ArcelorMittal: Two years after the mega merger

23 May 2008

Lakshmi Mittal's big dream, when he set out to acquire Arcelor, was to rid the steel industry of price cyclicality. Two years after the mega deal which transformed the steel business, is he any closer to his dream? By Vivek Sharma

In 2006 when Lakshmi Mittal detailed the bid to acquire Arcelor, his most compelling argument for the deal was that it would make steel price-cycles history. Though many dismissed this as an implausible dream, there was merit in his argument. Steel was probably the most fragmented among basic or core industries, until recently.

While the major steel producers had the technology and marketing expertise, they lacked access to sufficient iron ore reserves. Those steel producers which had enough and more iron ore reserves, especially the state-owned companies in Eastern Europe, were mostly inefficient and lacked market access.

As steel producers abound and competition intensified, consumers gained more bargaining power. Producers, saddled with excess capacity, were too eager to undercut each other and played into the hands of big consumers like auto and white goods manufacturers. The industry soon learned to live with steel price cycles, inextricably linked to the fortunes of the large consuming industries. They made money when prices were good and prepared themselves for the winter when the cycle turned.

Then the big miners started consolidating. This development squeezed the steel producers even further, as the iron ore suppliers could demand higher prices as their numbers were reduced to a handful and they could behave like oligopolies. Besides, geographical and logistical constraints forced many steel producers to depend on select iron ore suppliers.

Mittal is now seen as the visionary who foresaw this difficult future and started building a large, geographically diversified steel empire. He bought his steel assets when the price-cycle was down and was perfectly positioned to reap windfall gains when the upswing came. Before prices started moving up, Mittal fortified his empire with tenacious - and sometimes ruthless - drives to improve efficiency. It is better to have a few large producers, he argued, which will smoothen out the price fluctuations - if not completely eliminate price-cycles. The Arcelor deal was to be the culmination of his grand plan for consolidating a highly fragmented industry.

After the deal
Post-merger financial performance of Arcelor Mittal has been exemplary. For 2007, the first full year of combined operations, total revenues increased nearly 18 per cent to over $110 billion even though total shipments were marginally lower than previous year. Net income was up 30 per cent at $10.4 billion and free cash flows were over $14 billion. Synergies from the deal until the end of 2007 were estimated at over $1.4 billion. The company's market value has jumped more than 60 per cent over the last year and now stands at close to $140 billion.