Man of Steel; the Story of a Backward Industry That Resisted Globalization, until Lakshmi Mittal Came Along
Foroohar, Rana, Newsweek International
Byline: Rana Foroohar (With John Sparks in New York)
Lakshmi Mittal was the only steel baron tough--or crazy--enough to turn Kazakhstan's state steelworks into a going operation. When he first visited in 1995, he found a 1960s-style operation run by workers who hadn't been paid in seven months. In winter temperatures that average minus 30 degrees Celsius, there was no heat or hot water. Suppliers were paid by barter. U.S. Steel, acting as a consultant, had tried and failed to turn the plant around. The buyer would have to assume responsibility for housing the 250,000 people of Temirtau, who depended on the works.
Mittal saw potential in what looked like a basket case. Sure, rebuilding the town would be expensive--but building a new steel plant would cost more, between $2 billion and $5 billion. And Kazakhs work a lot cheaper than Germans or Americans. What's more, says Mittal, "Kazakhstan was rich in steel's raw materials, like iron ore and coal--you couldn't have had a more ideal location in that respect." He bought the factory for $500 million, staffed it with his best managers and spent another $500 million upgrading equipment, power, electricity and transport, redirecting sales to new, burgeoning markets like China. Today the plant can produce 6.6 million tons of steel, nearly triple its original load, and turns a healthy profit.
Aptly named after the Hindu goddess of prosperity, Mittal clearly has a nose for money. In the past year he's become London tabloid quarry by buying the world's most expensive house--a palatial $128 million home in London's Kensington Palace Gardens--and throwing a $55 million wedding for his daughter. But behind the extravagance there is a hard-bargaining entrepreneur who is creating the world's most far-flung steel empire, with operations in 14 countries and counting. His strategy is so familiar, the real surprise is that no one has done it before: buy cheap assets, use cheaper labor, diversify globally, employ the best technology and exploit economies of scale. Yet Mittal is the first to bring these basic tenets of multinational business to an old-fashioned, highly localized industry that was, until very recently, among the most unprofitable businesses on earth, and one of the last industrial bastions of resistance to globalization.
Mittal is about to become the world's largest producer of steel, as a result of the December merger of his private company (LNM Holdings) with his publicly traded company (Ispat) and his acquisition of U.S. giant ISG, which will be finalized in late March. Two weeks ago the new company, Mittal Steel, based in Rotterdam and London, became the first Western firm to gain a major foothold in China, the world's largest importer and exporter, with a 37 percent purchase of Hunan Valin Iron & Steel Group. Many analysts call it a brilliant move that gives Mittal access to one of the most important markets in the world. Others say the $314 million acquisition could leave him vulnerable at a time when demand in China--which is driving steel prices to record highs--could be slowing.
To understand Mittal's rise, it helps to have a bit of steel history. Even after his mergers, the world's top five producers of --steel control only about 18 percent of the market. This is astonishingly low when compared with other commodities like iron ore (36 percent), copper (39 percent) or even consumer products built from steel, like cars (73 percent). Steel is a commodity but not a natural resource like coal or ore, so it can be made anywhere. And because of its many uses--both in civilian goods and in military hardware--steel has, from the dawn of industrialization 200 years ago, been both developed and protected by many nations as a strategic industry. "Like airlines more recently, the notion was that every country should have one," says Steven Burchell, a steel analyst with the London-based market-research firm CRU.
After decades of state control, the steel industry became sluggish and unproductive. …