The Iron Man 2: The Man Behind UK-based Stemcor

Stemcor’s project, implemented under its subsidiary Brahmani River Pellets (BRPL) will get the ore from nearby mines, majority-owned by Stemcor and operated by another group company, Aryan Mining and Trading Corporation (AMTC). This is the first case of a foreign company owning an iron ore mine in India.

The plant couldn’t have come at a better time for Stemcor whose trading business has been shaken by the recession. Its revenues dropped to $5.1 billion in 2009 from $11 billion in 2008. Its European and international business profits were squeezed. Stemcor was left with few options except looking at the Indian initiative as the way forward. “The pellet plant is the first step. We want to further expand our presence in India and take the learning to other countries including Australia and Indonesia,” says Stock.

Ralph Oppenheimer, Stemcor’s executive chairman and a member of the family that owns the majority stake in the company, has fully backed Stock’s plans. The decision to invest in India was taken “because... steel production capacity, according to the Indian steel ministry, is forecast to double to more than 100 million tonnes by 2011/2012,” Oppenheimer says in an  email to Forbes India from London. “Stemcor‘s management believes that its Indian resource assets represent better value, being located lower down the operating cost curve and with the geographical advantage of being located closer to their key markets,” he says. Little wonder then that Stock was elevated to Stemcor’s board in 2009.

So how did a family-owned trader without direct manufacturing experience pull off what might steelmakers with deeper pockets couldn’t?

The Starting Point
Stemcor first sailed into the subcontinent in 1956 and served companies like Hindustan Steel (now Steel Authority of India Ltd.) and Tata Steel. Over time, it forged trading relationships with leading families of the Indian steel industry such as the Jindals, Mittals and Ruias. Nothing much changed in the following decades until 1991, when the economy began to open up. Stemcor sensed new opportunities and began to prepare for them. Stock, who took over as the managing director of the Indian unit in 1997, seized the moment by leveraging these relationships.

Ruias’ Essar Steel, just like many of its peers, had embarked upon a major expansion  expecting the surging economy to boost demand. But in the ensuing economic crisis of the late 1990s, demand tanked and Essar Steel found itself neck-deep in debt. Banks refused to lend more. Stemcor, which was already one of Essar’s trading partners, offered to step in to save the latter’s pellet plant project.
Stemcor took 51 percent stake in Essar’s subsidiary Hy-Grade Pellets and chipped in with about Rs. 200 crore. In return, Stemcor got exclusive rights to not only sell Essar’s products but also to supply its raw material needs. “Our expertise was in manufacturing, while Stemcor brought in the marketing part. This was needed at both ends – to buy raw materials and to sell our products,” says Essar Steel’s former chief executive officer J. Mehra, who is now a director in the Essar Group. 

Image: Hemal Seth

Stock, too, needed the deal badly. Intense competition from richer rivals like Japan’s Marubeni and Mitsui had threatened its trading volumes and the Essar project gave it a substantial boost. In fact, Stock’s strategy would prove useful years later, when the spread of Internet would erode all the traditional advantage of price information that big companies like Stemcor had enjoyed. “Now buyers in India immediately know if there has been a price correction in Brazil,” says Stock. Moreover, margins in trading have reduced from $10-$15 a tonne to $5 over the last three years. Having a reliable source of supply, especially one that is partly owned, has become all the more important now.  

Tasting success, Stock pressed on the advantage and looked to expand his territory. The Essars bought over Stemcor’s Hy-Grade stake in 2005 as their steel capacity had increased and needed all the pellets that the unit could make (Stemcor reportedly made a profit that would put private equity firms to shame). Stemcor, on its part, bought stakes in Mideast Integrated Steel and Hindustan Tin Works. Both were clients seeking money for expansion. Vijay Bhatia, chairman of Hindustan Tin,  says his company’s business with Stemcor doubled to 60,000 tonnes a year after the stake sale.  Similarly, Stemcor turned another supplier-client relationship into an equity deal by acquiring 14.7 percent stake in Karnataka-based Sathavahana Ispat in 2008. All three companies is now expanding.

Stemcor found its fourth equity partner in Electrosteel Casting which is putting up a 2 million tonne steel plant. In all, the British company will have access to more than 5 million tonnes of new steel capacity in another two years.

After the Hy-Grade project with Essar, Stemcor invested in an iron ore mine and pellet plant in Australia. By 2008, Stock had spotted an opportunity in India. So Stemcor sold most of that stake and put money in the iron ore mines of AMTC in Orissa. And, Stemcor didn’t have to face red tape as AMTC had already got the approvals from the state and central governments.

The plan for the beneficiation cum pellet plant emerged from the acquisition of mines. “We realised most of the low grade of iron ore was either exported or were lying unused in India, where steelmakers only use the high grade version. But there was enough and more demand for pellets made from this low quality ore,” says Stock.