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

India's steel industry is a maze of red tape and controversy. But smart partnerships and a low-key approach can help find one's way, as British company Stemcor has shown

Published: Jul 8, 2010 06:30:28 AM IST
Updated: Feb 28, 2014 01:06:00 PM IST
The Iron Man 2: The Man Behind UK-based Stemcor
Image: Amit Verma
Matthew Stock of Stemcor

If the Indian metals industry, especially the steel part of it, were a prized territory, then multinational companies would resemble invaders who failed to hoist their flags after repeated attempts. Rio Tinto, ArcelorMittal and Posco haven’t been able to master the elements in a country that has one of the largest deposits of metals and minerals in the world.

Come September, though, an unlikely success will come up in the form of a Rs. 1,500 crore iron ore beneficiation and pellet project in Orissa, the most coveted mining territory in India. This will be the first ever manufacturing unit set up by an overseas company in the Indian steel industry. The conqueror is an unlikely candidate, relatively unknown outside its own kingdom. Even stranger is the fact that for this company too, it is the first ever manufacturing project in more than 60 years of its history.

Stemcor is a privately owned steel trader based in London. It is the world’s largest steel trading firm. Stemcor helps steel makers buy raw materials like iron ore and coal; find market for their steel products and sometimes get finance for their projects. It also has stockholding facilities and service centres in Europe. It may have bigger peers in the trading community, but when it comes to steel as the only business, Stemcor is the undisputed king. But its recent ambitions go beyond being an industry intermediary and its unfolding transformation into a manufacturing company is being shaped up in India.

Matthew Stock, managing director of Stemcor’s India unit, came here as a student in 1987 and immediately fell in love with this hot, humid country. He returned repeatedly until 1997 when he decide stay back once for all. In the following 13 years, Stock has built Stemcor’s business pellet by pellet, sewing up smart alliances to build volumes and learn the tricks of steel manufacturing. He has increased the share of the Indian business in the total revenues of the London-based company to 10 percent from 1 percent just a decade ago.

Now, he is taking it a step further. “We are changing tack,” says Stock. Stemcor’s new plant to refine iron ore and make 4 million tonnes of pellets each year will give it the manufacturing muscle to take advantage of an expected surge in steel demand in India. It will also provide a much-needed and lucrative diversification from the steel trading business where profit margins are steadily falling. And most importantly, it will put the Indian operations at the core of Stemcor’s growth strategy globally.
For the record, many steel projects have seen foreign interest. Korean steel major Posco, whose project in Orissa continues to be in a limbo, has a steel service centre in Pune, Maharashtra.

Multinationals like the Lakshmi Mittal-owned ArcelorMittal and Germany’s ThyssenKrupp have taken the acquisition route to make presence in the local industry. But, as a manufacturing unit built from scratch, Stemcor’s pellet plant is the first of its kind in the country.

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. 

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

Unlike some multinationals, Stemcor is also a big believer in local talent. Stock’s staff largely consists of Indian engineers and workers from the local area. Thus it has avoided the kind of problems that companies which bring expats to run local operations face. Examples abound of such companies where the managers could connect with the Indian colleagues or communicate effectively with the public.


The Way Forward
But the hard work for Stemcor begins only now. The transformation from trading to manufacturing could be severely testing given the lack of experience in Stock’s team. In fact, Stock admits that his men will have to learn new tricks because manufacturing is more of a “fixed costs business with large assets,” unlike in trading where assets are more liquid and business more flexible. While the beneficiation and pellet plant will bring in the big bucks for Stemcor during the boom years, it can be more hurtful to the company’s finances during a downtrend than trading will be.

But industry experts agree with Stock that there is no better place to start off in manufacturing than the Indian steel industry, which was among the fastest to recover from the slowdown. “A company with a trading expertise is better off in manufacturing than a rank new comer,” says Jitendra Singh, owner of Indian Steel Corporation. This veteran of four decades is himself from a steel trading family that branched out to manufacturing.

Another challenge that Stock faces is to retain talent. Orissa is a unique operating territory with specific requirements and companies prefer to recruit technical experts locally. Stock has done the same for his mining and production facilities. But several companies are setting up plants in the region and inevitably, they will look to poach some of his staff. The company will have to quickly ramp up its understanding of the human resource function in India.

Back home in London though, Stock’s success story has made Stemcor fashion its global strategy around India. It is already planning a second beneficiation and pellet project in Orissa. The British company is buying up mines abroad to cater to India. It has just invested in a coal mine in Australia that will feed the increasing demand for metallurgical coal in India. It is also scouting for thermal coal, used in thermal power generation, in Indonesia. Again, this will make use of the apparent shortage in the supply for thermal coal in India.

“As India evolves, there will be opportunities for a downstream business to connect steel producers to end users via distributors, stockholders and service centres,” says Oppenheimer. “Stemcor’s management, working with joint venture partners in India is keen to assess the opportunities,” he adds. Other multinationals have already taken a leaf out of Stemcor’s experience with ArcelorMittal and Posco scouting for similar opportunities.

Stock, for the moment, is happy carving up a niche territory for himself.

(This story appears in the 16 July, 2010 issue of Forbes India. To visit our Archives, click here.)

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  • Hemant Tibrewalla

    Very captivating and informed article.

    on Sep 3, 2010
  • Helmut Sternberg

    A very thorough article. The author understands things so well that one is tempted to assume he must have been part of the steel scene. For fairness´sake I must mention I am ex director of Stemcor (quite ex actually, at my age of 78)

    on Jul 16, 2010