Who is the Man Who Bought Sparrows Point?

© by Mark Reutter

Updated 9/2005, originally posted 2/2005

The new owner of Sparrows Point has come a long way in a short time – an Indian now living in London who is reputed to be the world’s third richest person.

In his 16-year rise from obscurity to opulence, Lakshmi Niwas Mittal has multiplied his steel holdings by 138 times. As recently as four years ago, before he became embroiled in an influence-peddling scandal involving UK Prime Minister Tony Blair, he was known mostly for his oddball collection of steel mills in such countries as Kazakhstan, Trinidad, and Mexico.

Today, he is the biggest steelmaker on the globe, holds a dominant position in the U.S., employs 165,000 people worldwide, and, at least on paper, has climbed to the uppermost rungs of the mega-rich.

With a net worth vaulting last year from $6 billion to $25 billion, according to Forbes magazine, Mittal has not been shy about advertising his wealth. He shelled out $125 million last year for a mansion next door to the royal family’s Kensington Palace in London. The property, comprising the former Egyptian and Russian embassies joined together, boasts 55,000 square feet of floor space, a swimming pool inlaid with jewels, Turkish baths, a ballroom, and a 20-car garage. Purchased from Formula One racing boss Bernie Eccleston, the house is the most expensive private residence in the world, excluding that of royalty.

Mittal also raised eyebrows last year for the lavish wedding of his 23-year-old daughter Vanisha. Invitations for the Hindu nuptials were 20 pages thick, encased in silver, and contained jade necklaces or diamond watches for close family friends. The industrialist chartered 12 Boeing jets to fly 1,500 guests from India for five days of festivities in France that ranged from the Tulleries Gardens in Paris to the Palace of Versailles.

Fireworks filled the skies, Bollywood stars mixed with the guests, 5,000 bottles of Mouton-Rothschild 1986 were consumed, and pop star Kylie Minogue entertained the throngs before a makeshift castle. The Indian press tagged the cost at $55 million.

The source of his over-the-top extravagance? Forget Silicon Valley innovation or creative-class convergence. Mittal makes his money the old-fashioned way, accumulating strategic control over the same commodity that forged the fortunes of Andrew Carnegie, Charles M. Schwab, J.P. Morgan, and John D. Rockefeller.

Mittal’s specialty is scooping up “distressed” steel mills in remote corners of the world and making them profitable through tough management practices. In other words, he follows a financial playbook of extracting value through vulnerability that is not dissimilar to the gospel of Wilbur Ross. “His policy is very simple; he does not touch a plant he can’t turn around in two years,” noted an article in the Indian media titled, “L.N. Mittal, Steel-ing the Show!!”

His quest to become the greatest tycoon in history – “I want to be the Ford of steel,” he proclaimed to the London Sunday Times on Sept. 4, 2005 – hasn’t been hurt by his political connections in his adopted country or by the West’s economic policies that place a premium on privatization and make it easy for clever businessmen to smelt gold by buying public-sector assets.

Born in the village of Safalpur, India, on June 15, 1950, Mittal moved to Calcutta when his father bought a small steel mill. Between preparing for his accountancy exams at St. Xavier’s College, Mittal started working at his father’s company. He also met his future wife, Usha, the daughter of a moneylender, who would become a key adviser to the future tycoon.

In 1976, the Mittals moved to Indonesia to operate a failing rod and wire maker that had been purchased by his father. By driving down the cost structure, Lakshmi made the mill profitable. He trained a very competent staff and adopted new technology, while grasping the larger economic truth that the Third World was undergoing a major political upheaval. Many of the steel mills in the developing world were sluggish and unproductive. But more to the point, many of the governments that owned these mills had shed their socialist-communist ideology and were seeking to sell the properties.

Parting ways with his father, Mittal purchased a money-losing state mill in Trinidad in 1989, the same year that the Berlin Wall fell. His strategy, as explained to management professor Sumantra Ghoshal: “We set very aggressive targets because we don’t benchmark companies based on local standards, but on international standards. If the management of the acquired company is willing to commit to these targets, they stay. If they have any problems following our business plan and vision, they go.” The local management went, and Mittal’s Indonesian team, led by Dr. Johannes Sittard, repeated its financial success in the former British colony.

Opportunity next knocked in Mexico. On the Pacific Coast lay the Sicartsa mill, part of a grandiose scheme by the ruling Institutional Revolutionary Party (PRI) to create a “Pacific Pittsburgh.” The government had invested $2.2 billion in a state-of-the-art facility, using direct-reduction furnaces and thin-slab casters, to produce pipes for the then-booming oil industry. But before the mill was completed, the oil boom collapsed and the Mexican economy tanked.

Encouraged to sell off the property by British and U.S. lenders, President Carlos Salinas accepted Mittal’s offer of $220 million, or one-tenth of the money sunk in the mill. Significantly, the transaction required only $25 million in cash from Mittal. The rest came from bonds issued by the Mexican government itself and secured not by Mittal, but by the mill’s assets.

Again Mittal dispatched his Indian “SWAT team.” They packed the pipe mill back in crates and sold it to Korea, then concentrated on wringing out costs from the ex-fishermen and peasant farmers who were recruited to the mill.

Concentrating on the production of thin-rolled slabs, the facility, renamed Lazaro Cardenas, became a money machine selling to U.S. markets in Texas and California. Between 1992 and 1998, annual shipments jumped from 929,000 tons to 3 million tons, and output per employee-hour nearly tripled.

Moving to London with his wife and two children, Mittal snapped up small-to-middling mills in Canada, Germany, and Ireland. But the heart of his operations remained in so-called “emerging economies.”

The boldest example of his strategy was his 1995 purchase of the giant government steel works in Kazakhstan. A product of Soviet state planning (the mill had been established by Stalin with forced labor), Temirtau was a pollution-besotted Goliath with a labor force numbering 83,000. The workers had not been paid for six months, and heroin trafficking and AIDS plagued the company town.

Mittal purchased much of Temirtau’s infrastructure along with the mill, including its streetcar system, electric company, and hydropower plant. “People hoped that he [Mittal] would be a rich investor and a rich master and that there would be more aid and assistance,” a resident told Kazakh Channel 31 TV.

While workers started receiving their wages on time, they did not see a pay raise, not even after a third of the labor force was dismissed as redundant. In fact, according to a February 2005 report from Kazakh Channel 31, wages have not increased since Mittal took over. They average $500 a year per worker, or less than the cost of one of the bottles of Mouton-Rothschild consumed at his daughter’s wedding.

Mittal received a whopping $450 million from the European Bank for Reconstruction and Development and the International Finance Corp. to upgrade and expand the plant. Production of flat-rolled steel increased from 2.5 million tons in 1994 to 4.1 million tons in 2004, and the mill churned out what the company called “significant” profits.

An example of Mittal’s growing political clout was revealed in 2002 when it emerged that Tony Blair had intervened to help Mittal purchase Romania’s state-owned Sidex Works shortly after the mogul had made a £125,000 (about $235,000) donation to the Labor Party.

Blair’s letter to Romanian Prime Minister Adrian Nastase came at a critical moment when Mittal’s bid was under challenge by a French firm. The letter suggested that acceptance of Mittal’s bid would help Romania gain membership in the European Union. The contract was awarded to Mittal two days later.

Combined with the discovery that Mittal’s companies were registered in the Dutch Antilles and thus paid no British taxes, the letter caused a furor. The British press dubbed the affair “cash for favors” and “Mittalgate.” The controversy turned nasty when UK trade unions and some executives complained that the Blair administration’s support of Mittal threatened to undermine existing steel jobs in Britain.

It turned out that the Blair administration also had aggressively backed the steel mogul’s bid for a $70-millionloan from the European Bank for Reconstruction and Development, also his kind benefactor in Kazakhstan. Mittal needed the loan to pay an immediate $47 million deposit to the Romanian government. With the government loan guarantee in hand, Mittal flew to Romania, met with Privatization Minister Ovidiu Musetescu, and clinched the deal.

The plant was technically purchased by a firm named Ispat International of Rotterdam, Holland. Ispat was formed when the Mittal clan partitioned its family business. Lakshmi formed two companies, Ispat and LNM Holdings, to assume ownership of the foreign steel mills, while his younger brothers, Pramod K. Mittal and V.K. Mittal, took over the steel operations in India that were started by their father.

Ispat, which means steel in Sanskrit, was taken public by Lakshmi in 1997 and traded on the Amsterdam and New York stock exchanges. Backed by investor cash from the stock float, Ispat made its first foray into the U.S., buying Chicago-based Inland Steel in 1998.

The Ispat/LNM empire swelled after 2002 as more state steel plants became available in Eastern Europe and Africa. By the start of 2005, the Mittal group trailed only Arcelor of Luxembourg as the world’s biggest steel producer. Among its new holdings were Huty Stali (Poland); Nova Hut (Czech Republic); BH Steel (Bosnia-Herzegovina); Ispat Skopje (Macedonia); Ispat Petrotub, Ispat Siderurgica, and Ispat Tepro (Romania); Annaba (Algeria); and a controlling stake in Iscor (South Africa).

On the other hand, Mittal shut the steel mill in Ireland that he had purchased in 1996, giving the labor force a day’s notice. The mill was “no longer viable,” Malay Mukherjee, the chief operating officer, said, because of high energy and labor costs and the prospect of installing new pollution-control equipment. Management had earlier called on the unionized workforce for wage reductions, but closed the plant before the union could respond. Many creditors were left with losses after the mill was liquidated.

In December 2004, Mittal Steel Co. NV was formed from Ispat and LNM. The company then hopscotched over Arcelor to become the world’s No. 1 steelmaker when it absorbed Wilbur Ross’s International Steel Group (ISG) in April 2005.

What satisfied Mittal a couple years ago – ownership of 20 million tons of raw steel production capacity – increased to 70 million tons with the ISG merger. Mittal now says he’ll only settle for 100 million tons, arguing that the steel industry still remains globally fragmented and can achieve lasting prosperity only through consolidation among two or three worldwide companies, led, of course, by Mittal Steel.

Precisely how Mittal finances his purchases is blurred. There is little transparency in his company. Headquarters are in loosely regulated Netherlands, top management is based in Britain, physical plants are tucked around the world, 88 percent of the company stock is owned by people with the name of Mittal, and family assets are stashed away in the Dutch Antilles and other tax havens. Any analysis of the different parts of the corporate vehicle for Mittal’s empire is rather like trying to see Temirtau through the mill smoke.

And that’s how the Mittals want it: a family affair. Lakshmi is chairman and CEO of the company; his 29-year-old son, Aditya, is president and chief financial officer; and Vanisha, who did post-graduate work at London’s School of Oriental and African Studies before her marriage, now sits with her father and brother on the Mittal board of directors.

Some investors in Ispat have questioned the relationship between Mittal’s private and public companies, especially the $2-billion dividend (that’s right, billion, not million) paid last year by family-owned LNM Holdings to Lakshmi Mittal.

By handing over $2 billion to the senior Mittal, the family did not have to fork over the same amount to the publicly traded company (Ispat), which assumed ownership of LNM prior to the formation of Mittal Steel. The investors said the family had promised Ispat stockholders that they would make acquisitions only through the public company.

Lakshmi then had another big payday upon Mittal Steel’s formation. He received a $260-million dividend based on his 88 percent stock ownership of the company, which amounted to a second helping of the 2004 profits of LNM and Ispat.

No doubt wishing to spread around his good fortune, Mittal donated £2 million ($3.6 million) to Tony Blair’s Labor Party on July 13, 2005. The party accepted the money and issued a public statement cordially thanking the steel baron for his “very generous donation” and “continued support.”

The donation, which replenished Labor’s coffers following Tony Blair’s reelection for a third term, has led to press speculation that the billionaire will be honored with a new title – Lord Mittal – and a seat in the House of Lords. (A roadblock to be cleared beforehand is Mittal's Indian citizenship.)

The emergence of Lakshmi Mittal marks the fourth time in U.S. history that a single businessman has exercised strategic control of the steel industry. Andrew Carnegie wielded de-facto market dominance in the late 1890s. The consolidation of Carnegie and other properties into U.S. Steel Corp. led to Carnegie’s retirement in 1901 and the emergence of financier J.P. Morgan as the reigning eminence.

The third era of single-party rule was the 1920s heyday of Bethlehem Steel Chairman Charles Schwab before personal excess and the Great Depression wiped out his millions and he died in hock to the Franciscan brothers of his hometown. (See the chapters “Chasing Dollars,” “Smash-Up,” and “End of an Era” in Making Steel for more.)

Mittal is the first non-U.S. citizen to exert such marketplace power. He now controls four of the five major steel works on the Great Lakes (former LTV Indiana Harbor, former Inland East Chicago, former Bethlehem Burns Harbor, and former LTV Cleveland). The Gary Works outside of Chicago is still owned by U.S. Steel Corp.

More importantly, he owns about 40 percent of domestic production of flat-rolled steel – the material used to make automobiles and appliances and the last major steel market that is free of competition from scrap-using mini mills. The Wall Street Journal reported that “the emergence of London’s Mittal family as a significant force in the U.S. steel market will diminish the bargaining power [of Ford and General Motors] and put further pressure on their efforts to control costs.” Additionally, Mittal Steel holds a major share of domestic tin-plate production at Sparrows Point and Weirton, W.Va.

The Wall Street analysts that the media are so fond of quoting are predictably sanguine about Mittal’s ownership of U.S. steel properties. Their mantra that steel needs to consolidate, globalize, and extract synergies to become an efficient industry is rarely questioned by government officials or the press. Instead, both have become cheerleaders of consolidation. Fortune magazine, for example, honored Mittal as “2005 Businessman of the Year in Europe” for combining “managerial savvy with superb acquisitive instincts.”

But is Lakshmi Mittal really so savvy outside of his undeniable genius for collecting the cash flow of scores of geographically isolated steel mills? For the most part, Mittal mills are hardly high tech; they are ex-government operations in very poor countries with little vertical integration, modern equipment, or obvious business interconnection (a.k.a., synergy).

What they all share, though, is an incredibly cheap workforce. From Indonesia to Mexico, and from Kazakhstan to South Africa, Mittal has come to the table with his knife sharpened. Privatization has served as a cover for huge job cutting. In South Africa, for example, work reductions and wage freezes have sparked job actions and lawsuits by the local Solidarity trade union. The trade union has been backed in several instances by the South African government, which has complained of unwarranted job cutbacks.

Several prominent companies, led by the Harmony Gold group, have called for parliamentary hearings into the prices charged by Mittal South Africa, which controls 80 percent of the nation’s steel market. Mittal’s “import parity pricing policy” calculates higher rates for domestic steel than for exports, adding freight and other charges that customers would pay if they had to import the steel. The policy, which boosts the price of domestic steel by as much as 40 percent, prompted Harmony to publicly accuse Mittal Steel of harming South African industry and stifling job growth.

In Kazakhstan, controversy over Mittal’s business practices centers on safety and wages rather than steel prices (impoverished Kazakhstan consumes little steel itself; nearly all of the steel it makes is exported to China.) Safety came to a head after 23 miners died last Dec. 5 in a coal mine operated by a Mittal subsidiary.

This led to information that the accident rate at Mittal’s 11 coal mines had tripled from the prior year. At the same time, the Kazakhstan government extended property-tax breaks to Mittal Temirtua for another five years. Believing that the workforce should share in the tax benefits and production increases at the plant, the head of the miner’s union went to London to try to talk to Mittal. He was not received by the mogul.

On March 5, 2005, the chairman of the Kazakhstan Trade Union Federation summarized the union’s grievances in a letter to N.K. Choudhary, plant manager. Translated into English by the Kazakh Information Agency, the letter is worth quoting:

On behalf of the Federation of Trade Unions of Kazakhstan, which counts two million workers, I express concern in connection with social tension, which is lately observed in the labor staff of Mittal Steel Temirtau, particularly in the coal department mines.

On 26 January of 2005, the representative confederation of miners asked crucial questions concerning refusal of the administration to negotiate the conclusion of the general agreement, absence of development perspectives for the coal department envisaging shutdown of mines and threats of unemployment, extremely low wages and other acute problems.

Unfortunately, the participants of the conference received not a single answer to the questions asked. The administration seems to ignore the conference and the opinion of the trade union [in] what appears to be inadmissible violation of the current labor legislation of Kazakhstan.

Such position of the employer, as well as local authorities [who] bar implementation of collective actions, arouses bewilderment.

Unlike the workforce in Temirtua, whose options are limited by crushing poverty and “government by oligarchs,” Mittal has faced a more sophisticated labor organization in Poland. In March 2004, Mittal beat out U.S. Steel Corp. for a controlling stake in Polskie Huty Stali. The workforce was abruptly sliced from 14,500 to 10,000, sparking protests by the same Solidarity trade union whose protests under Lech Walesa led to the dismantling of Poland’s Communist regime in the 1980s.

Earlier this year, the Polish government granted Mittal the right to bid on the Huta Czestochowa Works, the biggest steel enterprise in the country, so long as it reached agreement with Solidarity. During three months of intense negotiations, the two sides became estranged because of Mittal’s refusal to grant pay increases and guarantee jobs. Distrust was further sown by the firm’s alleged failure to meet promised goals of capital investment at Huty Stali.

Hundreds of steelworkers demonstrated against Mittal. The government withdrew Mittal’s exclusive bidding right, and Ukraine’s Donbasu Group was given four weeks to negotiate an agreement with Solidarity and the mill’s management.

The three parties reached a settlement quickly and signed a “social package” that granted workers a seven-year guarantee of employment as well as a modest pay raise. This represents the first time that workers at a privatized steel plant have had a direct say in the terms of the plant’s disposal.

The Ukraine company further promised to invest $438 million in Czestochowa over the seven years. In July, the government approved the deal and sold the works to Donbasu, handing Mittal a rare and humiliating defeat that he has not forgiven – his protests have led to an inquiry by the European Union into possible public subsidy of the mill, which is against EU’s privatization rules.

The question raised at the end of Making Steel regarding Wilbur Ross remains as compelling today as it was a year ago: Will the takeover of steelmaking assets by the Mittal family represent a turnaround for a troubled industry or yet another phase of deindustrialization in which a deep-pocket financier squeezes more toothpaste out of the tube?

The lack of transparency and the insider domination of Mittal Steel make any prediction of the company’s policies speculative at best. But a future company decision may prove to be a portend:

Last summer, a month after Amit Bhatia, the 25-year-old financier who married Vanisha Mittal, arrived at the wedding ceremony in a jeweled chariot, Ispat Inland stopped paying monthly supplemental benefits to about 1,800 widows of deceased steelworkers at East Chicago, Ind.

Mittal Starves Widows and No Shame were among the picket signs held by union members and widows who protested the decision in a public demonstration. The media were present, and the company quickly reinstated the benefit. But Lou Schorsch, the new chief of Mittal Steel USA, has told analysts that the company will demand future concessions from USWA Local 1010 at Inland.

Whether these concessions include taking $62.50 a month away from the widows of East Chicago will give us a clue about how the “steel raja” plans to treat American workers.