Headlines such as "ArcelorMittal buys Bayou Steel of U.S. for $475 million" have a way of catching the attention of How the World Works.. Get your snapshots of contemporary globalization riiiiiight here, in eight words or less.
ArcelorMittal is the world's largest steelmaker, a gigantic multinational headquartered in Luxembourg but run by Lakshmi Mittal, an Indian national who works out of a London office and is thought to be the fourth richest man in the world. Bayou Steel is a steel recycling mill in Louisiana -- it chews up car bodies and other scrap metal and spits 'em back out as new steel products, mostly for domestic U.S. consumption.
Given steel's symbolic importance as one of the heaviest of heavy industries -- a backbone of classic U.S. industrial brawn -- the easy first reaction is to view the purchase as just another datapoint illustrating the fading of U.S. supremacy. Perhaps not as potent a threat to American self-esteem as the ghastly spectacle of Brazilian-Belgians lusting to chug down the King of Beers, but still, in its own way, telling.
But it gets better. The frame of reference shifts. I soon learned that Bayou Steel had emerged from bankruptcy in 2004, only to be purchased in 2006 by a private equity firm, Black Diamond Capital, for $190 million. Black Diamond then sold out to ArcelorMittal for $475 million. More than doubling your money in two years? That's not a bad day's work for Black Diamond. So let's add to the changing global power dynamic the extra spicy variable of private equity wheeler dealers, swooping in and out of the corporate landscape, looking for deals. That too carries its own symbolism. The star American tycoons used to be steel and oil and railroad barons. Now they're private equity firm CEOs, hedge fund traders, and mortgage loan repackagers. Something got lost in the transition.
So how was Black Diamond able to cash in? Although as recently as 2003, analysts were calling the steel business a declining industry with "terrible" fundamentals and bemoaning the fact that the global steel industry was capable of producing about 100 million more tons of steel a year than the world could consume, times have changed. Today, the world is witnessing a huge steel boom. The demand for steel is so strong in China and India and Russia and Brazil and the Gulf that steel mills everywhere are working at a fever pitch. The position of U.S. steel makers has also benefited from the recent drastic increase in transportation costs. Countries such as China are finding it more difficult to undercut U.S. steel prices.
So savor that: Foreign demand for steel increases the profitability of American steel makers, which in turn makes them more attractive takeover targets to foreign steel conglomerates.
But it gets even better. Bayou Steel was never what one might call a native American steel company. It was founded in the early 1980s as part of a foreign-owned joint venture led by the Austrian state steel giant Voest-Alpine. The goal, writes Christopher Hall in "Steel Phoenix: The Fall and Rise of the U.S. Steel Industry," was to build a state-of-the-art minimill for recycling scrap steel to demonstrate Voest's superior technology.
As a result, no expense was spared in its construction, and its construction costs, reportedly in excess of $300 million, far exceeded any other minimill built to that date. Unfortunately, it opened just as the Gulf Coast economy ended the oil boom, and the mill lost $153 million in the first three years of operation. It was sold for just $76 million, after bringing down the head of Voest Alpine in Austria and causing a political crisis in that country.
So our symbol of changing power relations had already been a symbol of a reconfiguring global economy three decades ago, when the U.S. steel industry was getting pummeled by foreign competition and the U.S. economy was being hammered by the after-effects of the oil shocks of the 1970s. And even though RSR Corporation, the Dallas-based company that took over Bayou Steel in 1986 from Voest-Alpine, steered Bayou to its first years of profitability, taking the company public in 1988, by 1992, it was losing money again. And in 2003, the company filed for Chapter 11 bankruptcy.
Voest-Alpine, incidentally, received fully one third of all the Marshall Plan funding that went to Austria in the years 1948-1951. So American state aid helped get the Austrian state steel company on its feet so that it could eventually fund the building of a steel mill in Louisiana which would, at last report, be sold to a European steel conglomerate run by an Indian.
If your frame of reference isn't now shattered into a million little pieces, you haven't been paying attention.
And just for fun, according to Wikipedia, Lakshmi Mittal's "house in Kensington, London is decorated with marble taken from the same quarry that supplied the Taj Mahal. The extravagant show of wealth has been deemed the 'Taj Mittal.'"
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