A Mittal secret from the ‘rust buckets’ of Kazakhstan

Prof Pankaj Ghemawat says it was not steel that got the richest Indian his first billions

MUMBAI: Know how Lakshmi Mittal made his first few billions? Of course through steel!

Coal from the ‘rust buckets’ of Kazakhstan is more like it, says Pankaj Ghemawat, one of the youngest-ever Harvard Business School professors.

Ghemawat, who is currently on leave from the ivy tower, and is working as a full-time professor at the IESE Business School, Barcelona, along, with some of his students, conducted some “forensic examination” of Mittal’s past acquisitions. They deconstructed annual reports till 2004.

“I was struck when I went through this exercise around a couple of years ago, as basically one-third of Mittal’s operating profits were coming from Kazakhstan,” he said.
He credits Mittal for using his imagination.

“Mittal’s strategy was to buy up old public sector steel mills across the world. These mills, which Mittal turned around, were derisively known as “rust buckets”.

Kazakhstan was no different. “What he basically bought was a Soviet era township, along with 70,000 employees. One of the pre-conditions of the deal was that Mittal couldn’t reduce employment by much as it was the Kazakh president’s pet project. Hence, it came along with huge political problems,” said Ghemawat.

And this is where Mittal was “very, very clever”. The steel mill in Kazakhstan, a huge country, has vast reserves of coal and the rail links to China were just across the road, as it were.

Mittal had known all along China’s massive need for the fuel. He sold huge quantities of coal across the border.

“In privatisation processes people generally focus on what’s the price per tonne of steel-making capacity. But people give the raw material rights and whatever else the buyer insists on, which is why you see the jockeying that you see in Orissa. And smart steel makers - not just Mittal, but also the likes of Posco —- understand this.”

Steelmakers across the globe, including the Tatas, are vying to set up operations in the backward states of Chhattisgarh, Orissa and Jharkhand, India’s richest regions in terms of iron ore and coal.

“But,” says Ghemawat, “to be fair to Mittal, he is just looking at multiple revenue sources and deserves the credit for being imaginative.”

“They may have been too creative in terms of having cultivated relationships with governments —- the Tony Blair letter to the Romanians on behalf of the Mittals is an example. I have seen protocols of some of the eastern European deals and they have been very creative at structuring the deals,” Ghemawat said.

“The other thing worth noting is that there were two Mittal-vested entities that were operating and he then sold one to the other and this is where he got his $2 billion of cash-out,” says the professor. “It is interesting to note that since then, the price he is willing to pay for a tonne of capacity has escalated signinficantly since he got his cash out of the business.”