Ispat International N.V.
Ispat International N.V.
In just ten years Ispat International N.V. has grown from an obscure fringe company to become one of the top four steelmakers in the world. Led by Calcutta, India’s Lakshmi Mittal, registered in the Netherlands but more or less run from the company’s London office, Ispat (the Hindi word for “steel”) is also the industry’s first global steel manufacturer, with operations in the United States, Ireland, Mexico, Canada, the Caribbean, Germany, and France. Ispat specializes in low-cost, high-quality steel produced using Direct-reduced Iron (DRI) in the company’s minimill-equipped plants. Ispat is also the world’s leading supplier of DRI and, as one of the pioneers of the technology, is considered to be years in advance of the rest of the industry. The company’s DRI capacity is expected to top ten million tons by the year 2000. The company’s global operations enable it to respond quickly to industry movements, using its own shipping fleet to reroute shipments of raw materials and finished product—both flat and long steel—according to market forces. Ispat International is part of the Mittal-controlled LNM Group, which also has steel operations in Indonesia and Kazakhstan. The 46-year-old Mittal, through LNM, controls some 80 percent of Ispat’s stock, which trades on both the New York and Amsterdam stock exchanges. Ispat’s July 1999 purchase of France’s Unimetal will add some 1.5 million tons to the company’s production and more than US$800 million to the company’s annual sales of US$3.49 billion.
A 21st-century Carnegie
Lakshmi Mittal was born to be a steel magnate. Growing up in Calcutta, Mittal went to work part-time for his father, Mohan Mittal, owner of several small-scale steel mills in India. By the age of 19, Mittal had already participated in setting up a new mill, while earning a university degree in business and accounting from Calcutta’s St. Xavier College. In 1971, at the age of 21, Mittal joined one of his father’s mills—a small operation that produced only about 20,000 tons per year—as a trainee. From the beginning, Mittal worked at improving production quality while reducing costs, both necessary components when operating as a private producer in the developing region.
The ambitious Mittal soon chafed under India’s tight quota limits on private steel production. Mittal also sought to branch out on his own, if not to leave the family’s small steel empire, then to expand it. In 1975 Mohan Mittal agreed to open a new mill in Jakarta, Indonesia, with Lakshmi placed at the head of operations. The mill, at 65,000 tons annual output, was still tiny but gave the young Mittal the launchpad from which to build his own steel empire. In 1976, Lakshmi Mittal formed his own company, Ispat International, giving a clear indication of his intention: that of building the world’s first truly international steel producer. As Mittal told the Wall Street Journal, “I always believed in doing something unique, and I felt the opportunities for me in India were limited. Steel has been my strength, and I always wanted to build my steel company, to create the largest global steel company.”
Over the next decade, Mittal greatly expanded production at the Jakarta mill, eventually increasing output to more than 550,000 tons per year. Mittal was also putting into place the technology and strategy that later enabled him to vastly expand his steel empire. The first decision Mittal took was to base the Jakarta plant on the relatively recent electric-arc minimill process. Unlike traditionally, fully integrated steel works, which used huge blast furnaces, minimills were smaller production units providing a lower-cost entry and more flexible setup. Mittal’s use of a minimill for his Jakarta plant—and his accountant’s urge to reduce costs while maintaining high quality standards—led him next to investigate alternative raw material sources.
Minimills relied almost entirely on scrap steel as raw production material (blast furnaces traditionally used pig iron). Mittal correctly predicted that, with the rising numbers of minimills in the steel industry, prices for scrap steel would quickly rise as well. Mittal began looking for a different type of raw material to feed his steel mill. In the early 1980s, Mittal read of a new potential raw material source, Direct-reduced Iron (DRI). DRI was formed, as its name indicated, directly from iron ore using a special treatment process that allowed for the smelting of iron ore, eliminating the oxygen, without melting. Producing DRI was much less expensive than other raw material processes, giving cost advantages on the order of 40 to 50 percent.
In 1983 Mittal converted his steel works to DRI, buying from the state-run Trinidad & Tobago steel plants, which were among the world’s largest producers, for shipping to Jakarta. Over the next several years, Mittal worked on perfecting the DRI process—a non-proprietary process, but nonetheless one that was described as difficult to implement. Using DRI enabled Mittal to cut his raw materials costs nearly in half and to increase production more than tenfold. By the late 1980s, Ispat International’s pockets were swelling rapidly.
Forging a Steel Empire in the 1990s
Ispat remained a decidedly minor player throughout the 1980s. But Mittal was developing the strategy that would make him one of the most powerful figures in the global steel industry by the end of the 1990s. Where others in the steel industry found themselves crippled by the recession in the late 1980s, Mittal found opportunity.
Mittal’s quest began with his Trinidad & Tobago DRI suppliers. In typical state-run fashion, the Trinidad & Tobago plants were poorly run, loosing more than $80 million per year. As Mittal described the situation to Forbes: “They weren’t paying attention to improving the technology, and they were really not bothered because it was a state-run company.” As the steel industry—and the global economy in general—collapsed at the end of the 1980s, however, Mittal saw his opportunity. Quietly, Mittal negotiated with the Trinidad mill to take over its lease and operations for ten years—with an option to buy out the mill after five years. The Trinidad & Tobago government agreed, and Mittal and his management team moved in to put order in the house.
It took Mittal only one year to turn the steel plant around and achieve an operating profit. Mittal’s formula was also becoming clear: reducing costs, including layoffs, while shipping steel to where Ispat could find the best price. Ispat, however, was not merely content to reduce costs; the company also began intensive investments aimed at modernizing and expanding production. The Trinidad plant not only gave Mittal a new jewel in the crown, it also gave him access to one of the world’s largest suppliers of DRI—with production at the time of around seven million tons annually—enabling Ispat to achieve still lower costs. Ultimately, Mittal was able to produce finished steel product at less than the price most of his competitors were paying for their raw stock.
Ispat exercised its option to buy the Trinidad plant in 1994, for the price of $73 million plus the promise of at least an additional $74 million in capital investment over three years. Ispat directly set to work to reduce its costs still further, including employee cutbacks that brought on an extended steelworkers strike. The Trinidad purchase, renamed Ispat Caribbean, by then joined another key component of the emerging Ispat empire. Ispat’s revenues grew to $440 million by the end of 1992.
In 1992 Ispat paid the Mexican government $220 million for its Sicarsta steel mills, the country’s third largest, but bankrupt, mill built in the 1980s for some $2 billion. The purchase also gave Ispat access to that plant’s DRI production; the company also bought shares in the country’s DRI mining operations, making Ispat effectively the world’s largest DRI producer. Once again, Ispat’s management rushed in and began reducing the Mexican plant’s costs while boosting production. Ispat quickly turned around the Sicarsta operations, renamed Ispat Mexico, taking production from only 25 percent of capacity to 110 percent of capacity, as expansion continued through the 1990s.
Ispat International’s philosophy is to channel personal and organisational energies needed to attack and transform global challenges and opportunities into world class performance. Each subsidiary is growth driven and benefits from highly entrepreneurial local management, with proven track records and skills in managing change and integrating diverse cultures. Ispat International’s aggressive growth is driven and supported by cumulative experience gained from significant performance improvements at each subsidiary, and its advanced expertise in acquisition management. This is a source of genuine competitive advantage, equipping Ispat International to acquire companies which others would often not even consider.
After buying the Trinidad plant, Ispat identified its next acquisition target: Canada’s Sidbec-Dosco. That purchase was achieved in 1994. The next year, Mittal and Ispat reorganized. Until 1995, the company had remained part of Mohan Mittal’s India-based empire, which had grown beyond its steel core to become one of India’s most prominent conglomerates. In that year, Mohan and Lakshmi agreed to break off the younger Mittal’s Ispat operations, reforming them into a separate company, which Lakshmi, already living in London, registered in the Netherlands. The Trinidad, Mexico, and Canada operations were grouped under Ispat International, which in turn was placed under Mittal’s LNM Group, which also included the original Indonesian operations. The following year, Mittal would add to the LNM Group with the acquisition of the giant Karmet, Kazakhstan steel plant, another money loser, for some $300 million. Mittal again slashed costs—including some 20,000 of the plant’s 85,000 workers—and took the plant off its traditional barter system of payments. Once again, Mittal quickly brought profitability to a former state-run operation. At the same time, LNM bought up the former government-run steel mill in Hamburg, Germany. This purchase was soon followed by the acquisition of Irish Steel, the only steel plant in Ireland. The purchase price was entirely symbolic, although Ispat agreed to take on Irish Steel’s millions in debt.
While LNM was beginning to diversify its operations, including building a worldwide shipping fleet and entering the fuel industry, Ispat International concentrated on its steady drive to global prominence. In 1997 Ispat, seeking to boost its presence in the German and European long steel market, acquired the ailing wire rod and other long product divisions of Germany’s Thyssen AG. The Ruhr Valley plants, renamed Ispat Stahlwerk Ruhrort and Ispat Walzdraht Hochfeld, cost Ispat just $16.4 million.
In August 1997, Ispat blasted into the steel industry’s headlines when it placed an initial public offering of 20 percent of its shares (Mittal himself held the remaining 80 percent, through the LNM Group) on the New York and Amsterdam stock exchanges. The IPO, valued at nearly $780 million, was the largest public offering ever in the steel industry. By then Mittal, who had boosted company revenues to nearly $2.5 billion, with profits of some $140 million, had so impressed the industry that the IPO was eight times oversubscribed.
The boost in capital gave Ispat the ammunition for its next acquisition. The company placed its bets on acquiring the Sidor steelworks from the Venezuelan government. However, Mittal’s acquisition strategy had started to catch on among the industry. Previously, Ispat had been able to make unrivaled bids for its other acquisitions. In the second half of the 1990s, however, as more and more governments began looking to sell off their often money-losing steel operations, others began to see the opportunity for relatively low-cost entry in the industry. Ispat lost its bid for Sicor, to a consortium of investors who paid $2 billion.
Ispat barely blinked at the loss. Instead, in 1998 it reached an agreement to purchase Inland Steel. Departing from its low-cost acquisition position, Ispat paid $1.43 billion for the East Chicago, Indiana-based steelmaker, one of the world’s largest single operations. The Inland acquisition, renamed Ispat Inland, bolted Ispat International into the world’s top ten steel producers; with the addition of LNM Group’s holdings, Mittal now found himself in charge of one of a steel empire, with annual production of some 19 million tons. Ispat International’s truly global operations were also an anomaly in the traditionally domestic-based and domestic market-focused steel industry.
Ispat’s acquisition drive continued in 1999, when the company agreed to purchase the Unimetal and other steel production subsidiaries from France’s Usinor conglomerate, adding more than $700 million to Ispat’s annual sales. Despite increasing competition for new acquisitions, Ispat remained confident that its carefully planned policy of growth through acquisition could continue into the 21st century. As Mittal himself began to diversify his interests—including joining a U.K.-based satellite television partnership—he also began to groom his most likely successor, son Aditya, aged 24 and a graduate of the Wharton School of Business, who had already taken a key position in the company’s all-important mergers and acquisitions team.
Ispat Inland (U.S.A.); Irish Ispat Limited; Ispat Caribbean Limited; Ispat Mexicana S.A. de C.V.; Ispat Sidbec Inc. (Canada); Ispat Hamburger Stahlwerke Gmbh (Germany); Ispat Stahlwerk Ruhrort GmbH (Germany); Ispat Walzdracht Hochfeld GmbH (Germany); Ispat Unimetal (France); Ispat Trefileurope (France); Ispat SMR (France).
Adams, Chris, Jonathan Karp, and Lawrence Ingrassia, “Carnegie’s Heir? How Calcutta Business Became a Global Player in the Steel Industry,” Wall Street Journal, March 18, 1998.
“The Carnegie from Calcutta,” Economist, January 10, 1998.
Dolan, Kerry A., “Carnegie Would Be Jealous,” Forbes, August 23, 1999.
Evans, Richard, “Showing Its Mettle,” Barron’s, November 24, 1997.
Lanchner, David, “Dragging Steel into the Global Era,” Global Finance, May 1, 1998.
Mehta, Manik, “Steel’s Still-Growing Giant,” Industry Week, January 18, 1999.
Tait, Nikki, and Stefan Wagstyle, “Gazelle Among the Elephants,” Financial Times, March 19, 1998.
Tomlinson, Richard, “Metal Guru,” Independent, August 25, 1999, p. IF.
—M. L. Cohen