Turning Cheap Steel Mills Into Gold

Flush with success in emerging markets, Ispat eyes the U.S.

After an early-morning dip in the indoor pool at his home on Hampstead's "millionaire's row," Lakshmi N. Mittal, chairman of steelmaker Ispat International, starts phoning his executives in Kazakhstan and India. By 8 a.m., he and his wife Usha are in a chauffeur-driven Mercedes-Benz, heading for their office overlooking London's Berkeley Square. Lakshmi, 45, scans production figures, while Usha, also 45, minds outside investments and looks after Indonesian operations. "My 15-year-old daughter always complains that whenever we're together, we talk only business," says Mittal with a sigh.

This kind of relentless focus has helped the Mittals turn Ispat into one of the world's top steelmakers. An offshoot of Ispat Group of India, the conglomerate founded by Lakshmi's father, Mohan N. Mittal, the privately held Ispat specializes in buying state-owned mills on the cheap and turning them around. So far, so good: Sales have risen to $2 billion in 1995, from $520 million in 1993. The company says profits jumped tenfold over the same period to $272 million last year. Skeptics say Ispat can only get so far with its bargain-hunting. Undaunted, Lakshmi Mittal is expanding Ispat (which is Sanskrit for steel) from emerging markets like Indonesia and Mexico and into Europe and the U.S.

In just a few weeks Ispat expects final approval from the Irish government to take over money-losing Irish Steel. Ispat has offered the nominal sum of $1.55 but will invest $31 million over six years and guarantee a minimum of 300 full-time jobs. The state will write off a government loan and pay $31 million to the new company. But British Steel PLC opposes what it calls "illegal" subsidies to Ispat and may file suit to block the sale.

Mittal faces tougher challenges than a possible lawsuit. In November, the company doubled its capacity by acquiring Kazakhstan's state-owned steelworks in Karmet for a price of $450 million and a promise to invest $500 million more. When Ispat took over, the cash-starved plant was issuing its own paper currency to pay its 38,000 employees. Since then, Ispat has doubled the plant's shipments of steel. Now, Ispat is closing inefficient units. Even so, industry consultants wonder if Ispat can turn Karmet around. "It will be a miracle if they can," says one, who combed through Karmet's operations for several lenders.

Others will testify to Ispat's success. In the late 1980s, Mittal's fast turnaround of Trinidad and Tobago's steel mill impressed the Mexican government, which persuaded Ispat to buy a state-owned minimill in Lazaro Cardenas in 1992. Since then, production has risen an average of 40% per year, and costs have plunged. Says Felipe Morales Suastegui, general secretary of the local metalworkers union: "Profits are up, and they kept their promises" to pay higher wages and bonuses. But Morales will also propose a 60% wage hike to match the production gains.

OUT OF INDIA. Ispat's relationship with unions hasn't always been so cordial. Its failure to get the backing of the United Steel Workers helped scuttle its bid for Bethlehem Steel Corp.'s Johnstown plant a few years back. Workers feared Ispat would run a "third-world," nonunion shop. Now, it's trying once more to break into the U.S. market--this time with its partner, Japan's Kobe Steel Ltd. Together, they plan to build plants to provide raw materials to minimills.

So far Mittal says he has had to rely on cash flow to fund his ambitions. He has tried to tap the public markets, though. A plan to float Ispat shares in early 1995 was scuttled in the wake of Mexico's peso devaluation crisis. Ispat may try a debt offering soon.

The need to reassure potential investors may be why Mittal has distanced himself from the family business in India. Ispat Group of India has been tarnished by the poor stock performance of one of its divisions, as well as by allegations that the family used political connections to win Indian contracts. Despite efforts by BUSINESS WEEK, family members in India could not be reached. Last March the steel business was split off from the family business--and Lakshmi resigned his seat on the Indian company's board. Just as well. Ispat may have its origins in India, but in its freewheeling way it is becoming as global as any giant corporation.

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