Mittal Steel in 2006

Topics: Mittal Steel Company, Strategic management, Arcelor Pages: 5 (1500 words) Published: December 1, 2012
Mittal Steal in 2006: Changing the Global Steel Game

Industry Analysis

Although steel was a highly demanded good, the industry as a whole was largely unprofitable. One reason for this was that the industry remained highly fragmented in contrast to their suppliers and even some of their buyers, who were considerably more consolidated. Aside from the increased competition that fragmentation contributed to, it also degraded the steal industry’s bargaining power to raw material suppliers and in some cases, such as the auto industry, the buyers. The resulting high fixed costs, volatile raw material prices, and intense price competition fueled unstable profitability. Adding to the fragmentation issues was a lack of differentiation in the market. For the longest time there were really only two production possibilities. One, being vertically integrated and producing higher-grade steel at a higher cost of operation, or two, de-verticalize and focus on low cost, low-grade steel production. Depending on the production selected, the resulting accessible customer base was limited. This lack of differentiation further fueled the limited bargaining power of steel manufacturers.

As stated above, steel was highly demanded. The problem was that the growth of that demand remained quite stagnate for nearly 20 years. It wasn’t until the explosion of growth in the Chinese construction industry, attributing to 25% of total steel consumption, that the steel industry saw any profitability. In an industry where customers demand a low cost and a consistent product, being able to maintain a reliable supply while being as cost efficient as possible was key to a firms success. Though there was a spike in Chinese demand, only those strategically positioned could access the true value of the Chinese market. This was because the steel industry operated primarily on an intra-regional basis. Many factors attributed to this, but a firm’s dependence on raw material access, and trying to avoid high transportation and tariff costs, as well as delivery lags, were the primary reasons for high regional trade. In order to access the benefits of regional trade, firms had to expand their operations through high FDI in the form of M&A’s. This gained them access to highly profitable regions and it allowed firms to spread their risk over a larger area, reducing the impact of demand fluctuations in one particular region. The reason many of these M&A opportunities existed was because of a major shit from government owned steel plants to privatization. Through privatization, FDI opportunities became possible in many countries, thus make intra-regional trade more accessible and attractive.

Consolidation & Integration

Recognizing that the dynamics of the market were changing, LNM was quick to take advantage. He was steadfast in his belief that they only way to create sustained success was through consolidation and integration. With increased privatization opportunities available, LNM began a series of M&A’s that would gain him access to regions that were highly profitable, had lower labor costs, and would position him to have higher bargaining power with suppliers. LNM made the first moves in the industry toward consolidation, and was this strategic initiative that has since driven the evolution of the industry to where it is today.

A major source of value creation was derived from their technological lead in DRI. LNM decided early on to focus their operations around “integrated minimills”, which was untraditional at the time. Through this structure he was able to capture the maximum value of his operation, using scrap in the minimills, then reverse integrating into DRI. Once unreliable, DRI technology had advanced so much that it’s output was now comparable to the quality of integrated steel plants. This technology stronghold provided them better quality steel at a cheaper cost of production, providing them...
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