Mittal Arcelor and Value Creation

Why is there such a euphoria in India over this potentially threatening event. Steel is an old commodity and no great innovation is happening in either the product or process to benefit consumers. It is not a high value or closely guarded technology product and therefore production and markets are dispersed throughout the world. Like all commodities, the prices are cyclic as demand growth is secular and capacity growth is in large steps.

Dispersed controls over manufacture ensure free markets and fair play. Consolidation in the industry is decisively bad for the consumer. The balance of power will pass on to the industry and indeed that is the logic for this sigle minded pursuit by Mittal and its acceptance by Arcelor. Fig leaves like economies of scale should fool no one. They are only attracted by the immense potential to control the markets and therefore the prices through this merging of capacities.

Mittal Arcelor now controls 10% of global production. Watch this grow to 25% very soon in the next 3 years. At the global level 25% would give them a killing advantage vis-a-vis customers who will not and cannot consolidate in the same way as they are too fragmented. The premium that Mittal paid for Arcelor will be the best investment he ever made. There are no global anti trust laws in place.

The industrial customers of steel will simply pass on the cost increase to the end consumers. Mittal plans to become much richer by reaching his hands even deeper in the consumers' pockets.

Consolidation or mergers in cutting edge technology space is good because it gives scale to industry to invest in even more daring reasearch thereby benefitting the consumer eventually. The same actions in commodities make the consumer poorer. Imagine what would happen to prices of groceries if 25% of global farming was controlled by Bill Gates.

Even then we rejoice over what is seen as Indian success and therefore naturally calling for celebrations. Captains of Industry uniformly gloat over the occurance hinting that more will be encouraged to follow in Mittal's footsteps, Ministers openly congratulate the self made Tycoon and even try to take some oblique credit of the happening forgetting that they are supposed to represent the fragmented consumer not the monopolising industry.

There is nothing drastically wrong in letting oneself feel a little puffed up over the success of a sibling. However this is a much much more ominous development. It is beyond national concerns and needs to be viewed in the global perspective. The international community needs to energise itself to address exactly these kinds of anti competition and hence anti consumer consolidations. Watch dogs need to be setup to monitor their future game plans and obstacles need to be created in the interests of the consumer.

We must internalise the belief that consolidation for the purpose of obtaining leverage with respect to any group of customers is at the heart of it a grossly immoral endeavour. The fact that the proponent this time comes from a developing country background and has overcome insurmountable odds to reach where he has in a single lifetime and is therefore a role model for all the aspiring masses does not in anyway dilute this reality or detract from the capital sin and therefore does not entitle him to any concessions when ascribing motives to what has been attempted so successfully.