Suits Gone Wild

© by Mark Reutter

Posted 9/05

Lakshmi Mittal (right) and Wilbur Ross announce the $4.5 billion buyout of ISG, making Mittal Steel the largest steel producer in the U.S.

A latter-day Rip Van Winkle who fell asleep at Sparrows Point a year ago and woke up today might conclude that the world has been flipped upside down. For those who have been awake, the changes are even more remarkable.

The man who pledged his commitment to American workers and American steel upon buying Sparrows Point in 2003 turned around and announced the sale of Sparrows Point and 14 other mills to a foreign investor. The sale was completed in April 2005.

As a matter of ethics, Wilbur L. Ross failed to live up to the pledge made on his company’s website: a corporate culture that emphasizes individual responsibility and honesty. As a prominent financier who demanded favors from government and givebacks by steel employees, he went on to fail the twin tests of patriotism and morality by letting 40 percent of U.S. flat-rolled steel production slip into the hands of a mysterious Indian industrialist living in London.

Ross’s motivation to pack up his bags was apparent: he left loaded with lucre. He picked up $267 million from the sale of his International Steel Group (ISG) to Lakshmi Mittal. Four ISG executives shared $58.5 million in cashed-out stock options,(1) while a group of investors allied with Ross enjoyed a hefty return.(2)

For Mittal, chairman and 88 percent owner of Mittal Steel Co., a newly formed company based in Rotterdam, Holland, the reason for purchasing the U.S. mills at a premium price appears to be more complicated.

Having tasted the rich repast of political power and cash flow by buying Third World and ex-Soviet-bloc mills, he seems to be under a megalomaniacal spell. Openly, hungrily, he seeks to conquer and corner the metals market as the “steel raja.” A presence in America is a necessary part of his journey.

The once-modest businessman has been attracting attention in Britain for his extravagant real estate purchases and flamboyant parties, although these activities seem calculated less for personal enjoyment than to impress the public (18 months after buying the “world’s most expensive private residence” in London, he has yet to actually live in it).

In its 2005 rankings of billionaires, Forbes magazine listed Mittal as the third richest person on Earth (after Microsoft chairman Bill Gates and U.S. investor Warren Buffett), with a net worth of $25 billion. But with steel prices tumbling since January, Mittal has already fallen a few notches on the Croesus scale. At the time of the Forbes’ estimate, Mittal Steel shares were trading as high as $43.86. On the first day of September 2005, the stock closed at $28.09 – a 36 percent decline – dropping the raja’s fortune to about $16 billion.

Ross, in retrospect, bought at the bottom of the cycle and sold at the top. When he acquired Sparrows Point in May 2003, hot-rolled strip was selling at about $300 a ton. Seventeen months later, hot-rolled strip had reached $756 a ton, propelled by perceived fears of a world steel shortage due to China’s expanding economy.

Demand began to cool by the end of 2004, and prices have since dropped steadily to a low of $460 a ton in July. (They have recovered a bit since then). At the same time, the costs of making steel, including the price of mining iron ore and buying energy, have not fallen.

In short, an industry that Business Week (Dec. 22, 2003) pronounced as saved by Wilbur Ross’s restructuring and tough love toward labor unions, is back on the brink. The Associated Press reported on August 23, 2005: “Steelmakers are warning their shareholders and the investment community that results in the third quarter of this year are going to reflect a much weaker landscape. Many steelmakers have cut back production to try to fall in line with slumping demand (and to minimize their losses), but thus far the production cuts have not resulted in a pricing rebound for finished steel. Just 23 blast furnaces were operating in the U.S. at one point this summer, the fewest since a nationwide steelworkers’ strike in 1959.”

“Red ink is even being discussed,” AP warned.

The current slump has hit Mittal Steel USA hard. Shortly after taking over Sparrows Point in April from ISG, the company shut down parts of the plant, saying it was “adjusting to the order book.” This was followed by a press release in which Mittal reported that it was “taking further steps to match its output with inventory adjustments occurring in the markets that it services.”

The new owner then banked the C-6 furnace at its Cleveland plant and idled a second blast furnace at Indiana Harbor, Ind. On June 6, the company announced that it was extending the outage of its blast furnace at Weirton, W.Va., by eight to 10 weeks. The furnace had been expected to return to full operation on the day of the announcement. Outages at Weirton and the Indiana facilities have continued into September, while C-6 at Cleveland was returned to service, replacing C-5, which will be idled in October.

The rise in retail gas prices this summer couldn’t have come at a worst time because they threaten to disrupt the last big “safe” market for integrated steelmakers, namely, sales to automakers. Last year, the mills now owned by Mittal shipped 4,915,000 tons of steel to the auto sector, accounting for 23 percent of total shipments. The drop in consumer purchases of gas-guzzling SUVs and light trucks are reverberating backwards to those mills. And were this not enough, the long-term financial problems of General Motors and Ford, along with the real possibility of bankruptcy facing auto-parts makers Delphi and Visteon, are a mounting concern.(3)

Significantly, capital investment at Mittal’s U.S. mills has been ratcheted down, while the tycoon’s appetite for foreign mills continues unabated. Currently, he is pursuing acquisitions in Poland, Turkey, the Czech Republic, Ukraine, and China and has proposed to the Indian government building an extraordinarily costly ($11.4 billion) mega-mill in Jharkhand, India.

For a man in such a hurry overseas, the question rises: will he invest in America? In a presentation to analysts earlier this year, he announced his intention to eliminate 7,000 to 8,000 existing jobs a year, or a quarter of his worldwide workforce, over the next five years in order to eliminate duplication and integrate ISG holdings into his company.

Vague as his words were, they seemed to signal that he would not hesitate to shut any U.S. mill that fails to meet his production quotas or proves to be extraneous in light of market conditions. As “the world’s most global steel company” (the firm’s slogan), it goes without saying that he could shift production to any number of countries in Asia or Eastern Europe, where labor costs are a fraction of those in the U.S.

Under this scenario, Weirton and Cleveland would likely be the first mills to go, while Sparrows Point, if it survives, would serve primarily as a landing dock for foreign steel. A reasonable prediction is that the plant would cease making steel once “L” blast furnace ends its current ironmaking campaign, but could continue to re-roll overseas metal to get around steel quotas while meeting “Buy America” requirements. This could translate into a workforce of, say, 300 – or one for every 100 workers that were on the payroll in Sparrows Point’s heyday.

The following articles have been prepared to document the seismic changes that have shaken (and are shaking) the business since the publication of the new edition of Making Steel:

• How to Pocket $267 Million focuses on Ross and the circumstances of the ISG sale to Mittal. Sidebar: Everybody Loves Wilbur.
• Who is the Man Who Bought Sparrows Point? takes a look at the steel raja and his far-flung empire.
• What Can Be Done offers ways in which steelworkers and communities can fight the assault on their welfare. Katrina and Steel is a postscript.

So please read on. Marvel at the outsized, if not outlandish, personalities who have seized so much power and money in so short a time. And ponder how the current crop of strivers fits into the past mogulships of Charles M. Schwab and Eugene Grace of now-defunct Bethlehem Steel. To them all, the words of Shelley’s poem seem suitable:

“My name is Ozymandias, King of Kings:
Look upon my works, ye Mighty, and despair!”
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away.

Notes
1. Stock options exercised by four ISG executives:
Name, Title/ No. of shares exercised / Value realized
Rodney B. Mott, President / 1,448,000 / $40,109,600
Jerome V. Nelson, Vice President / 161,000 / $4,280,990
Gordon C. Spelich, Vice President / 371,050 / $10,849,502
John C. Mang III, General Manager of Burns Harbor / 112,200 / $3,281,313

2. Ross’s early co-investors scored nearly a seven-fold gain on their $343 million stake in ISG. They included Franklin Mutual Advisors, run by money manager Michael F. Price; Paulson & Co., a hedge fund specializing in distressed companies; the Howard Hughes Medical Institute, a bio-medical research group; Cleveland Cliffs, a producer of iron ore pellets; and President Rodney Mott, who owned 2,152,000 shares of ISG stock in addition to his options.

3. Robert “Steve” Miller, the man who sold Beth Steel to Wilbur Ross in 2003, was named chairman and CEO of Delphi Corp. in June 2005. Since then, Miller has threatened to place the auto-parts supplier – the nation’s largest – into bankruptcy court in an apparent re-play of the Bethlehem situation. Back in October 2001, two weeks after being named Beth CEO, Miller put the steelmaker into bankruptcy. This move set the stage for the eventual stripping of benefits to Beth retirees and dependents. Postscript: Delphi filed a "petition for relief" under Chapter 11 of the U.S. Bankruptcy Code on October 8, 2005.