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May 1, 2008

ARCELORMITTAL UPS THE ANTE—AND THEN SOME

The world’s largest steel company goes on a buying spree.

photo courtesy of ArcelorMittal

It would be easy to conclude that Lakshmi Mittal’s global acquisition binge was over a couple of years ago when the Indian steel tycoon completed his crowning move, the $33.5 billion takeover of what was then the world’s largest single steelmaker, Arcelor SA.

But if anything, Mittal’s hunger for properties has accelerated since the creation of mighty ArcelorMittal, with 2007 revenues of more than $105 billion and crude steel production of more than 116 million tons, roughly 10% of the world’s output. That’s more than triple the capacity of the industry’s second-largest company, Tokyo-based Nippon Steel, at about 33 million tons.

In 2007 alone, the company announced 35 transactions, completing 14 of them for a total cost of $12.3 billion. Its strategy to diversify geographically includes plans to enter or further its stake in Argentina, Armenia, Brazil, China, Costa Rica, Egypt, Indonesia, Mexico, Nigeria and Poland. There are mines—iron, coal, manganese and molybdenum—to be developed and plants to be built, as well as product diversification into pipes and tubes, galvanizing, stainless steel and wire businesses. There’s a debt-ridden steel mill, Kremikovtzi in Bulgaria, that Mittal wants to purchase, owned by GSHL, a subsidiary of Ispat Industries, and chaired by Mittal’s brother, Pramod Mittal. And there’s Russia, a country in which ArcelorMittal has no production but a lot of interest. The company signed an agreement last December with the administration of Russia’s Tver region to built a greenfield plant there. The list goes on.

ArcelorMittal plans to spend $35 billion increasing the capacity of its steel plants in the next eight years, with a focus on two new facilities in India. Mittal has said he expects his company to boast an annual capacity of up to 165 million tons by 2015.

How long can this acquisition and expansion frenzy go on? For a very, very long time. Michael Shillaker, an analyst with Zurich, Switzerland-based Credit Suisse, says Mittal has reason to be optimistic, based on the hard logic of supply and demand in the metals industry and with the credit squeeze that has paralyzed financial markets having little impact on the sector. ArcelorMittal is also showing no signs of slowing down (see “Globe-Trotting”). The company posted net income of $10.4 billion in 2007, up 30% year-on-year, and a debt-to-equity ratio of 37%. That compares to a net income of $3.4 billion and a debt-to-equity ratio of 61% for Mittal Steel in 2005, the year before the Arcelor purchase. Sales that year were $28 billion, about a fourth of 2007 sales.

Mittal certainly has no doubts of his company’s future. “In 2008, ArcelorMittal will continue to grow upstream through mining and downstream through acquisition of new companies,” he told a business conference in Luxembourg in January. “The only way to compete in a global economy is to get global, to adapt and to change to the demands of global markets.” Plus, he added, “The fundamentals of this industry are so strong, they give us a huge number of opportunities to continue to grow.”

Globe-Trotting

Here’s a roster of Luxembourg-based ArcelorMittal acquisitions and other expansion initiatives completed during the past six months alone:

 

SERVICE CENTERS

  • NSD Ltd., steel distribution company in the United Kingdom.
  • M.T. Majdalani Y Cia. S.A., stainless steel service center and distributor in Argentina.
  • Purchase of an extra 10% percent stake in Troy, Michiganbased car parts supplier Noble, bringing ArcelorMittal’s stake to 49.95%, in addition to a five-year $50 million loan.
  • Eisen Wagner GmbH, steel distribution company in Austria.

MANUFACTURING

  • OFZ, manufacturer of ferro-alloys and cored wires in Slovakia.
  • Cínter S.A., stainless steel tube producer in Uruguay.
  • 73% stake in China Oriental Group, Hong Kong-based metals producer, valued at an estimated $1.7 billion (U.S.).
  • Remaining 50% stake of Laminadora Costarricense S/A and Trefileria Colima S/A, the only long carbon steel player in Costa Rica (ArcelorMittal Brasil already owns the other 50%).
  • 50% stake in Brazilian flat steel processor Gonvarri Brasil.
  • Remaining 35.5% shares of Brazilian steel manufacturer Acindar.
  • Unicon, manufacturer of welded steel pipes in Venezuela.
  • Galvex OÜ, steel galvanizing company in Estonia.
  • 50/50 joint venture partnership with BE Group, processor of flat carbon steel, in Sweden.
  • 35% equity share in joint venture partnership with Black Gold Mining in Mozambique.
  • Greenfield Longitudinal Submerged Arc Welded pipe mill in Nigeria.

MINES

  • 97.59% stake in the Berezovskaya Mine and a 99.35% stake in the Pervomayskaya Mine from Severstal in Russia, as well as exploration and mining rights to the Zhernovskaya-3 coal deposit, a subsidiary of Severstal’s Pervomayskaya Mine in Russia.
  • 12.6% stake in General Moly Inc., a Colorado, U.S.-based molybdenum mineral development, exploration and mining company.
  • 50/50 joint venture with Kalagadi Manganese, a South African manganese development company, to develop a mine, plant, and sinter and smelter complex.