THE BUSINESS WORLD
PETER S. GREEN

Betting Big On Reviving 'Black Holes'

The Stygian mills of the Sidex Steel works are pulsing again. Spread out against the fading sunset here on the bank of the lower Danube. Spewing sparks and yellowish gray smoke. A year ago, Sidex . once the centerpiece of Communist Romania's overnight industrialization, was bankrupt. One of its four huge blast furnaces was wrecked and the others worked only intermittently. There was little sign of a future for its 27,000 employees.

It was called the black hole of Romania's economy, siphoning off a million dollars a day from the state budget, until international lenders told Romania that unless Sidex was sold or shut , the government's credit lines would be cut.

Now, after being sold for $366 million, Sidex has turned around and says it is making an operating profit.

Credit for the reversal of Sidex's fortunes goes to its new owner. Lakshmi N. Mittal, 51, an entrepreneur born in India and based in London. His companies have quietly become one of the world's top steel making groups, largely by cheaply acquiring huge money-losing state-owned mills from governments desperate to remove them from state books.

Applying strict management techniques common in many industries but not in the hidebound steel industry . Mr. Mittal says he has turned most of the mills into money makers, mainly by producing low-cost, lower-quality steel products and selling them through his global network.

"There was a time when my father used to tell me that steel-making is an art," Mr.Mittal said in an interview last month in Galati, 120 miles northeast of Bucharest. "I say it's a science. There are tools and you just have to implement them properly."

Today, Mr. Mittal's two primary companies, LNM Holdings, which is privately held, and Ispat International ,listed on the New York Stock Exchange, own steel mills in 13 countries, including the United Stated, Canada, Mexico, France, Germany, Kazakhastan, Indonesia and Trinidad. He bought Sidex in November, has juist bought the Nova Hut mill in the Czech Republic and has his eye on a group of steel mills in Poland .

An entrepreneur buys mills from desperate governments

Like many family-run businesses, the Mittal holdings are a complex web, making it hard to come by financial details of individual mills. Two important plants are known to be losing money. The collapse of steel slab prices last year was especially hard on North American steel makers , including the Ispat Inland Inc. mill, in East Chicago, Ind., which Mr. Mittal's group acquired with its purchase of Inland Steel Industries' steel making business in 1998. And markets have just begun to rebound for the debt-burdened Ispat Mexicana, built by the Mexican government for $2.2 billion in the early 1980's and bought by Ispat International for $25 million cash and the purchase of $195 million in Mexican government bonds at near junk-level interest rates.

Mr. Mittal contends that most of his mills, including the vast Karmet works in northern Kazakhstan, are making money.

Steel is not a glamorous business, and Mr. Mittal's recent acquisitions have focused on its least glamorous end, producing mainly what steel makers call "flat products," steel plates and beams used in ships ships and boilers, heavy-duty construction and lower-quality rolled metal for consumer goods like washing machines and lower-quality cars like Romania's own Dacia.

Other mills, like the Ispat Inland operation, produce high-quality rolled steel for automobiles and products like iron rods that can be squeezed into all kinds of wire.

Mr.Mittal says he has a customer and supply base that is broad enough to ride out the steel industry's cyclical downturns and international trade disputes. His largest mills are in developing countries, Kazakhstan and Romania, and are thus exempt from new 30 percent tariffs on imported steel. His other European steel plants do little business with the United States .

Industry analysts agree that the most important elements of Mr. Mittal's success have been geographical diversity and the application of basic modern management."What they do is pretty fascinating," said David Jardini, a steel industry consultant at Hatch Beddows, a consulting firm in London. "They have a core team of guys who go in there and work day and night to implement cost-cutting measures, market reorientation, marketing changes, efficiency ideas. And they go to places where others fear to tread."

Sidex has been a typical story for Mr. Mittal's group.

"Cost , quality and productivity are the keys to the steel business," said Narendra Chaudhary, Sidex's new general director. At Sidex, he said, where Communist-era managers had preferred to produce at any cost, "these were not the priorities ."

"We came with a different emphasis," Mr. Chaudhary said.

First to go was the plant's top management, replaced by senior executives from Mr.Mittal's other mills . A $100 milllion loan from the European Bank for Reconstruction and Development gave the plant immediate cash needed to end a barter system , in which it had relied on dozens of small trading companies that took its steel and delivered raw materials at vast markups.

Flush with cash from the bank loan , Mr.Chaudhary's team negotiated long-term supply contracts for the 14 million metric tons of raw materials that Sidex consumes annually, using Ispat's contacts and computer pricing models developed for other Ispat plants. Old debts were renegotiated , and the plant paid taxes to the city of Galati for the first time in years. Mr. Mittal also decided to keep the plant's first-division soccer team on the payroll.

(In Kazakhatan , where Mr, Mittal bought the colossal Karmet mill, he also took over most of the city of Temirtau, including a power plant , schools and the tram system.) The new sales director at Sidex, Satyakam Basu, abolished Sidex's combined sales and purchasing department which had encouraged the barter deals. He visited customers, some of whom had never met a Sidex sales man . Instead , distributors had offered Sidex products at varying prices.

"I realized my biggest competitor was me ." Mr. Basu said, " One customer in Turkey told me he had five offers from Sidex. so I said, ' Unless you buy from an authorized distributor I won't deliver ,' and I told the ditributors that unless I knew the name of the end user I wouldn't sell to them."

Sidex is still dark, dirty and smoky. A blast furnace that exploded in 1999 still lies in a heap. But inside, the plant is alreasy changing. Mr. Mittal's managers said they had tripled production of the lucrative coldrolled steel that is used for consumer goods and automobiles, raised quality and reduced the accident rate by two-thirds.

Workers at Sidex have expressed willingness to adapt to Mr. Mittal's capitalist demands, but sone grumble they want a greater share of whatever profits he says it is making now.

"You have to work to make money and keep your job , of course," said Atoni Dumitri, 37,a machinery operator, "but we can work harder if we are paid better." Takehome wagew at Sidex average about $150 a month, above Romania's average but still not much better than a subsistence level.

Chris Beauman, a steel expert at the European Bank for Reconstruction and Development , said he was astounded that that it had taken so long for an investor to realize that East European mills could produce inexpensive steel.

"The question is: Why isn't everyone trying to do this?" he said. "We saw on Kazakhstan that you can make money out of a low-cost steelworks. In the automotive industry everyone thought it was a wise move for VW to buy Skoda. Why not in steel?" Skoda, the Czech carmaker, has become a high-quality, low-price brand for Volkswagen.

Among American steel makers, only U.S. Steel has bought an East European mill, VSZ, the East Slovakian Iron Works.

The lack of steel-mill buyers may have to do with the glut that has pushed down not only steel prices but also the financial performance and stock prices of steel makers. In 2001, Ispat International lost $312 million, compared with a profit of $99 million in 2000, and sales fell 16 percent, to $4.49 billion. Its shares have fallen to $2.95 a share from an offering price of $30 in 1997.

Mr. Mittal's privately held company, LNM Holdings, which owns about 80 percent of Ispat International, fared better, reporting a profit of $113 million last year, down from $299 million in 2000.

Still, Mr Mittal's steel making colleagues agree that he has properly sensed the industry's direction.

"The industry does need to be consolidated, its one of the most fragmented in the world and right now that's what appropriate ," said Daniel r. Dimicco, chief executive of Nucor , a fast growing American steel company and one of the few to be consistently profitable. Mr.Mittal's strategy of buying existing, badly managed plants, Mr.DiMicco said, is the best way to do that. Another important part of Mr.Mittal's strategy has been to buy cheaply, and to leave the sellers holding their old debt. By focusing on privatizing government owned mills . Mr.Mittal has been able to swing some sweet deals.

He managed that in the Czech republic, where the government was eager to sell the Nova Hut mill before national elections last month, absorbing debts that it could deal with after the votes were in. In Poland, he may be able to work the same formula with a Socialist government eager to avoid huge layoffs ahead of the difficult last steps toward joining the European Union, Romania, too, agreed to absorb many of Sidex's losses.

Mr. Jardini, the hatch Beddows consultant, said Mr.mittal's mills had another advantage. Unlike senior management at most steel mills around the world, Mr. Mittal's men- and they are nearly all men- are managers first and engineers second.

"They do rightly regard the output of their mills as a commodity that competes in a global marketplace where cost competativeness is an absolute necessity, " Mr. Jardini said. " In the mills they acquire, they just bear down on efficiency."

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