other Antilles registered holding company, LNM Holdings NV. This is 100 per cent owned by Mittal. By far the most important asset in this company is the 6m ton capacity Karmet steel plant at Temirtau in the Kazakh steppe, and a clutch of mines in the surrounding Karaganda basin. This was not included in the IPO because it was considered too risky for outside investors to stomach.
Mittal’s record in Kazakhstan explains why South Africa’s Iscor and the Romanian government were keen to interest him, why Tony Blair signed a letter supporting privatisation of Sidex by LNM Holdings and why all the 23 directors of the European Bank for Reconstruction and Development (EBRD) voted in favour of a $100m loan to help finance the Sidex deal (with America abstaining).
Five years ago Karmet was desperate. It had been built on the virgin steppe to supply steel to Soviet defence factories in central Asia and Siberia. But Soviet markets had dried up. Nobody knew anything about finance or marketing. To keep the plant from freezing over in the harsh winter, former Soviet managers bartered steel slabs for food and clothing and basic supplies. Opaque barter deals made a few insiders very rich as cash was siphoned off to friends or family. But the plant stopped paying its 35,000 workers, its taxes and its suppliers.
Nursultan Nazarbayev, a former steel worker who was party boss at Karmet before becoming Kazakhstan’s last communist leader and then the autocratic president of independent Kazakhstan, tried and failed to attract western companies, including America’s United Steel. At about the same time LNM’s agents were investigating one of the world’s richest deposits of coking coal around Karaganda. Nazarbayev proposed a deal to Mittal-you can buy the coalfields if you take on Karmet too. After looking around the plant Mittal agreed to buy it for $380m. He also bought the power plant which supplies heat to both plant and city, the tram company, the local hotel and television station and the coal mines with their 27,000 miners.
Mittal agreed not to sack any workers, to pay their unpaid wages and only reduce numbers gradually through attrition. (The payroll has dropped from 35,000 to 27,000 since the takeover and wages remain low at around $300 per month). He also promised to pay suppliers regularly-including the near bankrupt state railways. He sent in 45 Ispat managers and specialists, mostly Indians with modest lifestyles, high skills and strong loyalty, to turn the plant around.
Production specialists removed bottlenecks and cleaned up the plant. They drew up an investment plan to raise quality to world standards and shift production to higher value steels. Marketing experts bought new equipment and set about finding new markets. Five years later Karmet sells much of its steel to Iran plus Russia and China, which are both neighbours.
Sidex, in Romania, is like Karmet was five years ago-corrupt, hugely overmanned and struggling to find a market for a fraction of its 5m ton output. Before Mittal stepped in, it had an accumulated loss of $900m and was a big burden on Romania’s state finances. Usinor the French steel company said Sidex was not ripe for privatisation and instead offered to run it under contract for three years. The Romanian government, anxious about privatising such a huge company, was attracted to this compromise but the World Bank and the EBRD warned that stalling on Sidex would derail the whole privatisation programme. This was the significance of Tony Blair’s letter. In line with Margaret Thatcher’s support for privatisation in central and eastern Europe (embodied in Britain’s know-how fund), the letter of endorsement for Mittal was designed to strengthen the hand of the privatisers in Romania.
What will happen to Sidex now? Sidex produces steel plate to make pipes for the oil and gas industry. Karmet does not. Ispat Mexico has a pipe mill which is under-used. Solution? Dismantle the Mexican pipe mill and reassemble it at Aktau, the Kazakh port on the Caspian sea, only 200km south of three of the world’s biggest new oilfields-Tengiz, Kashagan and Karachaganak. Here international oil and gas companies are investing over $50 billion in new fields and planning pipelines to Europe and Asia.
This scheme will create a profitable market for Sidex-and cheaper, domestically made pipes for the oil companies. It’s the kind of deal which keeps Mittal away from his London headquarters for much of the year. So much for the sleazy Indian asset-stripper.