Mr. Steel's Moment of Truth

April 29 was a largely clear, if occasionally cloudy, day in London. But the father and son team that walked into the bleakest moment of their career had seen fairer weather. It was just a conference call with analysts and journalists from around the globe, one of the scores of such events they address with ease each year. But this one was rather difficult. They had the unpleasant job of announcing the second straight quarter of losses in their business empire that had never made a loss before. It would come as a sharp contrast to the euphoria that marked their conferences in the past. They mustered some courage and started the call after a three-and-a-half hour delay.

As Lakshmi Niwas Mittal spoke about the slump in the global steel market and the mound of debt that burdened ArcelorMittal, the world’s largest steel maker, the dreary mood caught up with the participants. Mittal and his son, Aditya, led the presentation — some would call it a charm offensive — and argued the worst downturn in living history hadn’t entirely blighted their prospects. But it was clear their tough sell wasn’t succeeding. The elder Mittal, weighed down by the wisdom of experience, sounded much less confident than his son about the future.

As an audience, though, journalists and analysts are far more forgiving than steel plant workers. His headquarters in Luxembourg was attacked in early May by about 1,000 workers protesting against his surgical plans for them. The workers might have held back some of their smoke bombs if only they had read his latest financial statements.
ArcelorMittal’s core profits, marked by Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA), took an 82 percent knock, leading to a net loss of $1.1 billion in the first quarter to March. Worse than what investors had feared, the loss contained ominous portends: Demand for steel had collapsed, high costs and debt were killing and ArcelorMittal was facing a make-or-break moment.
“The world is witnessing the worst global recession since 1945,” Lakshmi Mittal says in an email interview with Forbes India. “Most people will not have witnessed anything like this during their careers so far.”
The most urgent threat, though not insurmountable, is a potential breach of the debt covenants. Under a commitment to his bankers, Mittal must make one dollar of EBITDA for every $3.5 of debt he carries. When the profit falls, he should either bring down debt or pay penalty. He may be forced to sell off assets or bring in the so-called equity cure, raising capital in this run-down market to pay off debt. Now, given that he had amassed $27 billion in debt, he should be making an EBITDA of $7.6 billion a year. He isn’t making it and isn’t likely to make it in the near future.

Image: Harry Borden Corbis Outline

FATHER, SON AND THE GRITTY SPIRIT: Lakshmi and Aditya Mittal stare into an uncertain future

The debt had come as the price for meteoric growth Mittal chased in the last few years. Before the $34-billion buyout of Arcelor in 2006, he had already spent more than $20 billion over 15 years in acquisitions. Even after that, Mittal spent $22.2 billion in acquisitions, including about $3 billion last year before the commodity downturn set in July. Though Mittal reiterates that “our strategy was the right strategy,” sustaining a steel capacity that is three times as big as the nearest rival was never going to be a walk in the park.

Actually, meeting debt covenants may be the easier part. Emerging from the impact of the bone-chilling slump in the global economy and pushing through the changes that are needed to make ArcelorMittal fighting fit again will be Mittal’s bigger, long-drawn challenges. Alexandre Weinberg, an equity analyst at Brussels-based Petercam SA, says Mittal’s success or failure might well determine the fate of the rest of the steel industry, which has followed ArcelorMittal’s cost cutting exercise step-by-step, from pruning capacities to cutting jobs.

The moot point: Can Mittal the accumulator become an equally successful stabiliser? And will he be able to meet the financial targets? How long can he wait out the steel slump? What can he sell? What can he close?

Beyond the rough and tumble of the markets, Mittal knows the biggest thing at stake is his reputation — both personal and professional. Already, the glint of his fortune, which kept the world media hooked until now, has faded and the attention now shifted from the billionaire row of Kensington Palace Gardens where the Mittal family resides, to the plants of ArcelorMittal, which are becoming hotbeds of labour unrest. The slowdown has shaved off $26 billion from Mittal’s fortune, or more than half of his last year’s wealth of $45 billion. He has slid down four places to the eighth spot on the Forbes Billionaire List this year. ArcelorMittal’s market capitalisation has fallen by over 75 percent since July 2008.

Yet, the steel baron may be chastened but not defeated. Industry veterans reckon that Mittal might turn the present challenge into an opportunity by restructuring his empire and shedding some fat. His modest beginnings and his ability to remain free of the compulsions of wealth are a pointer. Those who know him closely say he never allowed the riches to get to him. “He’s very careful with money, he knows where most of the pennies go,” Tim Bouquet, co-author of Cold Steel, the critically acclaimed book that chronicled Mittal’s Arcelor acquisition saga, says. “He likes to joke that on his plane, he serves pizza rather than champagne. Mittal’s idea of a good time is to order Chinese takeaway from Zen Central in Mayfair in London.”

He will need a lot of that thrift as he puts in place a comeback plan. Byron Ousey, who co-authored Cold Steel and has observed Mittal closely, thinks the man’s determination will see him through. “Mittal is an incredibly focussed man and has a great sense of timing. He and his team have a clear plan,” says Ousey.

For the immediate harsh challenge too, the Mittal solution will be three-pronged. First, he will effect cost-cutting measures across factories and offices, conserve cash and pay off some debt. He may even sell off some assets to raise further cash. Next, he will start producing more in low-cost factories and less in high-cost ones. Then, he will seek a more decisive entry into emerging markets where much of the future demand for steel could come from.

“We have seen the severe problems of some of our customers, most notably in the automotive sector,” Mittal says. “There is no point in continuing to produce what we know we cannot sell. That will only serve to make the situation even worse.”
Across his steel empire, the likelihood of plant closures, shutdowns and layoffs have already begun to spook trade unions and workers. Ever since ArcelorMittal announced a “Management Gains” programme to help cut costs and save about $5 billion in the next five years, including $2 billion in 2009 alone, there have been enough signals that suggest it’s going to be very tough to implement. The most controversial item on that agenda is the move to shave $600 million off staff costs. That means cutting about 9,000 of its 320,000 workforce. Mittal will find Europe a more vigorous opponent of his cost-cutting than any other geography.
While frugality will bring in some cash, it will nowhere be enough to rid ArcelorMittal of the debt problem entirely. Mittal would have to raise money. Very little is likely to come from the sale of steel. Lakshmi Mittal, or anyone else, has no idea how long the slump will last. “Some of the mills (of ArcelorMittal) are currently burning cash. So you clearly want to reduce debt in such an environment…the debt load is quite important given the volatility and severity of the downturn,” says Weinberg.
Mittal has announced a rights issue to raise $3 billion. The money will help pay off some of the debt. That will ease the pressure on the debt covenants somewhat. But the fact that ArcelorMittal has resorted to raising equity shows that it is not confident of meeting the debt covenants through cash flow, says Hermann Reith of Frankfurt-based BHF Bank.

Mittal has lots and lots of steel making capacity, but not all of it efficient in terms of cost or proximity to high-growth markets. ArcelorMittal is a giant patchwork of steel operations bought over 22 years. His plants in the United States and Europe account for 60 percent of the total capacity, but are also the costlier ones. He will have to scale down production there and utilise other plants in places like Kazakhstan, Ukraine and Mexico. For instance, the Kazakh plant has its own iron ore mines and is a cash cow with a core profit of $100 million a month. “If Mittal aims to shut down or prune capacities, it will be natural for him to start from the US plants, which also have high legacy costs,” an industry veteran who has worked with Mittal says.

Political costs too, will be lower in the US. Mittal had faced immense opposition from European governments and trade unions while he was pursuing Arcelor and now any plans to shut production could become a political fireball. But in the US, he would be able to explain it better.
Above all, there is a much bigger rationale for cutting production in mature markets. Mittal has ample presence in those markets where demand is stagnating and has scant presence in the regions that will ooze demand in the future. Brazil, Russia, India and China are the new growth regions for steel. ArcelorMittal is yet to own a steel-making unit in Russia or India, the latter his home country. It only has a 10-million-tonne capacity in Brazil. In China, Mittal has been struggling to make a mark.
Ironically, what had earlier been considered Mittal’s biggest success has become a big weakness now. In Arcelor, Mittal went for the high end of the market, what the industry calls flat rather than long products; steel for cars and consumer goods rather than inputs for construction. “Unfortunately for his company he has been strongest in the most mature markets which are the hardest hit, Europe and North America, and he has been strongest in the flat product markets, like the car industry, which have also been strongly hit,” says Roger Manser, managing editor of Steel Business Briefing.
Besides possessing tonnes of charisma, Mittal also knows the nuts and bolts, or rather the bars and coils, of his business. Often termed as perhaps the only owner of a steel company who can also operate a steel mill, Mittal has had sound ground training during his days in Indonesia. It was there, back in the 1970s, that Mittal mastered the art of turning around loss-making operations. At the same time, he was also known to be an owner who kept close company with plant workers and had his pulse on the industrial relations at his plants. In fact, says the Mittal old-hand, “If there is anyone who understands perfectly the complexity of an industrial unrest, it is Mittal.”

It will be Mittal’s charm offensive — Tim Bouquet termed him a ‘stealth diplomat’ — that helped him famously during those challenging days of early 2006, which will come in handy again now.
The family has been doing a lot of introspection these days. “At the Mittal household, they have been finding this whole steel thing a little exhausting,” said a source close to the family. “And that is not just now, not just with the downturn. It came with the acquisition of Arcelor. That really knocked something out of the Mittals even though they won through in the end. The family took a clear decision then not to go for this kind of acquisition again.” And since then the whole process of consolidation with Arcelor has proved tougher than expected. “There have been nagging doubts at home all the time — that was it worth it? — because you know, his older acquisitions are working much better for him.”

Mittal’s greatest source of strength is his wife, Usha. She is a sort of an in-house consultant. Usha Mittal had been insisting on the need for Mittal to diversify from steel, but her husband won’t listen. The couple would often debate the merits of diversification versus concentration. “But he is now Mr. Steel around the world, and he sees any major diversification as a betrayal of everything he now stands for,” says a source close to the couple.

Aditya, his son and the chief financial officer of the company, is the other person Mittal will depend on. (He has shown tremendous commitment, leadership and resilience even in the most challenging times, says the father). Wilbur Ross, a member of the ArcelorMittal board and who sold his American company International Steel Group to Mittal in 2004, perhaps put it aptly in 2007: “A father and son in business is usually a pretty tricky, complex relationship… But in this case, it seems to work just fine.”
Mittal will also tap the long list of contacts that he has built over the years, including top politicians, industrialists and lobbyists as he tries to negotiate and bargain with unions and governments, says an executive in London who has been tracking Mittal’s career. “He is a consummate businessman and a politician as well… and will activate these contacts as he focuses his energy in meeting the present challenge."

Mittal observers in London point out that he has been close to the Labour Party and recently met French President Nicholas Sarkozy who counts the steel icon as his friend. Among industrialists from other sectors, billionaire Francois Pinault, who helped turn the tide in favour of Mittal in France during the Arcelor takeover, might be again called for help. “ArcelorMittal’s plants in Belgium, France and Spain are an asset for the company and Mittal might not want to shut or sell. But he will try to bargain for time with the governments,” says the London executive.
Mittal himself remains confident about the prospects of the industry. “Despite the fact that steel demand has fallen as economies have slipped into recession, I remain confident in the fundamental demand for steel,” he says. If he manages to reduce his debt, prune inefficiencies and wait just long enough for steel demand to revive, Mittal may become a still bigger icon for entrepreneurship. Then, he will have enough time for yachting, golfing and climbing the Forbes List ladder.
Till then, Mittal isn’t running away from his problems. “In terms of my own position, as long as I am continuing to add value, I intend to be around!”
 

What was the flash point that led to ArcelorMittal shifting gears?
For many business people, the collapse of Lehman Brothers was an important moment. I remember this moment very well, it happened a few days after the ArcelorMittal Leadership Conference was held in Delhi. It was a meeting of the 650 top executives of the company. The atmosphere was normal, but the collapse of Lehman Brothers was a first really strong warning bell. The world is witnessing the worst global recession since 1945. Most people will not have witnessed anything like this during their careers so far.

In hindsight, do you think the steel industry went overboard? Should you have been a little more careful and better prepared for the slump?
There is a widespread recognition that the speed and impact of the crisis was very difficult to foresee. (But) We believe our strategy was the right strategy. The steel industry needed to consolidate and our strategy was to lead that integration. The industry overall is in more robust shape to weather harsh conditions than in previous downturns.
A large part of global demand is coming from emerging economies like India, Russia and China where you still have to make your presence felt. What is your plan to fill this gap in the portfolio?
Our strategy is based on three components: Geography, products and value chain. ArcelorMittal remains committed to its greenfield projects in India. However, it is only prudent to ensure that the timing of this project is adapted to the current exceptional economic environment…it would not be realistic to expect production to start before 2014. In China, we are closely working together with our joint venture partners.

Sometime last year, you had said you wanted to increase your capacity to 200 million tonnes. Does it still hold?
For the long-term, we remain committed to our three-dimensional growth strategy. However, in the current environment, there is no point in continuing to add new capacity given the current economic climate. Therefore we have paused our growth plans until the scenario becomes clearer.

Do you think Aditya Mittal is ready for bigger roles? And do you have a clear succession plan in place for Aditya to take over from you?
I am very happy with Aditya’s performance at ArcelorMittal. As CFO and Group Management Board member of ArcelorMittal, he has shown tremendous commitment, leadership and resilience even in the most challenging times. In terms of my own position, as long as I am continuing to add value I intend to be around!

Click here to read the entire interview with Lakshmi Mittal