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Arcelor Mittal Company Analysis

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Introduction

Executive Summary

Arcelor Mittal is one of the world's leading integrated steel and mining companies. Mittal steel was originally founded in India by Lakshmi Mittal. However nowadays as a result of merger between Indian-owned Mittal and Arcelor current headquarter is based in Luxembourg.

Company was facing limited growth opportunities in India and had to expand globally to keep its competitive advantage. Mittal saw a huge opportunity in purchasing assets of distressed companies for the cheap price. Mittal believed that there will be a new boom in demand for the steel industry.

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As a result of global expansion, Mittal's strategy and successful operations in Trinidad and Tobago in 1989, company acquired plants in Germany, US, France, Romania, Algeria, Czech Republic, Bosnia, Macedonia, Poland and South Africa.

By the beginning of 2000s Mittal's predictions came true and global demand for steel was huge and prices were hitting records high. All this was partly drive by demand from China.

In 2006, Arcelor and Mittal Steel merged into ArcelorMittal after much controversy.

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Hostile takeover was faced by much opposition from European politicians. However, shareholders of Arcelor saw a big value in this deal and approved it. In 2007 the newly merged ArcelorMittal continued to pursue an expansive growth strategy, with 35 transactions announced worldwide. New company generated sales of $110 billion and net income of $10.2 billion, which made it the world's largest steel company.

Key questions

What forces drove Mittal steel to start expanding across national borders?
Mittal Steel expanded into different nations through mergers and acquisitions, as opposed to greenfield investment.

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Why?
What benefits does Mittal Steel bring to the countries that it enters? Are there any drawbacks to a nation when Mittal invest there?

Case analysis

Porter's five forces analysis

Competitive Rivalry. Existing competitors are a dangerous threat to the company. The main threat from rivals comes in points of pricing. ArcelorMittal is the largest steel producer, but not the most profitable. Low prices of competitors lead to luring away customers and lower profitability of the company.
Supplier power. Suppliers pose a great threat to the company. The main suppliers of the company are suppliers of iron ore. Vale, Rio Tinto, BHP, and Gloucester, the major suppliers in the industry, were accused by large steel companies of raising ore prices and shifting bargaining power in their favor (Sarah, 2010). The pricing bargaining power seems to be centered on suppliers and had a negative impact on ArcelorMittal and the whole steel industry.
Buyer power. The bargaining powers of buyers must not be underestimated. Despite the growing production of the steel industry, profitability has not increased due to falling prices. ArcelorMittal has all the biggest resources, including modern technology, that are significant attractive features to potential buyers.
Threat of substitution. Substitutes posturize a particular threat. But it also gives the industry the opportunity to explore and develop more and more applications for steel, as well as to achieve success in manufacturing processes.
Threat of new entry. The industry of steel has low potential threats in the form of new entrants to the market due to the necessity of large investments. The threat of new entrants, however, is a remote opportunity and a rare occurrence and, therefore, does not cause much concern.

PESTLE analysis

Political

Arcelor Mittal operates in a large number of developing countries. There are risks of widespread insolvency, mass unemployment and the deterioration of various sectors of the economies where ArcelorMittal operates increased during crisis. Any slowdown in the development of these economies could have an adverse effect on Arcelor Mittal's business, financial condition, results of operations.

Economic

Arcelor Mittal's activities and results are substantially affected by international, national and regional economic conditions. ArcelorMittal operates and sells products globally, and, as a result, its business, financial condition, results of operations or prospects could be adversely affected by fluctuations in exchange rates, volatility in the prices of raw materials, energy and transportation.

Social

Arcelor Mittal has already embedded sustainability principles into its general contracts, and set out clear expectations in the areas of safety, health, social dialogue, and environment. It also requires suppliers to comply with all the relevant laws and regulations.

Technological

Research and Development plays a key role in Arcelor Mittal's strategy to lead innovation in the world of steel. The Group employs 1,200 researchers in 13 research centers around the world. In 2006, US$185 million was spent on research.

Legal

The legal systems in some of the countries in which ArcelorMittal operates remain less than fully developed, particularly with respect to property rights, the protection of foreign investment and bankruptcy proceedings, generally resulting in a lower level of legal certainty or security for foreign investment than in more developed countries.

Environmental

Arcelor Mittal is the biggest DRI (Direct Reduced Iron) in its Energy Plants as a substitute to pig iron. ArcelorMittal supports the European Regulation of 18 December 2006 concerning the Registration, Evaluation, Authorization, and Restriction of Chemicals (REACH), which entered into force on 1 June 2007. ArcelorMittal is set to become the largest1 beneficiary of the EU Emissions Trading Scheme. By 2012 the company is set to have 80 million permits to pollute which it does not need and which it was given for free.

Business Model Canvas

The business model canvas, as proposed by Osterwalder and Pigneur (2010), distills an organization's business model into nine interconnected components.

Conclusion

Answers

What forces drove Mittal steel to start expanding across national borders?

Firstly, the company was facing limited growth opportunities in the early 1970s in India. At that time Indian government closed the door to the outside world due to centralized economy. The government decided how much to produce and at which price, most of the companies was state-owned. Moreover, firms required complex procurement where they had to go through many absurd agencies to get a license to invest and develop their enterprises.

Secondly, Milital Steel was facing intense competition from German SAIL (Steel Authority of India Ltd) and Indian TATA, founded by members of Tata family. High competition was followed by the chronic shortages of coal, power and iuquirail transport. An estimated 450 million of salable steel was lost during 1979-80 because of these shortages. Moreover, Mittal-CEO saw the opportunity of emerging market growth in India. It was also the chance for the company to gain competitive advantage by acquiring plant in Indonesia and monopolizing the local market at that time.

Mittal Steel expanded into different nations through mergers and acquisitions, as opposed to Greenfield investment. Why?

Because of the slump in the economy for a quarter century Mittal Steel was extensively engaged in mergers and acquisitions by virtue of access capacity and slow demand for steel and a higher demand for substitute materials. Mittal had all the necessary resources to raise struggling businesses. Furthermore, there was an opportunity to buy low the assets of those loss making businesses. Besides, Mittal believed that eventually the economy will turn around.

There are reasons why mergers and acquisitions are better than Greenfield investment:

Mergers and acquisitions are quicker to execute;
Acquiring a foreign company means also acquiring valuable profitable strategic assets such as equipment, customers and distribution systems;
Easier and less risky to buy something already existing than building it from the ground;
Mittal believed it could increase the efficiency of the acquired unit by transferring capital, technology and management skills.

What benefits does Mittal Steel bring to the countries that it enters? Are there any drawbacks to a nation when Mittal invest there?

Mittal Steel brings several benefits to the countries that it enters. First of all, lower prices of steel. Secondly, entrance of the company brings improvement of domestic economy. For instance, Arcelor Mittal invested billions of dollars in Brazil and Latin America to increase efficiency of their local steel and coal production and develop local infrastructure. It is important to say that most of acquisitions occurred in developed or transitional countries with high need of investments. Third benefit is job opportunities. Company offers job opportunities and trainings to the local employees. Company has 199,000 employees across 60 countries.

However, there are also some drawbacks. Being world's largest steel producer Arcelor Mittal has a big influence on the countries where company operates. Similarly with other MNC main drawback is influence in local economy, which can lead to decrease of independence and sovereignty of a country. Another drawback is competition to the local steel producers. Presence of Mittal Company can discourage local producers from entering to the business due to high threat of competition. Lastly, the main drawback is pollution. Steel production requires large inputs of coke (a sort of coal) which is extremely damaging to the environment.