Lakshmi Mittal steel mill acquisition strategy

"They buy plants at ten cents on the dollar when the great managers run them into the ground." Acquired Burns Harbor from bankrupt Bethlehem.

When I said Bethlehem Steel was the last company in the world 50 years ago to build a steel plant, that's correct. Since then we've built plenty of steel plants in the world, but it was always a country that financed it. POSCO Steel in the 1990s became the world's largest steel company, passing US Steel as the world's largest steel producer, but they were funded by the government of South Korea. The world's largest steel company today is Bao Steel in China, funded by the Chinese government. Now, you can say ArcelorMittal is a huge steel company, but they haven't built any new plants that I know of. They go out and buy these other plants at ten cents on the dollar when the great managers run them into the ground.

Mittal buying up distressed steel companies at two cents on the dollar in the late '80s and early '90s; ArcelorMittal as proof that the future-of-metals thesis was right.

I was sort of a voice crying in the wilderness. Yes, steel only grows at two percent a year in volume, but when you've got a $500 billion base, the growth in steel is more than the growth of all of those others combined, in dollar volume. And it turns out there were some people who understood that. There's an Indian guy named [Mittal], and he went around in the late '80s and early '90s buying up every steel company that all the boys on Wall Street wanted to get rid of. He could buy them for two cents on the dollar. They had environmental problems and legacy obligations, but he worked some of those things out in the sales. All the investors wanted to get rid of the steel stocks back then, and this guy [Mittal] in India went around buying them up. Today some of the world's largest steel companies are ArcelorMittal, which is a French company that merged, and British Steel is now part of [Mittal].

"This guy in India" bought up unprofitable steel companies for a song; ArcelorMittal became the second largest steel company in the world. Used to illustrate that Wall Street misread steel's productivity-driven margin collapse as industry decline.

To a certain extent steel companies have been consolidating into some huge conglomerates, mostly because their profitability was so bad. Why was their profitability bad for the last thirty years? Because their productivity was so good. They had improved their productivity so dramatically that they almost drove themselves out of business competing with each other. Wall Street, those people over at that side of campus, can't figure these things out. Steel wasn't an ancient material that was no longer useful — they thought they were just an unprofitable backward industry. Maybe some of their management was backwards, but it's still an important material. And there was this guy [Mittal] in India who just started buying up steel companies for a song, and now ArcelorMittal is probably the second largest steel company in the world, and he's making billions. Actually starting to lose some billions right now.

Mittal recognized in the 1980s that worldwide steel excess capacity was temporary; bought up cheap steel companies (ten cents on the dollar); by 2005 sitting on a fortune as capacity caught up with demand. ArcelorMittal as conglomerate of ~15 pre-1970 firms.

So all of a sudden the steel companies were losing money. Wall Street thought steel was a dog, just like Ned Thomas. The people on Wall Street are just as stupid as Ned. They can't look at what the cause is, they just look at the effect and say, that's a bad effect, they're losing money. Why were they losing money? There was Lakshmi Mittal in India who was smart, and he knew there was value in steel, and he started buying up steel companies around the world cheap, like ten cents on the dollar. Finally in the 1990s — actually around 2000 — the worldwide steel excess capacity got consumed by increased consumption, and by tearing apart old plants that were unprofitable. By 2005, Lakshmi Mittal was making a fortune, because he knew, and anyone who had half a brain would have known, that the world needs a billion tons of steel a year. That's a lot of market. And when you don't have excess capacity, and you have high productivity today —

Mittal bought distressed steel mills worldwide at ~10¢ on the dollar while Wall Street dumped them; became multi-billionaire as overcapacity worked out. Arcelor Mittal (Luxembourg-based) is the largest European steelmaker; the Thyssen Krupp merger discussion (2017) would make them #2 worldwide after Baosteel.

Because of these productivity gains, they had 30, 40 percent overcapacity. The United States was only using a hundred million tons of steel in 1980, in 1990, but the workforce went down by a factor of two. Wall Street and the labor union said, oh, these companies are dying. They were, because no one would invest in them because they had too much overcapacity. It took them until the 1990s to get rid of some of that overcapacity. In the meantime, this guy in India named Mittal started buying up old steel plants around the world. Anybody know what happened to Mittal? They're talking about merging with Thyssen Krupp right now, to become — they are Arcelor Mittal. Arcelor was the French steel company which at one time merged with British Steel. Arcelor Mittal is based in Luxembourg. Mittal is this Indian who realized steel is a big industry, the world needs steel, and the Wall Street bankers — they're so smart — are selling all the equipment for ten cents on the dollar or less. He decided to start buying it and wait for the overcapacity to work its way out of the system, and now he's a multi-billionaire.

Mittal bought distressed US steel mills at ten cents on the dollar in the late 1980s while Wall Street pronounced steel dead. Used to illustrate the productivity-disguised-as-decline pattern: US steel halved employment 1980–1990 with constant output, doubling productivity at 6–7%/year vs. 1% economy-wide.

Now the problem was, the steel industry was losing its shirt back then. There was a guy named Mittal in India — anybody ever heard of Mittal, M-I-T-T-A-L? He knew that steel was an important material, and he went around buying up these old steel plants. There were plenty of steel plants for sale, and the reason was, with the Arab oil embargo and stuff in the 1980s, the United States had used a hundred million tons of steel a year — I've got plots, it's actually in this article — a hundred million tons a year, century constant. But at the same time the employment went from half a million steel workers to two hundred and fifty thousand steel workers in ten years. You'd read in the Wall Street Journal the steel industry was dying — they were laying off half their workers over ten years. Wait a second: it had constant consumption, the employment to produce it went down by a factor of two — what happened to productivity? It went up by a factor of two. I did that one in my head. If half the people produce the same amount of product in 1990 as they did in 1980, productivity doubled.

Closing case. Indian industrialist bought distressed U.S. and European mills at ten cents on the dollar in the 1980s–90s when Wall Street wrote off steel as a dying industry. Became multi-billionaire when overcapacity worked itself out.

Those are some of the stories. Over the last 50 or 60 years, the steel industry in the world has undergone a tremendous transformation. It's not the stodgy industry everyone likes to think. I told you the story about this guy in India who was not stupid — he knew that U.S. Steel and Bethlehem Steel were selling their plants for ten cents on the dollar trying to modernize. He went out and bought the plants at ten cents on the dollar. Burns Harbor in Indiana is now an ArcelorMittal steel mill — Bethlehem went bankrupt. This Indian is a multi-billionaire, because he went out in the 1980s and 1990s when Wall Street said steel's a dog. He knew it wasn't a dog. It might not have been making money, but it had to come back when the overcapacity in production went away.