Vulture Time for Tatas?

Vulture funds are financial funds that look for pickings among dying or dead companies in a recession. Today, many global steel giants are in their death throes.

In the US, 28 steel companies have filed for bankruptcy under Chapter 11, including the third and fourth biggest in the country (Bethlehem Steel and LTV).

This is a great opportunity for TISCO (Tata Iron and Steel Co). Parsis have a special affinity with vultures, which grace their towers of silence. They view vultures not as birds of prey, but as creatures that recycle the remains of the dead and provide life anew.

Buying dead companies is a form of recycling and rebirth too. TISCO must scour the world for the dead and dying.

That is how Laskmi Mittal has become the biggest steel producer in the world. TISCO has spent thousands of crores building steel plants.

But Mittal has never built a steel plant from scratch. He has become several times larger than TISCO by buying dying companies for a song, in Trinidad, Mexico, Kazakhstan, Germany and elsewhere.

TISCO was once regarded as a blue chip. But liberalisation soon proved it to be an obsolete, grossly overmanned company that had looked good only because its sole competitor was SAIL, which was even more overmanned and inefficient.

Under JJ Irani, the company cut production costs substantially. Irani now claims to have the second-lowest cost of production in the world, next only to Korea’s POSCO. I greatly doubt that Lakshmi Mittal will agree.

TISCO still looks phenomenally overmanned.

Irani wanted to build a huge export-oriented steel plant at Gopalpur. Luckily, the project never took off. It would have been a financial disaster, sinking the whole company.

TISCO and other Indian producers have been shut out of the US market by anti-dumping barriers, and global surpluses have sent world prices crashing. This is no time for new, export-oriented plants. Instead, it is vulture time.

Every country regards steel as a vital industry, to be protected with endless subsidies. So world steel capacity far exceeds demand. Actual production last year was 847 million tonnes.

But falling demand and high inventories mean world production needs to cut to 750 million tones to eliminate the glut. In a free market, the most inefficient steel plants would close. In practice, governments insist on keeping them alive.

The supposed land of the free, the US, wants to create a global steel cartel that cuts production to raise prices. President Bush, supposedly a free marketer, wants to do an OPEC in steel.

It must be the influence of Texan oil. Global steel producers have met to negotiate production cuts and closures. The Europeans say they have already cut steel capacity in the recent years, and it is time for the US to take the market medicine it urges on others.

Other major exporters like Japan, Russia, Ukraine, Korea and Brazil say they have already slashed production and cannot do more.

The US has threatened to impose additional import duties to protect its steel industry. If it does, EU Trade Commissioner Pascal Lamy has vowed to take action against the US in the WTO.

One way or another, government subsidies seem certain to encourage steel overproduction in most years, and protectionism will always be justified to save a vital industry.

That strengthens the case for TISCO to become a vulture. In a free market, building brand new plants can be better than trying to revive dying ones. But when free markets are not allowed to function, vultures fare better. Grab the huge subsidies being offered by governments to revive the dying and the dead.

In the US and Europe, many steel companies are uncompetitive for a special reason. In the hey-day of steel, trade unions wrested many concessions from owners, including generous pension benefits.

But modern technology has greatly shrunk the number of people needed to run a steel mill. In consequence, Bethlehem Steel has to support 6 or 7 retirees for every existing worker.

In extreme cases, companies have 13 retirees for every worker. This makes them uneconomic, yet the very size of retirees increases their political clout to seek rescues.

US Steel, a shadow of its former self but still the biggest in the country, wants to buy bankrupt competitors (Bethlehem Steel, National Steel, Wheeling-Pitsburgh), provided the US government picks up the $ 13 billion tab for retiree costs.

It remains to be seen whether President Bush agrees. The fiscal cost will be huge, but he is under tremendous pressure to revive the companies.

If he does not, it will prove impossible to restructure most of the 28 steel companies in bankruptcy court, which will be liquidated. Their assets will be auctioned to meet the dues of creditors.

Either way, it should provide a feast for vultures. If the government is wiling to pick up the cost of retirees, then TISCO should bid to take over some of the dying companies.

If there is no government rescue, then the assets of these companies will be auctioned, without any accompanying liabilities, and that again will provide good pickings.

There was a time when no Indian company could follow in the footsteps of master vulture Lakshmi Mittal because the Reserve Bank would not sanction foreign exchange for purchasing companies abroad.

But economic reform has got rid of that barrier. Tata Tea got the foreign exchange to buy Tetley Tea, a global giant.

So, TISCO should consider bidding for Bethlehem Steel, LTV, or the many other behemoths in distress.

In one go TISCO can triple its capacity, at a throwaway price, in the biggest economy in the world. And, instead of being at the receiving end of US tariffs and anti-dumping measures, it can be the beneficiary.

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