ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Mittal Steel: Carnegie Strategy?

Carnegie Strategy?
Lakshmi Mittal


Carnegie Strategy?

akshmi Mittal’s euro 18.6 billion (US $ 23 billion) hostile bid for Arcelor, Europe’s steel “industry champion”, on January 27 had more than the US 19th century industrialist Andrew Carnegie’s daring and impudence. Where the latter’s endeavours were backed by the Morgan bank of the robberbaron times, Mittal has so far at least not turned to high finance for support.

Andrew Carnegie’s firm and its leading rival had separately engaged in a series of acquisitions during the late 19th century. Then, in 1901, the two rivals were merged, along with some other smaller firms, to form US Steel that reigned dominant in the American steel market for decades. The merger that led to the formation of US Steel had been made possible by the association of the Morgan bank, concerned as the bank was about the depressing tendency of product market competition on the value of its portfolio of steel holdings. The 1901 deal put the wealthy banker and financial deal maker J P Morgan in the

Economic and Political Weekly March 25, 2006

saddle; Carnegie, the industrialist, retired. But this time around, will high finance, centred in the City and the Street, and some other quarters in these times of globalisation, come in to back Mittal Steel to bring about a historic merger that will catalyse a change in the face of the world steel industry?

Mittal’s steel empire stretches from Canada and Trinidad and Tobago to Kazakhstan and Indonesia, a blend of intelligent acquisitions and turnaround of former public sector steel companies and unwanted private sector steel assets amidst large global overcapacity. The company, Mittal Steel, is tightly controlled – Mittal and his family own 88 per cent of the equity capital, and his son is both president and chief financial officer. Arcelor, paradoxically, is the creation of the French socialists as a response to the steel industry’s worst ever crisis that hit the business in 1974. In 1981, French president Francois Mitterand presided over the nationalisation and merger of a number of ailing French steel companies to create Usinor SA, which was then privatised in 1995. In February 2002, Usinor took over Luxembourg’s Arbed and Spain’s Aceralia to form Arcelor that rivalled the German Thyssen Krupp combine. But, the dynamics of steel oligopoly took a new turn when Mittal Steel absorbed the International Steel Group of the US, which had earlier brought the assets of Bethlehem Steel within its fold, creating the world’s largest tonnage steel-maker.

More recently, Arcelor initiated significant inroads into the north American market with the acquisition of the Canadian steel firm, Dofasco, to pip its main European rival Thyssen Krupp to the post. As Mittal Steel had already around 30 per cent of its steel assets in north America by that time, it was clearly quite perturbed. As Aditya Mittal, president and chief financial officer, put it in a recent press interview: “…both Mittal and Arcelor were treading on each other’s toes to vie for the same chunk of the market.” They both bid against each other in the Ukraine for the Kryvorizhstal steel facility. The third highest bidder walked away, leaving the two rivals to bid against each other. Eventually Mittal ended up paying $ 3.5 billion, $ 1.3 billion more than what the third player had closed the bid at. Aditya Mittal goes on to say that “Such a scenario cannot be conducive for both of us to grow individually. …And, we could not wait any longer because Arcelor is trying to grow in the US and we are interested in increasing our presence in eastern and central Europe.”

Now if the proposed merger goes through, Lakshmi Mittal is probably hoping that the merged entity will be accepted by the other oligopolists as the world market leader, signalling when to moderate output, smoothening thereby the peaks and troughs of the demand cycle that significantly influences profitability. The steel industry, it must be recalled, is characterised by high capital intensity, large minimum efficient scale, and the centralising effects of the material intensity and location characteristics of iron ore and coking coal that have all contributed to the emergence of very large firms interested in controlling markets to deal with overproduction. We think that – like it was in the interests of the Morgan bank to back the creation of US Steel in 1901 – it is in the interests of high finance in these times of globalisation to back the Mittal bid to absorb Arcelor. One cannot then rule out a Nippon Steel-POSCO-Shanghai Baosteel combine in the days to come. After all, the enhancement of market power to moderate cyclical downturns and underutilised capacity, which are constant threats to profitability in this industry, is in the interests of high finance.


Economic and Political Weekly March 25, 2006

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