In the case of reading analysis, just need three questions were asked for this case.case is (mittal- steel- in 2006)Good question example in the ppt p45-49 from the session 2.
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-DRAFTJANUARY 15, 2007
Mittal Steel in 2006: Changing the Global Steel
On January 27, 2006, Laxmi Niwas Mittal (LNM) and his son, Aditya Mittal, Chairman & CEO and
CFO respectively of Mittal Steel, prepared for the press conference at which they would announce
Mittal Steelâ??s unsolicited $22.8 billion bid to acquire the European steelmaker Arcelor. Although
Mittal Steel had been a prime mover behind the consolidation of the industryâ??and most participants
and observers in 2006 seemed to accept the logic of consolidationâ??an offer for Arcelor was unlikely
to have been anticipated by the industry. Arcelor had been created in 2001 by the merger of three
European steelmakersâ??Usinor (France), Arbed (Luxembourg), and Aceralia (Spain)â??that were
themselves, in turn, the result of previous mergers in their respective countries. Mittal Steel and
Arcelor were at that point the two largest and most global steel producers; it would have been far
easier to imagine the two giants growing in parallel through other significant acquisitions. For
example, World Steel Dynamics had sketched out a scenario in which Mittal Steel acquires the AngloDutch steelmaker Corus and Arcelor acquires ThyssenKrupp of Germany1. Yet, at the announcement
of the offer on that winter day in London, LNM, described by the New York Times as having â??never
been bashful about his global ambitions2,â? would present the combination of Mittal Steel and Arcelor
as the next logical step in the evolution of the industry.
â??This is a great opportunity for us to take the steel industry to the next level. Our customers
are becoming global; our suppliers are becoming global; everyone is looking for a stronger
A torrent of deals
The amount we will receive for this company [the Kryvorizhstal steel plant] will be 20 per cent higher than
all the proceeds received in all the years of the Ukrainian privatization.
â?? Ukrainian President Viktor Yushchenko4
I can say that the Ukrainian administration has been very lucky to receive this price.
â?? Laxmi Mittal, Chairman of Mittal Steel, the winning bidder5
Arcelor will continue to seek to grow through strategically compelling acquisitions; however, management
will not compromise shareholder value in the pursuit of this goal.
â?? Guy DollÃ©, CEO of Arcelor, the losing bidder6
Professor Pankaj Ghemawat of IESE Business School and Professor Ravi Madhavan, of the University of Pittsburgh, prepared this case. This case
was developed from published sources. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as
endorsements, sources of primary data, or illustrations of effective or ineffective management.
Copyright Â© 2009 . No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form
or by any meansâ??electronic, mechanical, photocopying, recording, or otherwiseâ??without the permission of Pankaj Ghemawat.
Mittal Steel in 2006: Changing the Global Steel Game
Barely 3 months had passed since Mittal Steelâ??s previous acquisition. On October 24, 2005,
LNM had announced that Mittal Steel had won the bidding for Kryvorizhstal, Ukraineâ??s 10million tpy7 capacity steel plant, which produced one-fifth of the countryâ??s steel output.
Kryvorizhstal was a controversial privatization, having been sold in 2004 to former president
Leonid Kuchmaâ??s son-in-law and a business partner for around $800 million. The opposition, led
by Viktor Yushchenko, called the sale a â??theftâ? that gave away a very valuable industrial property
and promised to annul it.8 After the Orange Revolution brought him to power, President Viktor
Yuschenko kept that promise by organizing a second auctionâ??despite resistance from the former
owners who appealed to the European Court of Human Rights, mounting social skepticism about
privatization because of past corruption, and a Parliamentary vote to halt the sale. The new
government wanted to highlight the transparency of Ukraineâ??s new business culture to potential
investors, and therefore arranged for the auction to be televised live, with President Yushchenko
attending in person.
Mittal Steel, the worldâ??s largest steel company with 59 million tons of crude steel production in
2004, was an obvious bidder in the second auction: it had lost the first auction, in 2004, despite
bidding $1.5 billion, or nearly twice as much as the winning partnership. The other competitors this
time around were a consortium led by Arcelor, the worldâ??s second largest steel producer with 51
million tons in crude steel production in 2004, and LLC-Smart Group, a local investor group
reportedly controlled by a Russian businessman. LLC-Smart dropped out of the auction early on,
leaving Mittal and Arcelor to go head-to-head. The $4.8 billion that Mittal ended up paying greatly
exceeded expectations, with some reports suggesting that the Ukrainian governmentâ??s target price
had been around $3 billion.9
The World Steel Industry10
In 2005, the global market for steel was estimated at around 998 million metric tons (mt).11
Although the market for steel comprised several thousand distinct products, they could largely be
grouped into a few broad segments. Semifinished products were at least 8 inches thick and required
further processing. Flat-rolling them yielded plates (more than 0.25 inches thick), or sheet and strip,
thinner products that could be shipped in coils. Other kinds of products that could be formed from
semifinished steel included bars and wire rods, that were even thinner; a wide variety of structural
shapes that were used primarily in construction; and hollow pipes and tubes. Flat sheet was by far
the most important of these segments, both because of the volumes and because it included the
higher-value-added sheet steel for the automotive and appliance sectors. Other major customer
groups included service centers and distributors, and the construction sector. Price, quality, and
dependability were considered the three most important buyer purchasing criteria, although it was
difficult to get qualified by major buyers such as the automobile companies. Higher price realizations
typically reflected a focus on higher-end products, and tended to be accompanied by higher
From a technological perspective, there were three groups of steelmakers: integrated firms that
produced steel by reducing iron ore, minimills that produced it by melting scrap, and specialty
steelmakers that produced stainless steel and other special grades of steel for distinct submarkets and
will not be considered further here. Integrated firms traditionally dominated the industry and
followed a strategy of vertical integration, owning not only steel plants but also iron ore and coal
mines, transportation networks, and downstream processing units. In recent decades, however, many
Mittal Steel in 2006: Changing the Global Steel Game
had reduced their holdings in upstream and downstream segments so as to focus on the core
business of steelmaking. Minimills operated their scrap-based Electric Arc Furnaces (EAF) at much
lower scales than integrated steelmakersâ?? blast furnaces, reducing their minimum efficient scale from
millions of tons to several hundred thousand and their capital cost per ton of new capacity from
$1000 to the range of $200â??$300. Minimills had historically had a significant cost advantage over
integrated steelmakers, and had forced them out of low-end products, to the point where in the
United States, the minimills held about 45% of the total market, but continued to face difficulties in
meeting the exacting standards of automotive and appliance manufacturers. The constraints
reflected, in part, minimillsâ?? reliance on scrap steel as primary input: impurities in the scrap steel
tended to reduce the quality of the finished steel and, furthermore, scrap prices had come under
pressure even in markets where scrap had historically been abundant. In the 1970s, the new
technology of Direct Reduced Iron (DRI) began to catch onâ??this process produced a scrap substitute
from iron ore that could be used to feed the EAF. In its early years, DRI quality had been very
variable, but had improved gradually, and was expected to eventually provide the same clean
metallic feedstock for EAF as the blast furnace, but at a lower cost, and without scrapâ??s inherent price
volatility and quality problems.12
On the whole, steel producers around the world had posted significant economic losses for
decades. Thus, Marakon Associates, calculated that steel had persistently been the most unprofitable
of the major U.S. industry groups between 1978 and 1996 (see Exhibit 1), although economic losses
had since narrowed. The pattern was repeated in most other mature markets. Thus, Mittal Steelâ??s
comparison of the return on invested capital (ROIC) and the weighted average cost of capital
(WACC) of the 10 largest steel producers worldwide suggested narrower but still chronically
negative spreads, with only the most recent yearâ??2004â??generating significant positive returns (see
Exhibit 2). The reasons were various and included fragmentation, very high fixed costs and exit
barriers, generally slow growth and induced excess capacity, limited product differentiation,
intensified competition from minimills and imports as well as substitution threats (which included
less-intensive use of steel as well as replacement by other materials), and the bargaining power of
organized labor and large customers.
Many observers in or interested in the steel industry thought that after some particularly bad
years in the 1990s, steel industry stakeholdersâ??producers, unions and governments in particularâ??
had finally begun to move towards the end of the 1990s to bring about some much-needed
rationalization through bankruptcy-linked closures and consolidations. However, demand growth
had also taken a hand: after stagnating in the 700â??800 million tpy range in the 1980s and the 1990s,
consumption had steadily increased since 2000 toward the 1 billion tpy mark. But the very recent
spike in industry profitability, in 2004, seemed to have more to do with Chinaâ??s red-hot construction
sector. China accounted for close to one-quarter of demand and, more importantly, most of the recent
growth in demand (see Exhibit 3). Given the lags in building up domestic capacity to serve apparent
domestic consumption growth rates that had often surpassed 20% in recent years, China had sucked
in an enormous amount of imports. In particular, between spring 2003 and spring 2004, spot prices
for a benchmark sheet product, basic hot-rolled band, had increased from less than $300/ton to
nearly $500/ton in China, from $300/ton to slightly more than $500/ton in the European Union, and
from $300/ton to closer to $600/ton in the United States.13 However, although Chinese demand
continued to grow, prices had stabilized, signs of overbuilding were starting to appear in 2005, and
academic experts predicted that Chinese capacity was likely to flood the world with cheap exports in
all but the specialty grades.14
Longer-run demand forecasting exercises highlighted differences rather than similarities across
regions. Thus, an analysis by Arcelor based on data through 2003 suggested that through 2010,
Mittal Steel in 2006: Changing the Global Steel Game
demand would stagnate in Japan, and grow at a 1% annual rate in the European Union, 2.5% in the
United States (where demand in the base year of 2003 was particularly low), 4.1% in South America,
5.5% in China, and 6.5% in Asia excluding China and Japan.15
The steel industry presented a somewhat mixed picture along other dimensions of
internationalization as well. Trade in the steel industry was substantialâ??close to 40% of all steel
production was exported in some yearsâ??but close to one-half of it was intra-regional. In terms of
prices rather than quantities, some increases in inter-regional integration had been apparent in recent
years: according to calculations by Arcelor, the correlation of hot-rolled prices between the United
States and the European Union had doubled from 37% over 1994â??98 to 74% over 1998â??02.
Nonetheless, international price integration was expected to continue to be imperfect because of a
variety of barriers to international trade. Transport costs were the most obvious natural barrier and
were also subject to aggregate capacity constraints: thus, against the backdrop of a general boom in
Chinese trade, the run-up in steel prices over 2003â??4 had been accompanied by an escalation of the
costs of ocean transportation to China, from $40/ton of steel to $60/ton. Other natural barriers
included delivery lags and varied product preferences. Tariffs and other policy restraints on trade
constituted the most obvious artificial barriers. While there had been significant reductions in
average posted tariff levels over the previous decades, â??temporaryâ? countervailing duties, quotas,
and other distortionary policies such as subsidization of domestic producers or bail-outs remained
The general tendency of governments to support domestic producers reflected both concerns
about preserving employment in a large sector with well-organized labor as well as the specifically
â??strategicâ? status that had historically been accorded to the steel industry. Steelmaking had long been
considered a matter of national pride, as illustrated by the industry saw that the two major
investments that were de rigueur for every newly independent nation were a national airline and a
steel plant.16 As a result, 60% of the worldâ??s steelmaking capacity was government-owned in the
Since then, much of this capacity had been privatized, especially in post-communist countriesâ??
part of a broader cross-industry privatization wave worldwideâ??and government-owned steel
capacity had declined to 40% of the world total.18 These privatizations provided a basis for increased
cross-border integration through foreign direct investment (FDI) instead of just trade. U.S. Steelâ??s
acquisition of a steel plant in Kosice, Slovakia, supplied one example: the acquisition raised the share
of non-U.S. production in the companyâ??s total from virtually nothing to nearly 30%â??and later helped
keep the company afloat during difficult years at home. Arcelor, the European steel giant and the
second largest steelmaker in the world was formed in 2002 when three formerly state-owned
European steel companies from three different countries were combined: Aceralia (Spain), Arbed
(Luxembourg), and Usilor (France). Arcelor also appeared, however, to be hedging its bets about
inter-regional expansion: thus, it had formed an alliance with Nippon Steel of Japan, the fourth
largest steelmaker in the world, to serve (high-end) global customers.
By far the most dramatic example of growth by acquisition of (primarily) steelmakers being
privatized, in terms of its geographic scope as well as absolute scale, was Mittal Steel, which had
come from virtually nowhere to become the largest competitor in the steel industry with a strategy
that emphasized acquisitions, particularly of steel mills that were being privatized. One perspective
on the scale of Mittalâ??s M&A activities was provided by 2004, a record year for mergers and
acquisitions in the steel industry as a whole, with a total of transactions worth $31.4 billion. Mittal
Steel accounted for two-thirds of that with a two-stage transaction involving the $13.3 billion merger
of LNM Holdings and Ispat International and the $4.5 billion acquisition of the International Steel
Mittal Steel in 2006: Changing the Global Steel Game
Group in the United States to create Mittal Steel (the top 2 steel deals of the year) as well as a number
of smaller transactions.19 And while 2004 was an exceptional year, Mittal would clearly again top the
2005 transaction tables with its acquisition of Kryvorizhstalâ??as it had in most recent years.
Exhibit 4 provides summary operating and financial data for Mittal Steel and its 9 largest
competitors worldwide in 2004, and Exhibit 5 breaks out summary operating and financial for Mittal
Steel by region over 2002â??4. Exhibit 6 provides one industry consultantâ??s subjective summary
assessment of Mittalâ??s competitive position relative to its largest competitors. The rest of this case
describes Mittal Steelâ??s evolution over time, how it was managed and organized, and its vision as to
how it would sustain superior performance in the future.
Mittal Steelâ??s Evolution
LNMâ??s father, Mohan Lal Mittal, had founded the Ispat Groupâ??Ispat meant steel in Sanskritâ??in
Calcutta, India, to trade scrap metals.20 Upon graduating from college in 1970, LNM joined the family
business and was involved in setting up a new steel plant in Calcutta before being asked to oversee
the export business in South East Asia. In 1976, the elder Mr. Mittal had bought some land in
Indonesia with the goal of building a steel mill there; however, he subsequently changed his mind,
and dispatched LNM there with the charge of re-selling the land. When he arrived in Indonesia,
however, LNM was struck by the prospects of imminent growth in the Indonesian economy, which
would boost demand for steel; he successfully convinced his father to stick with the original plan of
making steel there, and stayed on to take charge of the mill.
However, the original idea of building a traditional scrap-based minimill did change under LNM,
who had always worried that traditional minimillsâ?? reliance on scrap steel as exclusive input would
prove to be their Achillesâ?? heel. LNM decided to invest in a 65,000 tpy DRI (direct reduced iron) plant
alongside the new minimill, even though DRI was a fledgling technology at the time that could not
provide consistent quality levels. Over the years, as DRI technology improved and became more
reliable, LNMâ??s trust in it as a viable alternative to scrap grewâ??indeed, he began to refer to his
minimills as â??integrated minimills,â? i.e., mills that used electric arc furnaces but integrated backward
into DRI production. By the late 1990s, one analyst described Ispat/Mittalâ??s lead in DRI as â??virtually
insurmountable for the foreseeable future,â? given that DRI was complicated and hard to copy.21
As its steelmaking capacity was expanded, LNMâ??s Indonesian mill came to rely on external
suppliers of DRI as well. One such supplier was Iscott, which was owned by the government of
Trinidad and Tobago. Built in 1981 by the state at a cost of $460 million, Iscott was in severe financial
trouble by 1988, with 25% capacity utilization, and weekly losses of $1 million since 1982. As a
customer of Iscottâ??s, LNM was very familiar with its problems, but could also see the potential value
that could be unlocked by better management. When the government of Trinidad & Tobago invited
him to make a bid for the troubled plant, LNM had no hesitation in expressing interest. However, he
did not have the funds to make an offer for outright purchase; instead, he suggested a 10-year lease at
$11 million a year with the option to buy in the fifth year at an independently appraised price. The
Trinidad government agreed, and LNM quickly embarked on his first turnaround. He brought in 55
DRI experts and managers from around the world, and pumped in nearly $10 million of new
investment in the first three months. Production bottlenecks were remedied and quality rapidly
improved; by the end of the first year, the operation made a small profit after paying for the lease.
With viability regained, Caribbean Ispat was able to secure World Bank financing that allowed it to
increase capacity by 50%. In May 1989, LNM ac …
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