Sanjeev Gupta, executive chairman of Liberty House
Gupta founded Liberty House Group while studying at Cambridge University in 1992, but trading in steel and steel-based products and the desire to build fully integrated supply chains is deeply rooted in family business history.
Gupta’s father, PK Gupta, set up a bicycle and bicycle parts business in Ludhiana, India, in 1955. The business eventually exported to over 70 countries globally. During the Biafran War (Nigerian Civil War 1967-1970) consignments got stuck in Nigeria.
“That’s where it all began,” Sanjeev said. PK Gupta could not rescue his actual consignments, but was given the option to pick alternative consignments stuck at the port. The bill of lading listed over 1,100 pieces and so he went to collect items from the warehouses, looking for the most valuable things. One of the first items was a Rolls Royce.
“My father then sold all the pieces on the market in Nigeria. That was the birth of the Nigerian operation which is still among the largest industrial groups, certainly in steel, in Nigeria,” Gupta said.
Another generation back in the family history, Sanjeev Gupta’s grandfather operated steel mills in India. “Steel was always there from the very beginning, as I was growing up and as I started Liberty,” he said.
Launching Liberty House
When the business was launched, Liberty House traded many products and commodities with the main areas comprising steel, soft commodities and chemicals and fertilisers.
“At one point we were trading in over 70 product ranges from frozen fish to televisions and various consumer goods – anything that a growing African country needs,” Gupta said.
Eventually the company dropped soft commodities, which had been vying for first position in the business group with steel.
“We were the largest shipper of rice and sugar to Nigeria and other countries in Africa. But it wasn’t yielding a good return, overheads were high, demurrage was high, freight went through the roof at one point, so that’s when we decided to exit,” he explained.
Through various phases of consolidation, Liberty narrowed its focus on metals and steel-based trading.
Liberty House Group comprises two businesses – Liberty Commodities Group (LCG) and Liberty Industries Group (LIG).
LCG, with a projected turnover of $3.8 billion and earnings before interest, taxes, depreciation and amortisation (Ebitda) of $48 million for 2016, operates from four main hubs in London, Dubai, Singapore and most recently Hong Kong. LCG ceo Paul Francis joined Liberty House in 2008 after working with leading banks, including Société Générale, Credit Agricole and RZB.
“The roadmap for Commodities for the next ten years was to completely de-risk the business so it is not really a trading business anymore, which is also the evolution of traders in my mind,” Gupta said.
“We provide services, finance, logistics, hedging, outlook and information. We always take principal. We are not a broker. But we never take risk. The model is to de-risk,” he went on to emphasise.
The business measures value-at-risk (VAR) very carefully and a VAR limit is put on each counterparty, which is constantly assessed, and the company does not hold any positions or stock. On the non-ferrous side that is different, but Gupta emphasises that everything is hedged as a reflection of the change in business model.
In the previous development phase of the business, the company would take positions and balance the book with longs and shorts. “Now everything is mapped one-to-one. So we buy and sell, buy and sell. We provide a service,” he said.
A central piece to this strategy is to bring customers and suppliers together. “As a general practice, we encourage suppliers and customers to meet and we sit in the middle of it,” Gupta said.
Liberty House may have dominated the news headlines in recent months for its interest in UK steel assets, but in trading terms at LCG, it is non-ferrous markets that have become more prominent in its activities.
“Non-ferrous is growing. Three years ago, it would have been 25%, today it is more than 50%,” Gupta said. “We always have a lot of inventory on non-ferrous in LME warehouses. We are probably one of the largest nickel traders in the world.”
The non-ferrous side of the business emanated from India, but now only a small percentage is related to India. Today, China is by far the biggest destination. “The vast majority is China, by far the biggest destination for us.”
Their customers in China use non-ferrous trades, particularly nickel, for arbitrage purposes.
“A steel mill will buy nickel on credit or on LCs, and then sell it for cash, so it is a good treasury product to manage,” Gupta explained. For Liberty Commodities, activity remains focused on the physical and all material is shipped. As of today, the company does not engage in paper trading, but may consider it in future.
On the steel trading side, LCG’s three largest market segments are billet, slab and hot rolled coil (HRC). Material is sourced globally including China, CIS, Turkey, Middle East, North and South America.
“We are probably one of the largest ferrous traders in the world today,” Gupta said. “In terms of a true global footprint, I can’t think of anyone else like us today.”
Gupta puts the company’s successful steel trading operation down to the fact that the company is diversified and does not only concentrate on steel. He admits that a single focus on steel would be a struggle, but in fact, steel trading only makes up a small part of the overall business.
“You need a large-size company to be a global player, which is difficult. The returns don’t justify the overheads. But if you can divide overheads, among various businesses, it becomes easier,” he said.
Liberty’s presence in other industries strengthens its presence in the trader world and allows it to leverage its assets. “It is not easy to trade steel slabs as a commodity, but because we are also a consumer, it is very easy for us to buy.
Everybody wants to sell slabs to us, but we can also trade it, which will be tougher for a pure trader,” Gupta said.
While some Chinese mills have become more active in trading themselves, Gupta does not see them as an immediate threat to his business and insists that there is a still a strong need for their services.
“Chinese counterparts often renegotiate, especially when the market has been so volatile. That becomes difficult for end-customers to handle. So they need somebody who can hold their hand,” he said.
Customers also require financing services and funding which is not something that Chinese trading companies offer yet, and the insurance banking business is not very evolved at present in China.
Trade cases and protectionism
In the debate in the UK about the demise of the domestic steel industry, much of the discussion has focused on cheap imports from China.
The same is echoed in other countries in continental Europe and the European steel association, Eurofer, has successfully lobbied for the launch of a number of anti-dumping investigations by the European Commission in Brussels.
How does a global steel trading company view such protective measures?
“I’m not a protectionist. I believe in a free market and in competitive forces,” Gupta said. “Protection stunts your competitiveness and makes your industry lazy. But more than anything else, it hurts the real customer, the industry.
“Having barriers on steel imports increases the domestic prices for steel which then has an impact on downstream customers, which are the real value of the economy in terms of engineering businesses, automobile businesses.
“All the value-added downstream businesses suffer because they have to pay higher prices,” he went on to explain.
Liberty owns various businesses in the Midlands, UK, which are effectively downstream customers. These include manufacturers of automobile components and other value-added products.
Gupta believes that focusing exclusively on high-end customers only and leaving supply of commodity-grade material to imports from China – which has become an established trend among steelmakers in Europe and other developed steel markets – is a self-defeating process which inevitably leads to the import segment to grow.
“Some of the products we use are made in China and are imported under our own brand into the UK. Slowly every year that percentage increases. […] Before you know it, it is all gone,” he said.
The UK imports 11 million tonnes of products made of steel each year. That is in addition to 6 million tonnes of actual steel imports.
“We [UK industry] are polarising ourselves to making very high end products, and slowly letting go of the industry. And millions of jobs have gone in the process. This is not necessary.
“If you let competitive forces play and focus on making your industry competitive, eventually you can stem the tide and turn the tide and we [Liberty] are doing that,” he said.
This desire for downstream integration is reflected in Liberty’s investments. It took management control of the former Mir Steel plant in Wales, UK – now Liberty Steel Newport – in 2013. In October last year, the company resumed operations at the 600,000 tpy HRC steel plant in Wales.
Shortly thereafter, in November 2015, it acquired UK-based Caparo Tubular Solutions, a leading manufacturer, distributor and supplier of advanced tube components and parts for the automotive and aerospace industries, headquartered in Oldbury, West Midlands.
“When we bought the steel mill at Newport, there was definitely the plan to go downstream. One of the Caparo businesses is the tube business which integrates perfectly with the Newport steel mill,” Gupta said.
In a next step, Liberty bought the two 200,000 tpy steel plate mills at Dalzell and Clydebridge in Lanarkshire, Scotland, in March from Tata Steel Europe. On May 16, Liberty announced that it will restart steel tube and pipe manufacturing at its Tredegar steelworks in South Wales in June.
The plant had been inactive since Liberty acquired it from Caparo Tubular Solutions last November.
“In isolation Tredegar struggled and went bust. The price of hot rolled coil in the UK is too high and overheads were too high,” Gupta noted. “We treat it as one business. It is going to be managed and run by the steel mill and the workforce will be integrated – and more importantly, the hot rolled coil. We look at it as one product.”
This means that when Liberty decides to grow its market share in the UK for HRC, it is selling tubes. “We look at the total contribution of the business rather than individual. That is positive and enables us to have margin,” he said. Production at Newport currently stands at 10,000 tpw.
High energy costs
Liberty will import steel slabs to its own port in Newport to feed the rolling mill, rather than use the on-site electric arc furnace to produce its own slabs, because of the high energy costs in the UK.
The UK government announced on December 17, 2015 that it secured European Commission approval to grant state compensation for the cost of renewables to energy-intensive industries, including the steel industry. The levy cost companies £4.5 million ($6.54 million) a month, according to British industry body UK Steel.
Gupta welcomed the successful request for approval, but says that more work is needed to ensure fair competition and a level playing field for all market participants. “It is a great help, but there is still more to do.
We are still uncompetitive,” he said. “Either you give us a level playing field with no barriers, and the same support systems our competitors enjoy. Or it is a case for protection.
“But I think in an eye-for-an-eye situation, everybody is blind. I’m in favour of the opposite. You deregulate some issues and find logical solutions.”
Focus on the UK
Looking at the timeline of how the Liberty business has evolved since its establishment in 1992, the focus on the UK since 2013 stands out. The same applies to Simec, the international resources group focused on sustainable energy, mining and infrastructure assets led by his father PK Gupta.
Simec acquired the 395 MW Uskmouth power plant in Newport, Wales, which recommenced production in April 2015. The company also committed to an eight-figure investment over time in the Swansea Bay Tidal Lagoon Power project in February 2016.
A new corporate structure is now in the process of being implemented to underpin the vision of a ‘new agile, sustainable, non-cyclical integrated global business model’, as it states in the corporate brochure of GFG, the Gupta Family Group, which is an alliance between PK Gupta and Sanjeev Gupta’s business interests. Sanjeev Gupta put the heightened interest in the UK down to circumstance.
“The UK is clearly at a flux point. I’m confident and I will certainly champion that we will see some kind of renaissance in the industry. What degree and what extent we have yet to see,” he said.
Much of his vision for steel in the UK centres around the growing availability of steel scrap and he points at studies that show domestic scrap generation will double from 10 million tonnes today to 20 million tonnes in the next ten years.
He also highlights Simec’s investments in renewable energy and the plan to convert the Uskmouth coal-fired power plant, which is currently capable of co-generation with biomass, to full biomass. It is clear that those events follow one vision.
“The country will have home-grown energy and home-grown raw material – steel scrap. So that gives a real competitive edge,” he said. “We can make the steel industry competitive. It doesn’t need protection.”
Made in Britain
Liberty has linked up with Julian Allwood, Professor of Engineering and the Environment at the University of Cambridge.
His research team is going to survey and map out every single tonne of the 11 million tonnes of products made of steel imported into the UK at the moment: what it is, where is it made, and where it was made previously.
Then Liberty plans to map out the upstream. The idea is to identify where the company’s own steel could be used, and where there are gaps that require investment or innovation.
“We will certainly participate in filling the gaps, but we will also encourage other businesses and the government to help.”
Liberty’s position in this market is that of a steel producer.
The aim then is to align as much production as possible to downstream production, in operations that are either owned by Liberty or in partnerships. “We already have a steel plant. We already have bought an arc furnace from Thamesteel which we are moving over [to Newport most likely].
So we already have a blueprint for 1.5-2 million tonnes of integrated EAF based on scrap, making hot rolled coil.”
The central point of this plan is to be integrated end-to-end as much a possible from the steelmaking raw material to the final finished product. Steel capacity within GFG as a whole is around 5 million tpy.
Liberty has capacity of around 2.5 million tpy. While the vision is large, this does not translate into a specific target for capacity growth.
“It is not about numbers for me. It is a journey. How far we get in terms of scale will be determined by opportunities and market forces. But the direction is clear,” Gupta said.
At the same time, the desire and energy is palpable in Gupta’s decisive gestures and speech which barely leaves room for sentences to complete. Vision, plans, actions get stacked up in staccato sentences. There is a ‘going-places’ energy in the office.
“We are at a point with the company where we need to grow. We have no long-term debts on our books. The family is moving on properly to the next generation,” he said. “There is dry powder to do stuff, as I call it.”
The company likes to describe itself as lean, agile, flexible and quick to adapt. With the amount of investment that has gone into assets in recent years, it might become more difficult to retain those attributes.
“I’m worried, obviously, but it is a good challenge. What we would like to do is to turn businesses that we acquire into our model. So we need to assimilate them,” Gupta noted, adding: “Assimilation is as two-way process, so we will also get changed as part of the process.
“We won’t remain as agile as we were when we were smaller. But we will continue to strive to use that model. We will try to stay agile.”
The alignment and de-coupling of businesses is key to this process. Behind that sits careful reflection of how trading companies have to evolve in order to survive in changing markets. Trading started off with merchant traders who would travel the world selling goods.
This evolved into companies with more organisational structure, but still essentially moving goods from one location to another. After that traders started to take positions and balance their book, until we come to the trader of today: fully hedged or “de-risked”, as Gupta likes to call it, and to all intents and purposes a service provider.
So what does the trader of tomorrow look like? “Tomorrow: it’s a marriage, a marriage between different parts of the industry. It is this de-coupled and aligned approach. Independent businesses but aligned to each other,” he said.
As much as Gupta envisions a revival in steelmaking and the re-emergence of an industrial supply chain in the UK, he also believes that this needs to happen in a sustainable low cost and low carbon way.
This comes back to the growing availability of steel scrap and renewable energy resources and with that a transition from blast furnace to EAF production in the UK.
But Gupta is a little concerned that Liberty’s ‘green steel’ plan has been overstated and wrongly led to the perception that should the company’s bid for the remaining Tata UK steel assets be successful, a closure of the blast furnace would be imminent.
“Primary steel will remain in the UK. Somehow there is a perception that we just want to go from one to the other. Perhaps it’s a little bit of miscommunication. We are not saying that at all. What we are saying is we would look to add upcycling, recycling, to primary and over time look to evolve,” he said.
Ultimately, this may not even be a question of one technology over another, but a blend of both production processes. “Steel recycling is all about processing the raw material. So if you can clean your scrap properly, actually you can make virtually everything. In the USA they do.
“Recycled scrap goes into high-end applications,” he said. Steelmakers in the USA have invested money and time on their processing and the same will need to happen in the UK.
Over time, processing will improve, melting and refining will become better. It is ultimately a vision that not only applies to the UK, but to the whole world.
“China is going to be a massive mover on this. There is going to be a lot of investment by everybody, the world at large, on technology, on full recycling. The world wants to become greener, China wants to become greener. Everybody becomes more conscious so that there will be the right amount of economic equilibrium between pollution and progress,” Gupta explained.
Most of the 6 million tonnes of steel that the UK imports each year is commodity-grade material, Gupta points out, and marks those imports as tonnage that could be easily substituted by domestic scrap-base production.
“Maybe we’ll end up still with a nucleus of primary. Maybe, in 20 years’ time, we still need 10-20% of production as primary, because there are certain things that benefit from that method.”
Gupta is visibly inspired and excited by the opportunities that have opened up in the UK, but this energy could easily be channelled into other directions.
The outcome of the sales process of the remaining Tata UK assets is a critical junction for the UK steel industry. For Liberty it is a crossroads of opportunities. The result of Tata’s decision will have a strong impact either way on the next direction for the company.
“The current situation makes it compelling to look at the UK. This is why I’m here. And if it happens, it will be amazing. We’ll have a great job to do,” he said. “It is legacy that we would leave behind. It is a very exciting opportunity. If not, we have other exciting things to do.”
UK referendum on EU membership
The impact of EU regulation on market conditions in the UK also plays on Gupta’s mind in light of the upcoming UK referendum on June 23 on whether to stay in the EU. He admits that the debate worries him immensely.
“I’m very much torn like many people in the country, but Europe is our biggest trading partner. So on balance it would be crazy for us to get out of Europe. The world is becoming more and more open.
“We can’t go backwards, we need to go forward. And at least from an economic point of view, the more free access we have the better,” he said.
But in policy terms, lines between the EU and UK are already blurred and can lead to confusion and delays.
While the UK levy on renewables is a UK specific tax, it is not something that the UK government could just remove without approval from Brussels since it could be seen as state aid in favour of certain industries.
This means that once you decide to be part of a union, you will also have to defer to collective decisions.
“There are arguments in both cases. Certainly for our specific industry, energy policy would be much easier if we didn’t have to go through Brussels,” he admits, “but on balance I think the country would suffer far more from being out than in.”
This article was first published in the June 2016 issue of MB Magazine, which carries in-depth feature articles, analysis and reviews of metal and steel markets.