HAS the world-wide recession in steel hit our men of steel? India's best-known expatriates, London-based Laxmi Niwas Mittal and Lord Swraj Paul, face difficult days ahead as steel prices around the world continue to slide, taking with them a substantial chunk of Paul's and Mittal's businesses.
Shares of Ispat International, managed by Laxmi Mittal and wife Usha Mittal, have nosedived in value in recent weeks. From a high of a little more than $30 a share on May 11 this year, the price of the scrip crashed to less than $5 last month before recovering mildly to about $8 last week. This represents only the measured fall in value of the part of the company held by shareholders on the New York Stock Exchange. Taking it as suf -ficient indication of the rest, the collapse in the value of what Mittal owns is phenomenal.
The story is similar for Paul's company, Caparo Industries. Paul had floated shares on the London Stock Exchange in earlier years, then bought them all to go fully private. The loss in value for Caparo is not measurable through share price, but market sources say it would be the greater for Paul because Caparo is a fully family-owned business.
Ispat's market capitalisation is estimated to have fallen by well over $1 billion over the past few months. Its price-earning ratio was a low 2.86, in itself a signal to turn investors away. The company went public on August 7 last year with an offering at $27 a share. Revenues for 1997 was $2.19 billion with a net income of $289 million and a net profit margin of 13.2 per cent. But Mittal's operating profit margin dropped from 30.4 per cent in 1995 to 13.2 per cent in 1997. Prices rose in April and May this year before going into a freefall. On August 5, the company announced an upbeat second-quarter performance but the news failed to stem the slide. The collapse has hit a number of Indian families, and 97 institutional investors who collectively own a quarter of the shares.
Last month, Standard & Poor's placed its lower BB corporate credit rating on Ispat International. It also downgraded its rating of Mittal's Mexico plant Imexsa's export certificates due 2003 from BB+ to BB, and placed it on CreditWatch. The markdown was in response to a 30 per cent fall in the price—and depressed future outlook—of steel slab products that form a large part of Ispat's output. Prices of these are not expected to rise soon.
Analysts are also questioning Mittal's latest acquisition decision—the giant US steel plant Inland Steel Company, for $1.43 bil -lion—in such adverse times. Far from profiting from the mid-July deal, Ispat finds itself in a crisis-management situation here. Staff strength has been cut by 12.5 per cent to a little more than 2,000 and more job losses are expected.
All this while, Ispat has built its success on cutting jobs, raising output, pooling operations with other holdings and introducing new cost-efficient technology—a formula whose efficacy is being tested by the falling demand and prices of steel. Unable to push sales, the company is finding it difficult to raise the capital required to buy new technology. Moreover, it had raised a debt of $1.1 billion to buy the Chicago plant, a burden that's grown heavier to service now.
Neither Paul nor Mittal would comment on the impact of developments on their firms. A company spokesperson for Ispat, however, denies that the share price fall has to do with anything other than the cyclical nature of the steel business. On the contrary, "Ispat's position has strengthened following our cost-reduction programme in Germany and the acquisition of Inland Steel Company in the US. " True, other steel companies too have laid off workers and cut output. American steelmaker Acme Metals Inc. declared bankruptcy at one of its operations earlier in October. Giants like Usinor of France and Thyssen of Germany have seen share prices drop by 30-40 per cent.
But few companies have seen as sharp a fall as Ispat, which seems huge in proportion to its sudden recent rise. Market sources fear that even as its peers were cutting costs and production, Ispat may have miscalculated the future by buying Inland Steel, a company that provides value-added steel products and materials-related services to industries. Just two months after this purchase, Goldman Sachs removed Ispat from its recommended list due to "greater-than-expected slab price weakness". Goldman sees no near-term catalyst for growth given the difficult environment. Santander Investment Securities advised investors against buying shares in Imexsa, recommending investment only in the company's 2001 Eurobond which carries a guarantee.
Lord Paul, on the other hand, has had extraordinary difficulties to deal with. In July, he lost a case in a US court over dismissal of three managers from his company Bull Moose Tube Co. He was ordered to pay a total compensation of $8.8 million to the three managers. But Paul lost more credibility than a few millions.
Judge Catherine D. Perry of the US Court for the Eastern District of Missouri ruled that Paul's testimony "revealed him to be a man with little time for details and given to making snap judgements, whose testimony frequently changed with the context, when challenged on cross-examination, or to fit his current explanation of events". Paul had sacked former president and CEO Charles E. Emmenegger (whom he had to pay $5.1 million in compensation) because of what he called "misconduct and neglect of duties". Judge Perry said in her ruling that the letters sacking Emmenegger and two others "do not reflect the true reasons for the terminations". Apart from disputes over shares, the managers had alleged that Paul was diverting profits from the tube company to his less profitable ventures.
PAUL failed last year to raise the $185 million he needed to modernise his steel plant in Farrell, Pennsylvania. He consequently shut down the electric furnace and decided to go to the slab market to feed the rolling mill. That closure marked a significant loss—the electric furnace had an annual capacity of 8 lakh tonnes of molten steel. The takeover had cost $26 million in majority assets, with the help of $6 million in government money. Like Mittal, Paul discovered in a smaller way that taking over a factory is one thing, producing profitably quite another.
The Caparo group has about 4,000 employees worldwide and annual revenues are estimated at over $900 million. The holding company is a trust comprising Paul and his family. This means that the family carries the burden of the losses—there are no public shareholders to split it with.
The financial crises in East Asia and Russia badly affected the steel business. As a result, steelmakers resorted to exporting steel to the West at prices considerably below those sought by Western producers. Imports of steel into the US rose 12.5 per cent this year. The steel world sees no early ways out of this trap. The stark realities at the production end were spelt out clearly at the international steel conference held in Taipei last month.
Leonard Holschuh, secretary-general of the International Iron and Steel Institute, told the meeting that Japanese steel consumption has fallen 11.9 per cent from last year's level of 82.1 million tonnes. Consumption in South Korea dropped by about a third to 25 million tonnes. This has pushed Korean exports. Markets in Malaysia and Indonesia have been "badly affected". Steel originally destined for Asian markets was diverted elsewhere. "The effect on steel prices worldwide has been extremely severe," he told the conference.
The steel industry is projecting no more than a 4 per cent recovery in 1999—if there's one. Offtake will be depressed as industry absorbs piled stocks, warned Holschuh. Consumption of steel in Europe is expected to rise 5.9 per cent this year to 136.2 million tonnes, but at falling prices.
In Asia, it's expected to fall to 282.8 million tonnes this year from 306.1 million tonnes last year. "We cannot forecast with any degree of confidence what the steel market will be like in a few years' time," said Holschuh.
Worse, prospects of a case filed by US steelmakers to impose duties on cheap imports has brought little cheer to shareholders stuck with steel. A group of 12 American companies—including Ispat International—and several unions have jointly petitioned the Commerce Department and the US International Trade Commission to counter what they call dumping by steel companies from Japan, Russia and Brazil. According to this petition, carbon steel imports from these countries more than doubled this year, after increasing three times between 1995 and 1997. They now represent 18.4 per cent of the US market. These imports have accounted for 62 per cent of America's needs for carbon hot-rolled steel sheets, the backbone of the industry. At the same time, domestic operating profits of US companies dropped 50 per cent in the first six months of the year. US companies have had to cut prices at least 20 per cent.
Robert Grow, president of Geneva Steel of Utah, told Outlook on telephone from Washington DC that the US cannot be a dumping ground for other companies to export their significant overcapacity. However, there are doubts about how far a country that prides itself on being a champion of free trade will be able to curb imports or impose stiff duties. Such measures can divert new steel imports from East Asia and Russia elsewhere, and American carmakers may not buy steel for long at prices above what the rest of the world pays. Clearly, it'll be some time before the cracks in the global steel business—and in the businesses of Mittal and Paul—start healing.
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