The Metal Meltdown

Mult-billion dollar acquisitions made superstars out of entrepreneurs in the global metals and mining sectors. Today, they cut a sorry figure.

Prince Thomas
Updated: Jan 26, 2013 10:08:51 AM UTC

In the metal business, the heady days of multi-billion dollar acquisitions had made superstars out of entrepreneurs.

Lakshmi Mittal became a household name in 2006 after his relentless pursuit of Arcelor, resulted in an acquisition that made him the steel industry's first global player. A year later, mining heavyweight Rio Tinto acquired aluminium player Alcan for $38 billion, becoming a metal giant. Back home, Ratan Tata paved the way in 2007 for other Indian entrepreneurs by leading Tata Steel's $12 billion acquisition of Corus.

Thanks to these superstars and their acquisitions, the fuddy-duddy, old-economy sector  began to acquire the glamour and attention, that large cross-border transactions invariably bring. For journalists like me who were tracking these moves, it was an exciting time.

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Most of these investments were made at the peak of a commodity bull run from 2006 to 2008. Everyone knew the good times wouldn't last forever. But only a few realised the implication of this. Over the last year, the cookie has begun crumbling.

Earlier this month, the world's second largest miner Rio Tinto announced a $3 billion write down of its coal mining assets in Mozambique. Among the most experienced in the trade, the company realised that the mine simply didn't have the reserves, it had initially estimated. It had also failed to get approvals from the local government on its plan to transport coal from the mine to the port.

What was even more shocking, the write-down was only a smaller part of the $14 billion "on-cash impairment," most of which was on its aluminium assets, a legacy of its Alcan acquisition. "The Group also expects to report a number of smaller asset write-downs in the order of US$500 million," Rio has said.The setback cost the jobs of Rio Tinto CEO Tom Albanese and another senior executive Dough Ritchie who had led the Mozambique deal.

Interestingly, Rio and Tata Steel are jointly developing another set of mines in Mozambique that were also part of the "Mozambique asset" - the erstwhile Riversdale mining company. The Indian steel major though told Telegraph that "our joint venture in Benga continues to perform as planned and (there’s) no substantial change in resource/reserve of Benga. Hence no impact.”

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Late last year, Mittal was forced to write-down the goodwill value of his European businesses by more than $4 billion, highlighting a rather worrying turn of events for the Indian billionaire since 2007. The market cap of ArcelorMittal, which at its peak crossed $200 billion, is now scratching the bottom at  $23 billion. European steelmaker Thyssenkrupp lowered the value of its facilities in Brazil and the US by over $ 4 billion.

Tata Steel itself has not had a very good time in Europe since 2007.Its erstwhile Corus unit reported a loss of $884 million in the last financial year. In late 2012, it announced another round of job cuts.

More bad news is expected in the mining sector. Initial estimates say that Rio Tinto's peers like BHP Billiton and Anglo might write-down their assets by $10 billion.

The string of poor results, have forced cold, harsh spotlight on the businesses and operating models adopted by Big metal -

1) Is it better to be a local player, instead of charting a global footprint? Japanese and South Korean steelmakers are in a much better financial position that ArcelorMittal and Tata Steel.

2) Mining biggies have always preferred to look for big mines, that have at least about 50 million tons of reserves. Are smaller mines better and less-riskier options?

3) Strategy Vs Operations, what kind of person should be leading a metals/mining company? As Malay Mukherjee, a steel veteran who worked closely with Mittal and now is a respected opinion maker, rightly points out. "Most of these companies were led by people known for making big strategies. Perhaps, some of the decisions and investments would have been avoided if people with operations experience were at the helm," says Mukherjee.

Sadly, the bad times might continue for sometime. Mukherjee, who has extensively traveled across the steel world, predicts tough times till 2016.

 

 

 

 

 

 

 

 

The thoughts and opinions shared here are of the author.

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