Steel king

The biggest buy-out in the history of the steel industry may have given a foretaste of what the new century holds. The deal has ended with a person of Indian origin beating a Russian to acquire the largest European steel maker""though any nationalist tub-thumping should be held off since Lakshmi Mittal had to leave this country's shores in order to build his global enterprise. He may be a testament to Indian enterpreneurship, but not to the Indian economic system. Also, the acquisition of Arcelor has not come cheap for Mr Mittal. He has succeeded only on his third attempt, finally agreeing to pay almost double the price that was ruling before he made the first offer five months ago, and conceding ground on several issues (like the board structure and even the company's name), though he and his family will be the largest shareholders. It should be a matter of relief that an episode that began with European outrage about Indian audacity has ended with the framework of decision-making confined to business and not nationality or other unrelated issues. That is as it should have been from the beginning.

Mr Mittal, for whom the bid became a personal battle and who showed astuteness, patience and staying power, says he has paid a fair price for a good business. In their first reactions, analysts round the world have welcomed the deal though in the early stages of the bid it was felt that paying too much would risk Mittal Steel's own rating. The Arcelor management, by fighting hard, has extracted a generous offer. Its board's unanimous decision to accept Mr Mittal's second revised offer appears to have been prompted by the negative view that Arcelor's major shareholders took of the management's attempt to strike a deal with the owner of Russia's Severstal.

One reason why the offer is being viewed positively by analysts and markets (leading Japanese steel stocks have risen after the deal) is that Mr Mittal is credited with knowing his onions better than anyone else in the world of steel. The process of consolidation that he initiated has combined with the huge Chinese appetite for steel to give the steel industry a new life. The price that Mr Mittal has paid in terms of cost per tonne of steel-making capacity may appear to be high but analysts point out that there is complementarity between the two firms as they are in non-competing segments. The costly European capacity will mainly act as finishing mills which create significant value addition on the cheap basic steel produced by most of the Mittal conglomerate's plants. The merger is also likely to lead to saving $1 billion in costs. As for competition watchdogs, they are unlikely to jump on the deal because it creates an entity that represents only about 10 per cent of global capacity. Analysts say that buyers and sellers in steel will be more or less evenly matched in strength when the global top five represent 30 per cent of capacity. This is still some way off.

Many eyes will now turn on China, which accounts for a third of global steel capacity and ought to play an important role in taking consolidation forward. The fear earlier in the year that, after the completion of construction for the 2008 Olympics, China will flood the world with cheap steel and bring down prices appears to have receded. As for India, it should ask itself why no resident businessman has been unable to build a comparable steel empire, especially when the country is blessed with abundant iron ore. The government should sort out its policy on leasing iron ore mines, and help set up large, modern steel-making capacities.