You were moving ahead with the integration of Arcelor with Mittal quite nicely even after a slump gripped the steel market. What was the flash point that led you to shift gears and go as far as to cut production?Do you think the steel industry was taken in by the boom in commodity prices and over-reacted? On hindsight, would it have been possible to see the signs of slowdown if the industry had been a little more careful and consequently better prepared?
For many business people the collapse of Lehman Brothers was an important moment. I remember this moment very well, it happened a few days after the ArcelorMittal Leadership Conference was held in Delhi. It was a meeting of the 650 top executives of the company. The atmosphere was normal, but the collapse of Lehman Brothers was a first really strong warning bell. The world is witnessing the worst global recession since 1945. Most people will not have witnessed anything like this during their careers so far.
How is the present slowdown different from the earlier ones?
While the slowdown in 2001 was a steel crisis, now we are facing a global economic crisis that started in the financial sector.
We have seen the severe problems of some of our customers – most notably in the automotive sector. This is the backdrop against which we are operating today.
Not unsurprisingly this has had an impact on the steel industry as well. We had face a deep decline in demand and an accelerated fall in steel price.
We must accept that businesses need to ensure they are operating in the most efficient, productive and cost-conscious way to manage this shift into what will continue to be a challenging period.
Despite the fact that steel demand has fallen as economies have slipped into recession, I remain confident in the fundamental demand for steel. Steel is not only an intrinsic material for building the infrastructure of the world, but also the most recyclable, and this will not change.
There is a widespread recognition that the speed and impact of the crisis was very difficult to foresee.
We believe our strategy was the right strategy. The steel industry needed to consolidate and our strategy was to lead that integration. We believe it was an important part of creating a stronger industry. The industry overall is in more robust shape to weather harsh conditions that in previous downturns on account of consolidation that has taken place in recent years.
The fundamental rationale behind the merger was to create a larger, stronger and more sustainable business. Following the merger, we focused on further enhancing the company along these lines.
Firstly our value plan enabled us to capture merger synergies of more than US$1.6 billion ahead of schedule. Furthermore, the company achieved its management gain plan and successfully identified opportunities for brown-field and value-added growth. All of this helped us to improve our underlying profitability. Secondly, cost leadership. This is a very important component of ArcelorMIttal’s leadership. Our size, scale and diversification has enabled us to develop a cost advantage of US$75 per ton. And thirdly we continued our three dimensional growth plan, which was financed 85% by free cash-flow. These three components helped us develop a stronger, more diversified business model that not only delivered very strong results when the economy was strong, but have also helped us adapt swiftly in the harsh climate that has followed.
Structurally the industry is in a stronger position today than it has been in previous downturns. We have the size and scale to be able to move swiftly, for example implementing production cuts of approximately 50% to help accelerate the required de-stocking period. The reality is that today our customers are not buying. There is no point in continuing to produce what we know we cannot sell. That will only serve to make the situation even worse. We appreciate that it is very difficult for our employees right now, but we are taking every measure we are able to, to avoid forced redundancies. For example we have implemented salary cuts for senior management and flexible working hours for white-collars as well as blue-collars. At present everything is being reviewed on a continuous basis.
Production cuts are not pleasant for anyone. ArcelorMittal is a steel company and we want to produce steel. But production cuts will be helpful in underpinning a technical recovery. It should also be noted that production cuts were not an option in previous years, because companies did not have the size and scale to realistically implement them. What has been a marked difference in this downturn compared with previous ones, is the extent to which steel companies have voluntarily chosen this route. This is an important component in ArcelorMittal’s defence against the recession.
(Editor's Observation: Brutal job cuts were the world’s answer to the “recession”, but how would a steel baron deal with falling demands for his product?)
What has been done within the company to keep the different sections of employee well informed of the ground situation? The fact that the workers and employees are from different cultures and time zone, how complex is the issue?
Communication between different cultures and time zones can be complex indeed. We have a presence in over 60 countries.
Internal communications play a very important role and management puts in a lot of effort into improving this on a daily basis. We have regular conference calls with CEO’s, management and employees, send out news up-dates, hold proximity meetings, etc. We want all our employees to be well informed.
Decisions that need to be taken in times like these are never easy. The absolute priority of the management is to protect the company and as many of its employees as possible. We are in constant dialogue with our stakeholders, including the unions. They understand that we are living in exceptional times that require strong decisions. It is very important that we are all aligned, understand the severity of the situation and are focused on protecting the long-term sustainability of the company and its employees.
We have introduced a range or measures to avoid forced redundancies to date.
We launched Group-wide VRS and early retirement programmes launched late last year.
As well as the flexible rotating work schedules at various sites.
And finally the voluntary salary cuts at management level.
We realise that these necessary measures are not easy for employees and we are grateful for their continued support and contributions.
Those employees affected will be taken care of in the most socially sensitive way possible in-line with economic employment legislation, where the company continues to take responsibility.
Much of the attention is focussed on your plan to reduce labour costs. As ArcelorMittal shuts some production facilities in the US and Europe, there are murmurs that you might shut a few of these permanently. Is that on the cards? How do you plan to deal with the political fall outs, especially in continental Europe?
We have a regular dialogue with all stakeholders, including the governments of the countries in which we have an industrial presence. Stakeholders know the scale of the current economic crisis and also understand that this does not only depend on ArcelorMittal. We are very grateful for the support we have received.In order to deal with the very difficult economic environment, we have announced a number of measures to reduce costs. Firstly we announced unprecedented production cuts of up to 50% to help accelerate the inventory decrease and the inevitable technical recovery. We have said that these production cuts are intended to be temporary and that we will be reviewing the market on a continuous basis.
If we were able to tell people when and where we expected to be able to bring production then of course we would. But unfortunately we don’t have the visibility at this stage to be able to predict this accurately.We have analyzed the market as well as the efficiency and productivity of all our plants across the globe in order to ensure we are producing as efficiently as possible for the current demand profile. Based on this analysis, we have temporarily suspended operation at selected tools and furnaces. We are also maintaining the health of all equipment so that we can re-start operation at the tools when the market-environment improves.
In this context, we have been able to temporarily reduce fixed cost on annualized basis by more than USD 6 billion in Q1 and expected to reduce further by more than USD 7.5 billion in Q2. Those temporary cost reductions relate to human resources related cost, reduction in services and contractors, maintenance and spares and SG&A.
Secondly, we analysed the business closely to see where we could implement substantial cost-saving measures. Our 5-year management gains plan, was adapted for the new environment. As the crisis materialised our plan had to be adjusted.
We have therefore accelerated our cost saving to target USD 2 billion by the end of 2009.
To date, measures announced included a sustainable USD2 billion reduction in SG&A and fixed costs, a Group-wide Voluntary Separation Scheme, a reduction in capital expenditure and a salary cut for senior management of up to 15%.
Thirdly, we looked at ways in which we could diversify and strengthen our debt structure. While the $3 billion issue makes it easier to meet the debt covenant, ArcelorMittal was also looking at lowering the working capital cycle to ease the net debt pressure. Could you please explain how the cycle will be reduced to the targeted 75 to 85 days?
Our working capital performance in term of rotation days appears historically poor. The extreme low level of activity explains a large part of it but we believe we can improve on this. Referring to historic level of rotation days since the creation of ArcelorMittal, we should be able to bring back our working capital days to 75-85 days. Such a reduction of rotation days would generate in theory between USD 5bn and USD 6bn of working capital release.
Our capital raising reflects a conservative view and prudent balance sheet management. In the light of this exceptional environment, our capital raising allows us to strengthen our balance sheet and accelerate our net financial debt reduction target. We saw from the initial convertible bond issue that there was good appetite for ArcelorMittal paper and we decided to capitalize on that.
Industry analysts say that your rights issue plan suggests that meeting the covenants on the strength of EBITDA alone would have been difficult. Should the steel industry prepare itself for a significant reduction in earnings?
The final amount of our offering is USD 4 billion and has proven to be well followed by investors. If you consider as well our recent measures as our USD 1.6 bn convertible bond or our forward start facilities we have made good progress in our refinancing and improve our debt maturity profile.
A large part of global demand is coming from emerging economies like India, Russia and China where you still have to make your presence felt. What is your plan to fill this gap in the portfolio?
Again, our strategy is based on 3 components: Geography, Products and Value Chain.
ArcelorMittal remains committed to its Greenfield projects in India and is confident about India’s future demand for steel. However it is only prudent to ensure that the timing of this project is adapted to the current exceptional economic environment. Given the long lead time that is required for Greenfield projects, it would not be realistic to expect production to start before 2014.
In China we are closely working together with our joint venture partners, Valin Steel and China Oriental.(Editor's observation: Target 200 million tons; is it still in the cards?)
After almost four decades in the industry, what lessons from the past do you take to face the present situation? Is the ground training in Indonesia helping more or was it the experience of convincing various segments of stakeholders - from governments to workers, during the acquisition drive – that has proved more helpful?
Sometime last year, you had mentioned the target of reaching a capacity of over 200 million tonnes. Does it still hold?
As mentioned earlier, for the long-term we remain committed to our 3 dimensional growth strategy based on Geography, Products and Value Chain – and of which the creation of ArcelorMittal has been a success.
However, in the current environment, there is no point in continuing to add new capacity given the current economic climate. This would only serve to further deteriorate the market at a time when our priority is to conserve cash. Therefore we have paused our growth plans until the scenario becomes clearer.
Yes, stakeholder dialogue is very important, especially during times of crisis.
We all need to be informed and to be in close contact to follow-up on the situation.
Gaining the trust and respect of our stakeholders is adamant to our success. On a local level, I have also noticed that if stakeholder engagement is managed carefully and respectfully, that our presence can make a tangible difference in the prosperity of a community.Over the last few years, you have also diversified into the energy sector. The present slowdown has seen Mittal Investment Sarl opting out of some of the projects with ONGC. Does it mean that there might be some permanent shift in your initiative to diversify?
Mittal Investments is the private investment company of the Mittal Family which in addition to owning the family’s stake in ArcelorMittal is also involved in investments in the international oil and gas sector. Mittal Investments has adapted its strategy and growth plans to the current exceptional and challenging economic environment. After a very thorough analysis of the impact the current economic situation is having on the oil and gas industry, we do not believe it is prudent to continue with some projects at this time. The returns have changed as oil prices are halved. Nevertheless, Mittal Investments remains committed to its Joint Venture with ONGC. The industry and the financial world has seen with interest and has been impressed with the acumen displayed by Aditya Mittal, as was also very evident during the recent media and analysts calls. Do you think he is ready for bigger roles? And do you have a clear succession plan in place for Aditya to take over from you?
I am very happy with Aditya’s performance at ArcelorMittal. As CFO and Group Management Board member of ArcelorMittal, he has shown tremendous commitment, leadership and resilience even in the most challenging times.
In terms of my own position, as long as I am continuing to add value I intend to be around!