That Gupta was attempting to do a Mittal is obvious – plug together the scrag and dog ends of the global metals business and see if a new conglomerate can be assembled. Why not, it did, after all, work for Mittal.
It’s possible to wonder a little at this though as Mittal was doing this while prices were depressed by that implosion of the Soviet Union. That $700 billion wall of metals stocks roaring out of the place did depress the prices of things like an Irish steel plant and so on. So much so that owners and states were willing to allow such plants to go for near nothing and often with a healthy dowry.
If, – if – the market then turned after the $700 billion had passed by then the assets rise in value again and, well, there’re houses in Kensington Gardens that show the strategy worked.
Gupta’s bet is, essentially, that the same can be done again. My reading of this is that it can’t because there is no passing act that has depressed prices. Those scrag ends are cheap because they are long term cheap.
Within this story though there are some fun bits:
But the commodities trader turned industrialist was not quite done. He asked Scottish first minister Nicola Sturgeon for one last bung: a second government guarantee, for the electricity from the nearby Kinlochleven hydroelectric power station. Internal government papers reveal that Sturgeon was wary: it was “premature” to give Gupta more funds, she thought. Holyrood would need “commitments, milestones and deliverables before contemplating a second phase”. Particularly important among those deliverables was a promised £120 million aluminium wheels factory.
Sturgeon was right to be cautious. That factory, like most of Gupta’s extravagant investment promises around the world, remains unbuilt (he said it was killed by the automotive downturn). In the verdict of one senior businessman who has dealt with Gupta: “He makes Del Boy look like an amateur.”
Del Boy often did have a bit of the Underpants Gnomes about him. Bits in the story that could have done with a little more explanation of the details of how it was all going to work.
The bit here being, well, why would you put a car wheels factory next to a primary aluminium smelter?
The thing being that car wheels aren’t made out of primary aluminium. Rather, aluminium alloys, a primary (sorry) ingredient for which is usually secondary aluminium, or as it is also known, scrap. Sure, you can use primary, clean and just made, aluminium as an input but you tend not to put the two pants together.
Your primary smelter is off out in the wilds where the ‘leccie is cheap because it’s right next to the dam for the hydro plant. In fact, you’ve selected your location precisely because this is a place where you can build a dam to make the cheap ‘leccie and you build the two together. Find the river that can be dammed, build the dam and the smelter together, one justifies the other.
Making car wheels needs supplies of all the things you’re going to alloy with. An entirely different set of furnaces. So, why put it out in the wilds where you’ve got to build all the supporting infrastructure? It’s not that you don’t, it’s that you tend not to. Well, unless there’s a political, or subsidy, reason that you want to that is.
Another example of the same interesting logic. Gupta has one of Britain’s last blast furnaces – these make virgin steel from iron ore. The argument was put forward that this is a capability that an industrial nation needs to retain. Well, maybe. So, a subsidy request was made. Which would have funded the replacement of the blast furnace with electric arc furnaces. Which do not make iron or steel from iron ore but from scrap. What is, the subsidy request was justified by exactly the retention of what would not be retained by spending the subsidy.
Oh, and Britain has no shortage of electric arc furnaces nor steels recycling capability.
My opinion is that Gupta’s a bit of a chancer. But then I was saying that before it became quite so obvious……