Swraj Paul had a strong belief in the steel industry, an eye for a deal, and a disregard to pessimists. It proved a magical formula, reports Annabella Gabb.
'I like to take the credit for making the British steel industry fashionable again. I bought what everybody wanted to get rid of and made it profitable. In those days, 1983/84, nobody wanted to touch steel. They thought we were crazy. But I had and still have a very firm belief that Britain can't afford to wind up all its old-fashioned industries. They have a place, providing proper (not big) investment in technology is made.'
Swraj Paul is more modest in manner than his words - and the numerous cartoons of him which adorn his Baker Street office - suggest. An engaging smile hovers close to the surface, ready to break through and belie the astute business sense he talks. Besides, he has good reason to be pleased with his investment. Where once a redundant rod mill lay still, a thriving merchant bar plant now glows red and roars with activity. In the shadow of the 'four queens', British Steel's towering blast furnaces in Scunthorpe, United Merchant Bar is the second largest of its kind in Europe with a 1990 turnover of £61.3 million. It produces angles, flats and channels which it sells to stockholders and steel merchants for use principally in the engineering and construction industries. Some 50% of production goes for export, mainly to Europe.
Nearly a decade ago, few in the industry would have thought it possible that British Steel's No. 1 rod mill, which closed down in 1982, would ever roll again. The 1970s and early 1980s were a time of over-capacity and consequent rationalisation for the steel industry. There was chronic overmanning and productivity problems were rife.
The monopolistic European giants like British Steel, Usinor, ARBED and Cockerill Sambre, which produce up to 15 million tonnes a year were weighed down by bureaucracy. Slow on its feet, BSC simply didn't have the flexibility to handle the smaller tonnages of merchant bar which the market required. Predictably, given the uncompetitiveness of the UK domestic industry, import penetration was high, with the 'backyard' operations of the Spanish and Italian mini-mills making much of the running in merchant bars: instead of using steel made in blast furnaces, they use the scrap meltdown method which is less capital intensive. At that time, British Steel operated two merchant bar mills, one in Jarrow and the other in Monks Hall, Lancashire. Both were old and their equipment obsolete: under government spending restrictions, they had been starved of proper investment for several years. Their location far from their raw material supply (the billets were cast at the Scunthorpe works) meant that transport costs were prohibitively high. All in all, the mills were uncompetitive and losing heavily.
Conscious of the redundant asset at the Scunthorpe works and the hopeless cases at Jarrow and Monks Hall, British Steel management had from time to time mooted the possibility of converting the old rod mill into a modern merchant bar mill and transferring production there. The project had obvious attractions: first, it would provide BSC with a captive market for its billets, yards from where they were produced; at the same time, the removal of the freight bill would significantly improve the cost-effectiveness of merchant bar production. The ultimate saving on transport is some £7 a tonne.
But BSC was not able to go it alone. It had no funds to invest. The Government refused to stump up the cash and told BSC to find a partner in the private sector. BSC approached all those in the UK industry who might be interested, but capacity was such that no one was anxious to go ahead. Indeed, it would have suited the others if BSC's operations had ceased. It wasn't until 1984 that the project came to the attention of Swraj Paul. Lunch with BSC chairman Bob (now Sir Robert) Scholey ended in a joint venture owned 75% by Paul's Caparo Industries and 25% by BSC. UMB started production in 1986.
The attractions for Paul were several. He admits first to a 'sentimental attachment to steelworking, because I grew up on top of a steel rolling mill in India'. His family still retains significant interests in the industry there, and Paul's own portfolio in Caparo Industries includes a number of steel converting businesses. He also has an eye for a good deal. The particular circumstances surrounding the project made it look viable. It required a comparatively low capital investment as British Steel would supply the existing building, utilities and basic equipment. Much of the old steel rolling gear used in rod-making could be used for merchant bar production.
Supplementing this with modern machinery where necessary and state-of- the-art computer controls brought UMB into the forefront of technology. That was one of Paul's conditions for going ahead: 'We said if we put up any investment in the '80s we must have the technology of the '80s.' Swraj Paul's son, Akash, who has been involved from the start and replaced his father as chairman of UMB in July, puts the point in perspective: 'Today it would cost £50 million to put this up; it cost us £12 million'- a figure that additional investment to keep abreast of technological innovation has since pushed up to £18 million.
The other, crucial, asset that BSC brought to the deal was its order book, which gave UMB a ready-made 20% of the UK market on which to build. Akash now estimates UMB's share at 30-35%. Very much his father's son, Akash has, like him, a ready smile. He also has an MBA from Massachusetts Institute of Technology but reckons he has found the lessons learnt from his father more useful.
The entrepreneurial flair of the Pauls has undoubtedly been the key to UMB's success. The project was attractive but risky. As Akash points out, 'Who knew what margins we could get?' But their status as a private-sector operator was significant for another reason. To be successful as a low-cost producer - not just in relation to what BSC could achieve, but also in relation to private merchant bar producers and the world at large - UMB had to achieve the right level of productivity.
The record achieved would have been impossible inside BSC because of entrenched working practices and union power. Paul Lormor, who took over as chief executive in June last year, is still relishing the fresh air of entrepreneurialism at UMB. He spent 15 years at BSC and experienced restrictive working practices at first hand. As works manager at Jarrow before coming to UMB in 1986, he oversaw the closure of the old plant and the commissioning of the new under then chief executive Jim Crossman. While we had a brownfield site for facilities, in employment terms it was a greenfield site,' Lormor explains. 'We were not bound to take on a BSC-style employee package and could make modern labour agreements.' As a result, UMB negotiated a single union deal with the Iron and Steel Trades Confederation. The agreement included concepts unheard of in the former nationalised industry - single status, profit related pay, private medical insurance, a no strike-deal and total flexibility of labour. The latter meant no fixed manning levels, salary awards by management assessment for the first two years, and no recognition of shiftworking or weekend premiums. As Lormor says bluntly, 'You'd never get that at BSC.'
Overnight, productivity soared. Where the two old mills which closed in 1985 and 1986 produced 120,000-130,000 tonnes with 550 employees, UMB's initial target was similar tonnage with just 150 people. 'That was nearly four times the productivity. In the end, we did it with a workforce of 125,' exclaims Lormor, adding proudly that the mill is currently producing 250,000 tonnes with a workforce of 162.
Helped by the buoyant state of the market in the late 1980s, UMB exceeded its original targets by a considerable measure in both volume and profit. The initial investment has been augmented by the recent addition of new plant. As well as improvements to the hot flying shear (to minimise waste when cutting bars to length), this included straightening, stacking and automatic tying machines, to bring the finishing end of the production process up to par with the rolling section. Before, where the molten bars shot down the line to the cooling rack at nine metres per second, they met a bottleneck. With the new equipment, total capacity is now 300,000 tonnes a year - more than adequate in the current climate. But, as Akash is quick to point out, 'We need to be there with the tonnes when the market picks up again.'
Akash Paul is clear about the conditions required to produce merchant bar successfully. 'Efficient conversion means maximising output, minimising manpower; maximising yield, minimising downtime,' he drums out. But under current economic conditions the approach has had to be modified. Says Lormor, 'In good times, you get the orders come what may. In recession, when supply is 5% above demand, you've got to give service to win orders.'
Swraj Paul may rate UMB's bars 'the best in Europe', but in the end they are a commodity product and customer service is the only effective weapon. So, says Lormor, 'Instead of long runs of standard products we're producing more sizes with lower working capital. We've doubled the frequency of changeover compared to last year. Faster service is what maintains market share and we've improved that by a factor of two.'
There has been pressure on prices, which are down some 17%. To protect margins, stocks and working capital have been reduced and costs trimmed even tighter. (Ever conscious of costs, Akash travels by Air Miles and the furnishings in his Scunthorpe office came from his old flat in London.) Despite UMB's relative strengths, 1991 profits will show a significant fall - but the bottom line will be healthier than those of less efficient competitors.
The pursuit of orders led Akash to Europe at an early date. The original plan was simply to chip away at the 30% import penetration; nobody was exporting merchant bars to Europe in 1986. But at that time UMB's range was limited and it was necessary to spread both the customer and the country base. Germany, where no merchant bar producers have survived, was a key target. Swraj Paul maintains that he sent Akash to Germany with a one-way ticket and said, 'Look son, either you come back with the orders or you don't come back.' Germany is now UMB's main export destination, though the policy is still to be small in many countries rather than very big in any one.
In the longer term, Swraj would like to see UMB with a European merchant bar mill. When conditions improve, the more likely expansion will be a broadening of the range, currently up to 250 sizes, to include smaller sizes, which nobody in the UK produces at present. But there are no plans to diversify into round bars, for example. Specialisation has served the company well. By concentrating on flats and light sections and using a single size of billet as feeder stock, UMB's operations have remained simple, and efficient. It has the widest product range for a single mill in the UK. Even so, the market will remain highly competitive and further rationalisation of UK mills is inevitable. But Swraj Paul is sure of one thing: 'I want UMB to be the last surviving one.'