Post by QPR Report on Nov 9, 2008 7:36:08 GMT
From The Telegraph/Russell Hotten
Steeled for the hard times ahead
Billionaire magnate Lakshmi Mittal has lost a large part of his fortune but his company is better placed to survive the downturn than most
Lakshmi Mittal had been expected to unveil some important developments, and the billionaire steel industry magnate did not disappoint.
As analysts and investors gathered in front of computer screens for last week's news of ArcelorMittal's profit figures, up popped Mr Mittal for the global webcast. "Today, all of us know that it's a very historic day," he began.
Indeed it was. Mr Mittal was referring to Barack Obama's election victory but many people wondered whether the "historic day" was also a defining moment for Arcelor – the day investors realised that cracks are appearing in the magnate's empire.
For weeks, analysts had been questioning how Arcelor was suffering from the global economic meltdown. And, after his homily to the President-elect, Mr Mittal gave them an answer.
Speaking from Arcelor's headquarters in Luxembourg, Mr Mittal gave a grim prognosis on the industry. The steel market is in freefall and Arcelor shares have followed, taking the company's market value from $150bn in June to about $37bn last week.
As a result, the fires are going out at some Arcelor furnaces as the world's largest steel company cuts production and reins in a decade-long expansion that turned the India-born entrepreneur into the world's fourth richest man, according to Forbes.
But will he retain his position when the magazine publishes its next rich list later this month?
Since June, Mr Mittal has seen the value of his 44pc shareholding in Arcelor slump from about $66bn (£41.5bn) to $16.5bn as the company's share price collapsed. Mr Mittal also suffered losses from his investment in RAB Capital, a hedge fund whose problems began during the run on Northern Rock bank.
Last year Mr Mittal pledged to invest about $200m in RAB's Special Situations Fund, which has lost about 48pc of its value in 2008. He also took a 10pc equity stake in RAB, whose shares hit new lows last week and are down about 90pc over the past 12 months.
Mr Mittal can easily absorb such paper losses and, despite Arcelor's problems, the company is paying a decent $1.50-a-share dividend next year, earning him $934m. Nevertheless, some bad investments does not enhance his reputation for having the Midas touch.
One hopes that his decision last year to join the super rich and buy a 20pc stake in Queens Park Rangers football club for £7m resulted from more than a desire to turn a profit. The club, in the second tier division, finished 14th last season and is struggling to break into the promotion places.
Mr Mittal's other equity holdings include 50pc of Caspian Investment Resources, bought for $980m in 2006, which is developing oilfields in Kazakhstan. His investment vehicle, Karrick, also has 17pc of platinum miner Platmin, listed in London and Toronto, whose shares have gone down.
For a man who once said that "money is a curse", Mr Mittal seems to be trying his best to break the spell by getting rid of the stuff.
Tim Bouquet, who wrote a book on Mr Mittal, says the billionaire is quite frugal, preferring to serve pizza rather than champagne on his private jet. A close confidante, Arcelor's communications chief, Nicola Davidson, insists that personal wealth means little to her boss.
Yet, to the outside world, Mr Mittal knows all about conspicuous consumption. His house at Kensington Palace Gardens was bought from Formula One impresario Bernie Ecclestone for £57m in 2004, a record at the time. Since then he has set new records, reportedly buying two other London homes for £70m and £117m (Who would bet on them being worth this in today's market?) The £34m wedding for his daughter, held in 2004 at the Palace of Versailles, is now the stuff of legend.
Born in Rajasthan 58 years ago, Mr Mittal was named after Lakshmi, the Hindu goddess of wealth. He entered the steel business in 1976, buying a plant in Indonesia after visiting the country on holiday. The company grew as he bought often-ageing plants across the world.
Mr Mittal turned his attention to the US, and became the biggest producer in America. His growing status gave him an entry into the world of the rich and famous. Figures such as Bill Clinton and Tony Blair became friends.
But Mr Mittal's crowning glory came just two years ago, when he merged Mittal Steel with Arcelor. It was the industry's biggest merger and done in the face of intense political opposition. The deal created a global powerhouse, with operations in 60 countries employing 326,000 people to produce 116 tonnes of crude steel last year.
But this financial crisis does not respect past achievements. In June Arcelor's share price hit a record $104.77. On Friday it closed at €17.46.
It is curious that the company's shares continued to scale new heights during the first half of 2008, as there has not been a shortage of warnings about the state of the global economy. The sudden precipitous decline in the price since June may be investors over-reacting after failing to heed previous warnings.
But on Wednesday Mr Mittal was not attempting to underplay the scale of the problems. "The crisis in the economy has come on us much more suddenly than anyone expected," he said. "We are facing a situation the world has not seen since the 1930s. As a result, the company has been forced to take quick action in an effort to bring the steel business back to normalcy."
Last week's stunning drop in UK car sales for October – down 23pc – gave a sense of what's going on. No car sales, no demand for steel. In sectors and economies around the world, from construction to shipbuilding, the need for steel is slowing fast. Arcelor's expansion throughout this decade coincided with a growth in world steel output that has not been seen since the Second World War.
The company was riding the crest of a wave.
Charles Dumas, of Lombard Street Research, estimates that output growth between 2000-07 has averaged 6.75pc a year.
"The boom since 2000 has been exceptional," he said. "By contrast, the previous 20 years had seen steel production grow at just under 1pc a year. The 1970s saw 2pc a year; the 1960s 5pc. Even in the post-war recovery of the 1950s the annual growth rate was only 6.5pc."
Since 2002 the price of iron ore has risen five-fold, and scrap steel six times. But in October prices fell off a cliff. What is more, Mr Dumas said: "Steel scrap could fall another 60pc or more from October's much reduced level, and iron ore by 80pc."
These frightening numbers illustrate the changed world that suppliers and users of steel are entering. The collapse in steel prices arrived a little later than for other commodities, which may explain why Arcelor shares went from hero to zero in under five months.
Analysts are running out of words to describe the severity of the rout in the commodity markets. However, UBS's Daniel Brebner has introduced a new one: a hecatomb - defined as a large-scale slaughter.
"The word is, unfortunately, appropriate in characterising the current and likely near-term environment for commodities markets," he said.
So, how does Mr Mittal get out of the steel industry's particular hecatomb? Production at Arcelor is being cut by another 15pc, bringing the total to 30pc. No plants are closing but several blast furnaces within the facilities will be switched off until markets improve. Europe will be the worst hit.
A planned $35bn expansion and investment programme are being scaled back to save cash. Mr Mittal said earnings over the next three months would fall to between $2.5bn and $3bn, down from $8.6bn in the third quarter. But, unlike many analysts, Mr Mittal is confident that steel prices may begin rising again in 2009.
Arcelor, being three times larger than its nearest rival, Japan's Nippon Steel, and sharing 10 pc of the industry's global sales, wields huge power to determine what happens to prices and production. In the medium to longer term, Mr Mittal expects the industry to bounce back sharply as the pace of industrialisation in China and India picks up again.
It is also worth underlining that Arcelor, despite its woes, still makes a hefty profit. In the 1990s Mr Mittal's vision was that he wanted to lead a massive consolidation of the industry, which still had an estimated 200m tonnes of excess capacity by 2002. Through rationalisation of the sector, according to Ms Davidson: "He put the whole industry on a more sustainable footing."
There are few entrepreneurs who can truly claim to have changed the landscape of a global industry. Mr Mittal is one. Yet, as the sector enters another potentially crippling era, his work may have only just begun. Body sans ST
Steeled for the hard times ahead
Billionaire magnate Lakshmi Mittal has lost a large part of his fortune but his company is better placed to survive the downturn than most
Lakshmi Mittal had been expected to unveil some important developments, and the billionaire steel industry magnate did not disappoint.
As analysts and investors gathered in front of computer screens for last week's news of ArcelorMittal's profit figures, up popped Mr Mittal for the global webcast. "Today, all of us know that it's a very historic day," he began.
Indeed it was. Mr Mittal was referring to Barack Obama's election victory but many people wondered whether the "historic day" was also a defining moment for Arcelor – the day investors realised that cracks are appearing in the magnate's empire.
For weeks, analysts had been questioning how Arcelor was suffering from the global economic meltdown. And, after his homily to the President-elect, Mr Mittal gave them an answer.
Speaking from Arcelor's headquarters in Luxembourg, Mr Mittal gave a grim prognosis on the industry. The steel market is in freefall and Arcelor shares have followed, taking the company's market value from $150bn in June to about $37bn last week.
As a result, the fires are going out at some Arcelor furnaces as the world's largest steel company cuts production and reins in a decade-long expansion that turned the India-born entrepreneur into the world's fourth richest man, according to Forbes.
But will he retain his position when the magazine publishes its next rich list later this month?
Since June, Mr Mittal has seen the value of his 44pc shareholding in Arcelor slump from about $66bn (£41.5bn) to $16.5bn as the company's share price collapsed. Mr Mittal also suffered losses from his investment in RAB Capital, a hedge fund whose problems began during the run on Northern Rock bank.
Last year Mr Mittal pledged to invest about $200m in RAB's Special Situations Fund, which has lost about 48pc of its value in 2008. He also took a 10pc equity stake in RAB, whose shares hit new lows last week and are down about 90pc over the past 12 months.
Mr Mittal can easily absorb such paper losses and, despite Arcelor's problems, the company is paying a decent $1.50-a-share dividend next year, earning him $934m. Nevertheless, some bad investments does not enhance his reputation for having the Midas touch.
One hopes that his decision last year to join the super rich and buy a 20pc stake in Queens Park Rangers football club for £7m resulted from more than a desire to turn a profit. The club, in the second tier division, finished 14th last season and is struggling to break into the promotion places.
Mr Mittal's other equity holdings include 50pc of Caspian Investment Resources, bought for $980m in 2006, which is developing oilfields in Kazakhstan. His investment vehicle, Karrick, also has 17pc of platinum miner Platmin, listed in London and Toronto, whose shares have gone down.
For a man who once said that "money is a curse", Mr Mittal seems to be trying his best to break the spell by getting rid of the stuff.
Tim Bouquet, who wrote a book on Mr Mittal, says the billionaire is quite frugal, preferring to serve pizza rather than champagne on his private jet. A close confidante, Arcelor's communications chief, Nicola Davidson, insists that personal wealth means little to her boss.
Yet, to the outside world, Mr Mittal knows all about conspicuous consumption. His house at Kensington Palace Gardens was bought from Formula One impresario Bernie Ecclestone for £57m in 2004, a record at the time. Since then he has set new records, reportedly buying two other London homes for £70m and £117m (Who would bet on them being worth this in today's market?) The £34m wedding for his daughter, held in 2004 at the Palace of Versailles, is now the stuff of legend.
Born in Rajasthan 58 years ago, Mr Mittal was named after Lakshmi, the Hindu goddess of wealth. He entered the steel business in 1976, buying a plant in Indonesia after visiting the country on holiday. The company grew as he bought often-ageing plants across the world.
Mr Mittal turned his attention to the US, and became the biggest producer in America. His growing status gave him an entry into the world of the rich and famous. Figures such as Bill Clinton and Tony Blair became friends.
But Mr Mittal's crowning glory came just two years ago, when he merged Mittal Steel with Arcelor. It was the industry's biggest merger and done in the face of intense political opposition. The deal created a global powerhouse, with operations in 60 countries employing 326,000 people to produce 116 tonnes of crude steel last year.
But this financial crisis does not respect past achievements. In June Arcelor's share price hit a record $104.77. On Friday it closed at €17.46.
It is curious that the company's shares continued to scale new heights during the first half of 2008, as there has not been a shortage of warnings about the state of the global economy. The sudden precipitous decline in the price since June may be investors over-reacting after failing to heed previous warnings.
But on Wednesday Mr Mittal was not attempting to underplay the scale of the problems. "The crisis in the economy has come on us much more suddenly than anyone expected," he said. "We are facing a situation the world has not seen since the 1930s. As a result, the company has been forced to take quick action in an effort to bring the steel business back to normalcy."
Last week's stunning drop in UK car sales for October – down 23pc – gave a sense of what's going on. No car sales, no demand for steel. In sectors and economies around the world, from construction to shipbuilding, the need for steel is slowing fast. Arcelor's expansion throughout this decade coincided with a growth in world steel output that has not been seen since the Second World War.
The company was riding the crest of a wave.
Charles Dumas, of Lombard Street Research, estimates that output growth between 2000-07 has averaged 6.75pc a year.
"The boom since 2000 has been exceptional," he said. "By contrast, the previous 20 years had seen steel production grow at just under 1pc a year. The 1970s saw 2pc a year; the 1960s 5pc. Even in the post-war recovery of the 1950s the annual growth rate was only 6.5pc."
Since 2002 the price of iron ore has risen five-fold, and scrap steel six times. But in October prices fell off a cliff. What is more, Mr Dumas said: "Steel scrap could fall another 60pc or more from October's much reduced level, and iron ore by 80pc."
These frightening numbers illustrate the changed world that suppliers and users of steel are entering. The collapse in steel prices arrived a little later than for other commodities, which may explain why Arcelor shares went from hero to zero in under five months.
Analysts are running out of words to describe the severity of the rout in the commodity markets. However, UBS's Daniel Brebner has introduced a new one: a hecatomb - defined as a large-scale slaughter.
"The word is, unfortunately, appropriate in characterising the current and likely near-term environment for commodities markets," he said.
So, how does Mr Mittal get out of the steel industry's particular hecatomb? Production at Arcelor is being cut by another 15pc, bringing the total to 30pc. No plants are closing but several blast furnaces within the facilities will be switched off until markets improve. Europe will be the worst hit.
A planned $35bn expansion and investment programme are being scaled back to save cash. Mr Mittal said earnings over the next three months would fall to between $2.5bn and $3bn, down from $8.6bn in the third quarter. But, unlike many analysts, Mr Mittal is confident that steel prices may begin rising again in 2009.
Arcelor, being three times larger than its nearest rival, Japan's Nippon Steel, and sharing 10 pc of the industry's global sales, wields huge power to determine what happens to prices and production. In the medium to longer term, Mr Mittal expects the industry to bounce back sharply as the pace of industrialisation in China and India picks up again.
It is also worth underlining that Arcelor, despite its woes, still makes a hefty profit. In the 1990s Mr Mittal's vision was that he wanted to lead a massive consolidation of the industry, which still had an estimated 200m tonnes of excess capacity by 2002. Through rationalisation of the sector, according to Ms Davidson: "He put the whole industry on a more sustainable footing."
There are few entrepreneurs who can truly claim to have changed the landscape of a global industry. Mr Mittal is one. Yet, as the sector enters another potentially crippling era, his work may have only just begun. Body sans ST