Mittal CEO Sees No Future in Steel Futures

Lakshmi Mittal, CEO of Mittal Steel,(MT) says the way out of the steel industry's boom-and-bust cycle is through consolidation, not financial markets derivatives.

"We are not working for the banks," Mittal said Tuesday at a steel industry conference in Manhattan co-sponsored by American Metal Market and World Steel Dynamics. "We are working for the shareholders."

Such comments from the CEO of the world's largest steel producer won't be welcomed by the London Metal Exchange (LME), which is currently in the process of developing steel market futures contracts. But they can't be a surprise to the LME. The steel industry has long resisted attempts at anything approaching price transparency.

In his speech, Mittal elaborated that in the past, steel companies had produced "volume for volume's sake," meaning that producers had simply continued their output of steel products when there was no market demand. As a result, price levels had periodically crashed, leading to the dramatic feast and famine style swings in industry fortunes. Now, however, he noted that industry participants were acting more rationally by reducing production levels, but remaining firm on prices during weaker economic times.

When Mittal indicated that he didn't see a need for an LME futures contract, he was rather predictably greeted with warm cheers by half the 1,200-strong audience at the conference at the Sheraton New York Hotel. The concept of risk management has never been a big hit with steel producers, which have steadfastly resisted using open market mechanisms to facilitate price discovery, as in other metal markets such as copper and aluminum.

Mittal's remarks are a reflection of his actions. Mittal Steel is actively engaged in the process of consolidating market share. Earlier this year, Mittal Steel made a $29 billion offer to acquire the world's No. 2 steel company, Arcelor. Arcelor, which itself wants to merge with Russian steel company Severstal, announced Tuesday it was hoping for an improved offer.