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The Mittal/Arcelor case in the interpretation of the School of Economic Warfare

Gagliano Giuseppe

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Among the examples of economic warfare provided by the School of Economic Warfare in Paris, it is worth mentioning the case of Mittal’s takeover of Arcelor and the situation of European iron and steel industry vis-à-vis financial globalization.

Over the years, the increasing number of takeovers, unions and joint ventures became an for market competitiveness. In this context, some of the takeovers stand out as hostile financial actions aimed neutralizing the opponent. Such strategic maneuvers are a significant source of concern for economic operators, as they observe the reaction of both private and public sector, which is likely to intervene in order to protect the sectors of national interests.

The acquisition of Arcelor operated by Mittal is a case in point because it involves steel, which is both one of the symbols of the European industry and the main material for other productive and strategic sectors. Both Mittal and Arcelor were two titans of the steel sector: while Mittal’s primacy consisted in the largest number of employees and produced materials, Arcelor could count on the most robust trade volume. In fact, when Mittal took it over, Arcelor was a very healthy company that had just incorporated the Canadian company Dofasco. Through this surprising trial of strength that no political or economic operator could have foreseen, Mittal secured a significant advantage on its competitors. In order to understand the strategic interests of this acquisition, it is necessary to examine Mittal’s communication campaign and the lobbying role of all the players, from the steel market to public opinion.

Looking at the steel market trends between 1980 and 2005, it is possible to notice that since the minerals coming from the Soviet Union entered the global market in 1992, both prices and demand of iron ore and steel increased significantly. If it is true that over a hundred countries produce steel, there is only a small group of states that influence its market trend:  Brazil and Australia, for example, control 42% of the steel market.

Due to the impressive growth of recent years, China alone accounts for 40% of global steel production (349 million tons in 2005), of which only 3% is exported. One of the first crisis occurred when China decided to limit the export of carbon coke – the main fuel for blast furnaces. This resulted in a spike in prices of 600% and showed how a given economic choice (driven by the desire of full independence) had remarkable strategic repercussions.

In order to discuss the conflict emerged with the Mittal/Arcelor case, the School of Economic Warfare provides a deep analysis of the actors involved.

Mittal

The Mittal family was the majority shareholder of this company and its funds were located in tax havens. If on the one hand the choice of acquiring Arcelor was motivated by economic and fiscal reasons, on the other hand it also hides some interests that the economic warfare should explore. The Mittal family remained the majority shareholder (51%), whereas the remaining part was divided between investment funds and institutions. In designing such a stake distribution, Mittal showed its strategic intelligence: with such a property assets arrangement, it was impossible for Arcelor to regain its business through another takeover.

Arcelor

Since it is more difficult to convince more shareholders to sell their quotas rather than a single one, it is more difficult to take over a business when there are multiple owners. Therefore, from the strategic point of view, Arcelor’s large pool of stakeholders discouraged competitors from acquiring it. Besides, Arcelor benefited from a strong political support on the international level thanks to its strong ties with governments and to its strategic appeal, since it was the symbol of a united Europe. The main shareholders of Arcelor –involved in the evolution of the company – were:

–              The Luxemburg government: traditional stakeholder, represented at that time by Prime Minister Jean-Claude Junker, who had been very active on the European level and who initially opposed the acquisition of Arcelor by Mittal.

–              The Belgian government, namely the Wallonia region, which also opposed Mittal acquisition after consulting Banque Lazard.

–              Colette Neuville, who held 2.5% of the stocks and represented the small shareholders, abstained from voting on Mittal acquisition. Even though she had such a small quota, Neuville could have played an important role due to the fragmentation of Arcelor ownership.

–              Romani Zaleski, French-Polish major shareholder and key man of Arcelor.

In order to secure its interests Mittal influenced decision makers and public opinion thanks to a network of associates:

–              John Ashcroft, representative of the U.S. Republican right-wing party, Attorney General between 2001 and 2005. At the end of his political career he founded a lobbying agency and was hired by Mittal because of his moral integrity and relations with several members of European governments.

–              Anne Méaux, press officer of Giscard d’Estaing, director of communication for Alain Madelin, who had entertained long term relations with prominent members of the French right-wing party.

–              Partner banks of Mittal Steels. There were five banks which acted simultaneously to support Mittal’s takeover of Arcelor: Goldman-Sachs, Crédit Suisse, HSBC, Citigroup and Société Générale. Goldman-Sachs, which had been previously involved together with Citigroup in Arcelor’s acquisition of Dofasco, played a prominent role in Mittal’s takeover of Arcelor; Société Générale opened up an eight-million-euro credit line for Mittal.

Arcelor’s network was quite complex. It mainly consisted in both personal and business relationships: the actors would pursue their own interests while immerged in a broader network of bigger interests that would tower over those of the single actors:

–              BNP Paribas and Calyon, Arcelor partner banks that had traditionally offered financial support.  Merrill Lynch and UBS drafted the strategy while other institutions were also involved: Michael Zaoui from Morgan Stanley (brother of Yoel Zaoui, main strategist of Mittal) was appointed by Arcelor Management Board to consider Mittal’s offer.

–                  DMG – Michel Calzaroni, international communication agency, embraced market battles on behalf of food titans and French energy companies.

–       Public Opinion. In order to influence public opinion, Arcelor chose Publicis Group, second best rated consultancy and media acquisition company.

–       Skadden Arps, international law firm whose team was made of twelve professionals from France, Belgium and United Kingdom.

Mittal’s acquisition of Arcelor was supported by a well-designed communication campaign. Communication capacities are an essential asset for big firms, especially for those with a large number of shareholders like in the case of Arcelor, where small investors represented 85% of shareholders. In fact, this was the main problem Mittal faced when acquiring Arcelor, even more than the legal and economic aspect or the anti-trust regulations. While competition authorities of the United States, Canada and European Union were in the process of approving this operation, Mittal was allocated huge economic resources in convincing thousands of investors to support its project.

Between the above mentioned personalities, Anne Méaux played a very special role in the deal: she chose a strategy using multiple communication tools (such as press conferences, advertising on business magazines, conference calls and travels to Mittal headquarters) in order to convince the investors of the opportunities of the project; in a context of economic warfare, these communication strategies are able to address competitors with hostile messages. Mittal’s strategy was very detailed and engaged trade unions as well. Since February 2006, Mittal Steel had committed to communicate to Arcelor’s trade unions representatives its intentions about the industrial plan supporting the acquisition. The main points were occupational advantages and better work conditions, together with promise of keeping in place the agreements they had previously made with Arcelor.

Mittal also conceived a special communication strategy targeting shareholders mainly using specialized press and popular weekly magazines. Communication agencies focused on conveying a very positive image of the leader Lakshimi Mittal, through describing him as a successful self-made-man able to gather consensus both between businessmen and public opinion. Their goal was portraying Mittal as a successful entrepreneur interested in the development of his country; this made him much different from foreign investors that delocalized investments and performed a “reverse colonization” both on the economic and cultural side.

Arcelor counter-campaign, instead, presented Mittal as an inferior competitor presenting an “Indian” offer, derogatorily referring to India as a poor country (quite inappropriate considering India’s fast paced economic development).  Supported by the belief to be able to rely on state aid, Arcelor tried every possible way to contrast Mittal’s attack and offered its small investors twice as much the dividends of 2005, hoping that they would have rejected Mittal’s offer. Since Arcelor’s strength consisted in the division of the ownership between small investors, in April 2006 this company offered another increase in the dividends. A month later, Arcelor announced to have received a very interesting takeover offer from a Russian company named Severstal: Mordachov, Severstal’s tycoon, would have acquired 32% of the company and the investors would have benefited from even more advantageous distributions of the dividends. Due to the initial lack of enthusiasm of Arcelor’s investors, Severstal decided to reduce its participation to 25% (that secured its position as majority shareholder), while discouraging Mittal from acquiring Arcelor and reassuring small investors on their pretty substantial profits.

Mittal’s decision to approach directly the group of Arcelor’s investors resulted in a winning move: almost the entire management board of Mittal – included Lakshimi Mittal – met with 70% of Arcelors investors and established open communication. This helped convincing their counterpart of the advantages of their acquisition offer.

This way, Mittal Steel managed to buy 34% of the Arcelor’s stake in May 2006. As the takeover took place, Mittal created the new management board in order to meet reassure the investors’ concerns about Lakshimi Mittal’s management, such as transparency of decision-making and compliance to share ownership arrangements. At the end of May, another key step was taken: in relation to a speculative investment fund, Goldman Sachs together with almost 30% shareholders requested to modify the approval procedure of Severstal proposal. At this point, the intervention of Zaleski – Arcelor’s majority shareholder – helped reaching a final solution. Thanks to the alteration of the procedures that Goldman Sachs had requested, Zaleski managed to buy more than 7.8% stocks so that by June 25th, Arcelor was fused with Mittal Steel with a final agreement granting shareholders 10% profits.

This case study highlights the importance of economic warfare that aims at protecting strategic sectors of a given field, preserving the resources and ensuring the employment development of related fields and more specifically of the industrial sector.

Besides the economic aspect of this kind of warfare, the School of Economic Warfare in Paris insists on its geopolitical aspects. In this perspective, the case discussed above has a number of hidden implications. For example, Mittal’s takeover of Arcelor can be interestingly considered as an operation aimed at containing Chinese expansionism.

Looking at the role of the United States, it is possible to argue that since the end of the Cold War, this country has adopted quite a unilateral approach in foreign policy that supported its role of world’s first economic power. Whoever challenges the American power, automatically becomes a rival, especially on the economic level. In this regard, China is a dangerous competitor that is able to successfully join forces with some African countries: through investing in education without linking any conditionality of human rights respect or fight against crime, Beijing creates alliances in another continent and gains profits from its own investments.

Besides, the Chinese government even reached a number of agreements with South American countries that are not limited to the economic sphere but also involve cultural aspect like the spread of Chinese language and culture. In Asia, China and India sealed an important deal aimed at going beyond containing the historical rivalry between the two countries: promoting in the Asian continent an environment of cooperation that is able to challenge the dominance of the United States.

Since India is the only regional actor able to contain China, the USA repeatedly tried to engage India as a trade partner, as mentioned in the deal between the two countries sealed in 2000.

In order to ensure its own economic growth and independence from other actors, China and India increased significantly their steel production and manufacturing.

In 2005, China’s consumption of steel accounted for one third of the world steel market and the very same year, Beijing became a prodigious exporter of steel. In the same timeframe, India’s steel production exceeded the needs of the country and this compromised supply-demand balance. In such a delicate phase for the steel sector, the political world did not welcome Mittal’s acquisition of Arcelor because of its impact on the strategic balance of power. From the United States perspective, Mittal was quite interesting and profitable:

–              according to the authorities of the country, Mittal Steel group was not Indian;

–              the reason for Mittal’s economic expansion was China. In fact, in 2004 Mittal was the first foreign company that managed to acquire 37.17% of a Chinese steel company.

The US financial community welcomed the fusion between Arcelor and Mittal, but the Department of Justice opened an investigation in order to make sure that the US could continue import large amount of steel from Arcelor. Besides, even on the financial level, Mittal’s acquisition of Arcelor confirmed the general world trend of the strategic formation of a few stable economic hubs.

As a final consideration on this topic, the European Union’s behavior vis-à-vis Mittal’s operation was quite surprising. Even though the EU originated from European Coal and Steel Community, (the organization promoting free trade for coal and steel), it did not adopt any measure to protect such a strategic sector whose value was both economic and symbolic.

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Economy

Record high remittances to low- and middle-income countries in 2017

MD Staff

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Remittances to low- and middle-income countries rebounded to a record level in 2017 after two consecutive years of decline, says the World Bank’s latest Migration and Development Brief.

The Bank estimates that officially recorded remittances to low- and middle-income countries reached $466 billion in 2017, an increase of 8.5 percent over $429 billion in 2016. Global remittances, which include flows to high-income countries, grew 7 percent to $613 billion in 2017, from $573 billion in 2016.

The stronger than expected recovery in remittances is driven by growth in Europe, the Russian Federation, and the United States. The rebound in remittances, when valued in U.S. dollars, was helped by higher oil prices and a strengthening of the euro and ruble.

Remittance inflows improved in all regions and the top remittance recipients were India with $69 billion, followed by China ($64 billion), the Philippines ($33 billion), Mexico ($31 billion), Nigeria ($22 billion), and Egypt ($20 billion).

Remittances are expected to continue to increase in 2018, by 4.1 percent to reach $485 billion. Global remittances are expected to grow 4.6 percent to $642 billion in 2018.

Longer-term risks to growth of remittances include stricter immigration policies in many remittance-source countries. Also, de-risking by banks and increased regulation of money transfer operators, both aimed at reducing financial crime, continue to constrain the growth of formal remittances.

The global average cost of sending $200 was 7.1 percent in the first quarter of 2018, more than twice as high as the Sustainable Development Goal target of 3 percent. Sub-Saharan Africa remains the most expensive place to send money to, where the average cost is 9.4 percent. Major barriers to reducing remittance costs are de-risking by banks and exclusive partnerships between national post office systems and money transfer operators. These factors constrain the introduction of more efficient technologies—such as internet and smartphone apps and the use of cryptocurrency and blockchain—in remittance services.

“While remittances are growing, countries, institutions, and development agencies must continue to chip away at high costs of remitting so that families receive more of the money. Eliminating exclusivity contracts to improve market competition and introducing more efficient technology are high-priority issues,” said Dilip Ratha, lead author of the Brief and head of KNOMAD.

In a special feature, the Brief notes that transit migrants—who only stay temporarily in a transit country—are usually not able to send money home. Migration may help them escape poverty or persecution, but many also become vulnerable to exploitation by human smugglers during the transit. Host communities in the transit countries may find their own poor population competing with the new-comers for low-skill jobs.

“The World Bank Group is mobilizing financial resources and knowledge on migration to support migrants and countries with the aim of reducing poverty and sharing prosperity. Our focus is on addressing the fundamental drivers of migration and supporting the migration-related Sustainable Development Goals and the Global Compact on Migration,” said Michal Rutkowski, Senior Director of the Social Protection and Jobs Global Practice at the World Bank.

Multilateral agencies can help by providing data and technical assistance to address adverse drivers of transit migration, while development institutions can provide financing solutions to transit countries. Origin countries need to empower embassies in transit countries to assist transit migrants.

The Global Compact on Migration, prepared under the auspices of the United Nations, sets out objectives for safe, orderly and regular migration. Currently under negotiation for final adoption in December 2018, the global compact proposes three International Migration Review Forums in 2022, 2026 and 2030. The World Bank Group and KNOMAD stand ready to contribute to the implementation of the global compact.

Regional Remittance Trends

Remittances to the East Asia and Pacific region rebounded 5.8 percent to $130 billion in 2017, reversing a decline of 2.6 percent in 2016. Remittance to the Philippines grew 5.3 percent in 2017 to $32.6 billion. Flows to Indonesia are expected to grow 1.2 percent to $9 billion in 2017, reversing the previous year’s sharp decline. Stronger growth in transfers from countries in Southeast Asia helped offset lower remittance flows from other regions, particularly the Middle East and the United States. Remittances to the region are expected to grow 3.8 percent to $135 billion in 2018.

Remittances to countries in Europe and Central Asia grew a rapid 21 percent to $48 billion in 2017, after three consecutive years of decline. Main reasons for the growth are stronger growth and employment prospects in the euro area, Russia, and Kazakhstan; the appreciation of the euro and ruble against the U.S. dollar; and the low comparison base after a nearly 22 percent decline in 2015. Remittances in 2018 will moderate as the region’s growth stabilizes, with remittances expected to grow 6 percent to $51 billion.

Remittances flows into Latin America and the Caribbean grew 8.7 percent in 2017, reaching another record high of nearly $80 billion. Main factors for the growth are stronger growth in the United States and tighter enforcement of U.S. immigration rules which may have impacted remittances as migrants remitted savings in anticipation of shorter stays in the United States. Remittance growth was robust in Mexico (6.6 percent), El Salvador (9.7 percent), Colombia (15 percent), Guatemala (14.3), Honduras (12 percent), and Nicaragua (10 percent). In 2018, remittances to the region are expected to grow 4.3 percent to $83 billion, backed by improvement in the U.S. labor market and higher growth prospects for Italy and Spain.

Remittances to the Middle East and North Africa grew 9.3 percent to $53 billion in 2017, driven by strong flows to Egypt, in response to more stable exchange rate expectations. However, the growth outlook is dampened by tighter foreign-worker policies in Saudi Arabia in 2018. Cuts in subsidies, increase in various fees and the introduction of a value added tax in Saudi Arabia and the United Arab Emirates have increased the cost of living for expatriate workers. In 2018, growth in remittances to the region is expected to moderate to 4.4 percent to $56 billion.

Remittances to South Asia grew a moderate 5.8 percent to $117 billion in 2017. Remittances to many countries appear to be picking up after the slowdown in 2016. Remittances to India picked up sharply by 9.9 percent to $69 billion in 2017, reversing the previous year’s sharp decline. Flows to Pakistan and Bangladesh were both largely flat in 2017, while Sri Lanka saw a small decline (-0.9 percent). In 2018, remittances to the region will likely grow modestly by 2.5 percent to $120 billion.

Remittances to Sub-Saharan Africa accelerated 11.4 percent to $38 billion in 2017, supported by improving economic growth in advanced economies and higher oil prices benefiting regional economies. The largest remittance recipients were Nigeria ($21.9 billion), Senegal ($2.2 billion), and Ghana ($2.2 billion). The region is host to several countries where remittances are a significant share of gross domestic product, including Liberia (27 percent), The Gambia (21 percent), and Comoros (21 percent). In 2018, remittances to the region are expected to grow 7 percent to $41 billion.

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A bio-based, reuse economy can feed the world and save the planet

MD Staff

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Transforming pineapple skins into product packaging or using potato peels for fuel may sound far-fetched, but such innovations are gaining traction as it becomes clear that an economy based on cultivation and use of biomass can help tackle pollution and climate change, the United Nations agriculture agency said on Friday.

A sustainable bioeconomy, which uses biomass – organic materials, such as plants and animals and fish – as opposed to fossil resources to produce food and non-food goods “is foremost about nature and the people who take care of and produce biomass,” a senior UN Food and Agriculture Organization (FAO)  official said at the 2018 Global Bioeconomy Summit in Berlin, Germany.

This means family farmers, forest people and fishers, who are also “holders of important knowledge on how to manage natural resources in a sustainable way,” she explained.

Maria Helena Semedo, FAO Deputy Director-General for Climate and Natural Resources, stressed how the agency not only works with member States and other partners across the conventional bioeconomy sectors – agriculture, forestry and fisheries – but also relevant technologies, such as biotechnology and information technology to serve agricultural sectors.

“We must foster internationally-coordinated efforts and ensure multi-stakeholder engagement at local, national and global levels,” she said, noting that this requires measurable targets, means to fulfil them and cost-effective ways to measure progress.

With innovation playing a key role in the bio sector, she said,  all the knowledge – traditional and new – should be equally shared and supported.

Feeding the world, saving the planet

Although there is enough food being produced to feed the planet, often due to a lack of access, estimates show that some 815 million people are chronically undernourished.

“Bioeconomy can improve access to food, such as through additional income from the sale of bio-products,” said Ms. Semedo.

She also noted its potential contribution to addressing climate change, albeit with a warning against oversimplification.

“Just because a product is bio does not mean it is good for climate change, it depends on how it is produced, and in particular on much and what type of energy is used in the process,” she explained.

FAO has a longstanding and wide experience in supporting family farmers and other small-scale biomass producers and businesses.

Ms. Semedo, told the summit that with the support of Germany, FAO, together with an international working group, is currently developing sustainable bioeconomy guidelines.

Some 25 cases from around the world have already been identified to serve as successful bioeconomy examples to develop good practices.

A group of women fishers in Zanzibar are producing cosmetics from algae – opening up a whole new market with sought-after niche products; in Malaysia, a Government programme supports community-based bioeconomy; and in Colombia, a community is transforming pineapple skins into biodegradable packaging and honey into royal jelly – and these are just a few examples of a bioeconomy in action.

“Together, let’s harness the development for sustainable bioeconomy for all and leave no one behind,” concluded Ms. Semedo.

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Belarus: Strengthening Foundations for Sustainable Recovery

MD Staff

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The speed of economic recovery has accelerated in early 2018, but the foundations for solid growth need to be strengthened, says the latest World Bank Economic Update on Belarus.

The economic outlook remains challenging due to external financing needs and unaddressed domestic structural bottlenecks. Improved household consumption and investment activity, along with a gradual increase in exports, will help the economy to grow, but unlikely above three percent per annum over the medium term.

“The only way for ordinary Belarusians to have better incomes in the long run is to increase productivity, which requires structural change. While macroeconomic adjustment has brought stability, only structural change will bring solid growth to the country,” said Alex Kremer, World Bank Country Manager for Belarus. “Inflation has hit a record low in Belarus, driving the costs of domestic borrowing down. However, real wages are now again outpacing productivity, with the risks of worsening cost competitiveness and generating cost-push inflation.”

A Special Topic Note of the World Bank Economic Update follows the findings of the latest World Bank report, The Changing Wealth of Nations 2018, which measures national wealth, composed of produced, natural, and human capital, and net foreign assets. Economic development comes from a country’s wealth, especially from human capital – skills and knowledge.

“Belarus has a good composition of wealth for an upper middle-income country. The per capita level of human capital exceeds both Moldova and Ukraine. However, the accumulation of physical capital has coincided with a deterioration in the country’s net foreign asset position,” noted Kiryl Haiduk, World Bank Economist. “Belarus needs to rely less on foreign borrowing and strengthen the domestic financial system, export more, and strengthen economic institutions that improve the efficiency of available physical and human capital.”

Since the Republic of Belarus joined the World Bank in 1992, lending commitments to the country have totaled US$1.7 billion. In addition, grant financing totaling US$31 million has been provided, including to programs involving civil society partners. The active investment lending portfolio financed by the World Bank in Belarus includes eight operations totaling US$790 million.

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