It was a cool autumn evening in 1999, and Lakshmi Mittal listened as a team of MBA students painted a grim picture of the turbulence roiling the steel industry. Mittal had agreed to judge a case competition at the London Business School, where teams of finalists vied to analyze the success of his steel empire (including the private firm LNM and a public corporation Ispat International), and make recommendations to the firm’s founder and CEO.
Mittal’s success was undeniable. Since starting with a single steel mill in Indonesia in 1976, Mittal had built the fourth-largest steel company in the world, by acquiring under-performing steel factories throughout the 1990s in countries including Mexico, Canada, Trinidad, Germany, Ireland, Kazakhstan and the United States. Founded by an Indian, incorporated in The Netherlands, headquartered in London and selling steel in 80 countries around the world, Mittal’s group was the first truly global steel company. Industry analysts estimated Mittal’s steel holdings were worth $2 billion, which secured him a place on Forbes list of billionaires.
Based on their analysis, the student teams implied (without quite stating it in so many words) that Mittal’s success resulted largely from good fortune. They argued he could not ensure continued success in the face of industry uncertainty. And since luck is not a strategy, they advised him to take chips off the table while he was still ahead, by selling his steel business, for example, or diversifying into related industries.
Mittal didn’t take their advice. and with the benefit of hindsight it is a good thing. In the following decade, Mittal would go on to help create the world’s largest steel company–ArcelorMittal, be named the Financial Times man of the year, and emerge as the eighth wealthiest person in the world by 2009, well ahead of better known names such as Bernard Arnault, Michael Dell, George Soros, or Michael Bloomberg. His success at creating economic value is particularly impressive in an industry that produced most of its billionaires nearly a century earlier in the era of Andrew Carnegie and Friedrich Thyssen.
The students admired Mittal’s success, but they questioned his ability to sustain it in the face of industry turbulence. A thick tangle of interconnected variables influenced steel makers’ profits, including cyclical demand, technological shifts, exchange rates, government policy, raw material costs, prices, changing customer preferences, to name a few.
Each of these variables was individually volatile: Mini-mill technology disrupted established production methods, and accounted for nearly 45% of US production. Shifting government policy led to the imposition and retraction of tariffs, changing environmental liabilities, and privatization of state-owned mills. Large customers in the automotive, appliance, and can industries constantly experimented by substituting plastic and aluminum for steel, and vice versa. Large mergers, such as the combination of Thyssen and Krupp, along with bankruptcies, reconfigured the competitive landscape on an ongoing basis. Fluctuating demand, raw materials costs, prices, and exchange rates further stirred the cauldron.
Turbulence was bad enough in North America and Europe, but Mittal made his largest bets in emerging markets which took volatility to a whole new level. His largest deal was the 1995 acquisition of the Karmet steel mill located in the remote city of Temirtau, Kazakhstan. The plant was one of the largest single-site integrated steel plants in the world, and disrepair after the Soviet Union dissolved. By 1995, Karmet operated at less than one-half its rated capacity. Lacking customers who paid cash, the factory relied on barter for 80% of its sales, exchanging finished steel for raw materials, and created its own currency. As the city’s main employer, Karmet’s decline decimated Temirtau’s population, which shrank 40% through the 1980s, while the remaining citizens were plagued by widespread heroin abuse and AIDS.
The Kazakh Prime Minister informed Mittal that any buyer would have to take responsibility for running support services including an orphanage, hospital, trams, schools, and newspaper. A team from U.S. Steel had studied the plant as a possible acquisition, but declared it too risky. Mittal, in contrast, acquired the plant within a month of starting negotiations, also acquiring local coal and iron mines to supply critical raw materials. When the power system later collapsed, Mittal bought that as well.
Karmet weighed heavily in the students’ analyses. After a perfunctory recitation of opportunities, the teams recited a long list of risks facing the company in Kazakhstan. The Kazakh government could impose a wide range of taxes, including value-added, excise, profit, payroll, property, and charges on transfer pricing, to shake down the company, or simply nationalize plants after Mittal had invested to increase its profitability. Kazakhstan was susceptible to a global currency crisis, inflation, volatile interest rates, and fluctuations in demand. Karmet, to top it all off, sat on a geological fault line susceptible to earthquakes.
Mittal did not ignore the turbulence facing his Kazakh operation, but he saw more opportunity than threat in emerging markets. “Emerged, emerging or submerging markets,” he told the students, “they all represent opportunity to me.” The students, in contrast, were so fixated on the risks that they missed the significant opportunities arising out of turbulent markets.
My next post will argue this is a common response to volatile markets, and a dangerous one.