ArcelorMittal targets global resource lock-up

Fri 23 May 2008

THIS week's $630 million purchase of a 14.9 percent stake in Macarthur Coal is the latest move by London-based steel tycoon Lakshmi Mittal to lock in supplies of iron ore and coking coal for his global steel giant, ArcelorMittal.

Mittal, whose family’s 45 percent stake in ArcelorMittal is worth more than $US60 billion ($63 billion) based on its market capitalisation of about $US140 billion, is concerned at the recent sharp rise in steel input costs that have pushed up production costs.

He warned earlier this month that prices for key commodities such as iron ore and coking coal were “yet to peak.”

Mittal, 57, is chairman and CEO of ArcelorMittal, which last week reported first quarter net income of $US2.4 billion. Its earnings before interest, tax, depreciation and amortisation (EBITDA) for the quarter were $US5 billion, with Mittal's son Aditya - who is the company's chief financial officer - forecasting EBITDA of $US6.5 billion for the second quarter.

ArcelorMittal, which has its headquarters in Luxembourg, was formed in August 2006 through the merger of Arcelor and Mittal’s own Mittal Steel.

It is by far the world’s biggest steel producer, with 2007 output of about 115 million tonnes, or 9 per cent of the world market. It has a production target of 153 million tonnes by 2012, including 23 million tonnes from new “greenfield” steel plants.

At the same time, Mittal’s goal is to lift the company’s iron ore self sufficiency from 45 percent now to as much as 85 percent by 2014, and to significantly ramp up its coking coal resources from the current self-sufficiency rate of just 15 per cent.

In pursuit of that objective, ArcelorMittal recently bought three coking coal mines in Russia and also signed an off-take agreement with Coal Africa that will start in 2009-10.

Senior executives for ArcelorMittal told The Australian in London that the company was continuing to hold talks with Macarthur Coal (ASX: MCC: quote) on possible further investment, but the outcome was by no means certain. Macarthur is a leading producer of pulverised coal used in steelmaking in the process known as PCI, or pulverised coal injection.

“PCI is a significant and growing part of our coking coal business,” ArcelorMittal’s London head of investor relations, Julien Onillon said. He added that the company's strategy was to exploit the synergies between steel production and mining.

As a consequence, it was "constantly looking at possible deals around the world.”“If there is anything for sale around the world that fits with our strategy, we’d like first call on it,” Mr Onillon said.

Mr Onillon told The Australian that ArcelorMittal was in a position where it could be very selective about its investments, and it was safe to assume most other deals done in the steel industry had already been looked at by ArcelorMittal.

Mr Mittal and son Aditya – a mergers and acquisition whiz who is the regarded as the architect of the 2006 merger – were in Indonesia recently to talk to the government about taking a possible stake in state-owned steelmaker PT Krakatau Steel.

Mr Mittal senior told journalists during a conference call on May 14 that no numbers had been set yet and there was “still a long way to go.”

But other ArcelorMittal executives have spoken of a total investment of up to $US10 billion in Indonesia, covering three projects: a stake in Krakatau Steel of up to 49 per cent, a second deal to set up a new steel mill as a joint venture with Krakatau, and a possible partnership with state-owned miner PT Aneka Tambang to look for iron ore, nickel and manganese.

Other steel companies, including Australia’s Bluescope and Indian producers Tata Steel and Essar Steel, have also been mentioned as contenders for Krakatau Steel.

According to Mr Onillon, ArcelorMittal’s iron ore business is growing faster than the steel side. Mining acquisitions such as those in Ukraine and Mexico were helping push self-sufficiency to 65 to 75 per cent by 2012, and a possible 75 to 85 per cent by 2014-15.

ArcelorMittal recently signed a 10-year off-take agreement with the big Brazilian iron ore producer Vale (CVRD) that Mr Onillon said was the first of its kind in iron ore supplies.

“We’ve seen that the creation of big mining companies gives them very strong pricing power, so we expect that raw material costs will stay very high," he said.

Mr Onillon said another factor behind ArcelorMittal’s push for self sufficiency was that it had become more difficult recently to get the guaranteed volumes that the company needed.

“The market is very tough,” he said. “Any little problem could cause disruption along the supply chain.”

The underlying imperative for ArcelorMittal’s strategy is to get and keep control of supply and costs, and also achieve some synergies in logistics.

“We adapt our investment program accordingly,” Mr Onillon told The Australian.

Geoff Hiscock is author of India's Global Wealth Club, published by John Wiley & Sons.)

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