On the road to America’s end times, retiree President Biden, aspiring president Harris, and former and aspiring president Trump agree that, at all costs, Nippon Steel must be stopped from acquiring U.S. Steel. That defines an unholy trinity.
Biden will kill the deal, reportedly at the end of September, on the fictional ground that it imperils national security, pursuant to a so-called CFIUS (Committee on Foreign Investment in the United States) review. Harris will do anything to appease union leaders who oppose the deal and win Pennsylvania. Trump sees the deal as antithetical to his America first program, letting an icon of U.S. manufacturing slip into the hands of Japanese owners.
The timing of the deal could not be worse, viewed politically. U.S. Steel is famously headquartered in Pittsburgh ever since J.P. Morgan agreed to buy out his bitter rival Andrew Carnegie in 1901 to form the largest anticompetitive megalith in the nascent Industrial Age. At its founding, it was capitalized at $1.4 billion. It employed 168,000 people, later peaking at 300,000 employees, supplying two thirds of all American steel needs and 40% of global steel production. U.S. Steel continues to have substantial operations in Pennsylvania. In election year 2024, the optics is the reason the deal will die.
Nonetheless, it is vital to understand the real story here. Industrial policy of this sort imperils American economic and national security. Killing the deal weakens U.S. Steel, which otherwise will receive $3 billion in capital to modernize its aging blast furnaces and other assets. It prevents the two world leaders in steel emission reductions from pooling their best-in-class technology, including hydrogen injection into blast furnaces and hydrogen direct reduction of iron ore. Customers will not be offered new and exciting lightweight, high-strength steels. And most ironically, it deprives employees, who already earn an average salary in excess of $130,000, of growth opportunities.
More broadly, it is unwholesome in the extreme to see uncontroversial economic and business truths twisted to party ideologies. Ronald Reagan’s words ring true: “The best minds are not in government. If any were, business would steal them away.”
Take the national security argument. The claim is that steel, as a backbone ingredient to U.S. industrial strength, cannot be owned by a foreign corporation. Leave aside the obvious response that Japan is our ally; that Nippon Steel is a public corporation, not a governmental entity, organized to reward shareholders through innovation, investment, and growth; and that as part of the transaction, Nippon Steel has agreed to extensive special protections of U.S. interests, including maintaining the Pittsburgh, Pa. headquarters and commitment to support all union agreements for employees and retirees, with financial backing and guarantees that do not presently exist.
Nippon Steel’s economic motivation for the transaction runs far deeper and explains why the acquisition affirmatively bolsters U.S. national security.
The underlying background is that Japan’s domestic steel market is in dramatic decline, falling from 94 million tons in 1990 to 59 million tons thirty years later, with worse ahead, even as world steel production is forecast to grow from 2 billion tons currently to an estimated 2.7 billion tons by 2050. The second major fact is that China has expanded capacity, now in excess of 1 billion tons, beyond its need and represents an existential export threat, especially in Asia.
That leaves Nippon Steel with only two practical growth opportunities: India and the U.S., both of which it is pursuing, in a long-term plan to reach 100 million tons of raw steel production capacity, compared to its 66 million tons currently. U.S. Steel would add 20 million tons, though presently it ships roughly 15 million.
A third fact most directly explains Nippon Steel’s interest in acquiring U.S. Steel and provides inviolable security for U.S. interests. Historically, steel is manufactured in blast furnaces from raw ingredients, chiefly iron ore and coal. U.S. Steel is primarily stuck with production from its six aging (and two idled), undersized, undercapitalized, but well maintained blast furnaces.
Led by Nucor in the U.S., the industry discovered a far more efficient alternative for making steel in electric arc furnaces (EAF) that melt recycled scrap metal. Nucor and Steel Dynamics exclusively use electric arc technology to fuel their growth from nascent start-ups, focused on a narrow range of end-use products, into a full range of high-value, high-margin products that dominate U.S. production at a combined 38 million tons. Even more remarkable is their economic performance. Whereas U.S. Steel stagnates at a market value of $6.9 billion, its same value as in the early 1990s, Nucor and Steel Dynamics, over this same period, have rocketed from nominal valuation to over $50 billion today, or roughly 7 times the U.S. Steel shareholder value on 2 times the production capacity.
U.S. Steel, the mythic icon of U.S. industrial strength, is, in truth, a historically poorly managed mid-sized company, of late working hard to adapt in the intensively competitive domestic and global steel markets. By any measure, it is a modest enterprise. It ships less than 1% of global steel. Its market capitalization ranks it a lowly 2,200 in the world. The $15-billion acquisition price compares to $3 trillion in global M&A transactions. Its employment has shrunk from a peak of 300,000 to 22,000 employees currently. Its ownership ought not be the concern of U.S. presidents.
So why is Nippon Steel interested in U.S. Steel? Because Nippon Steel also relies primarily on blast furnace technology, but with furnaces operated at far higher capacities and technically more advanced. In fact, Nippon Steel owns the best technology and R&D portfolio in the world for blast furnace steel production, including advanced programs to substantially reduce CO2 emissions.
So here is the key to understanding the transaction. Although electric arc is a superior technology, given the growth in steel demand, there simply is not enough supply scrap metal in the U.S. or globally to support the transition to all–electric arc technology. The major blast furnaces in the U.S. are here to stay. With the transfer of its world-class technology and operating knowledge, Nippon Steel knows that it can substantially improve U.S. Steel blast furnace performance, profitability, and emissions profile.
From that basic structure, U.S. Steel brings three unique advantages. Most importantly, it has endless access to extremely low-cost iron ore reserves, the economic base that supports U.S. Steel. Second U.S. Steel has a stable customer base, capable of growth, to which it supplies an excellent and growing suite of high-performance steels. Finally, through the acquisition of Big River, U.S. Steel has at last entered the electric arc business, buying one mill, with a second world-class EAF mill nearing completion.
In sum, unlike semiconductors, steel production cannot be moved, regardless of ownership. Localized steel production is the permanent reality. No possible development, economic or technical, can alter this fact. As a result, there is zero national security risk from a change in ownership. Quite the opposite.
Nippon Steel’s sole economic opportunity is to strengthen U.S. Steel in the U.S. Its own Japanese market is in terminal decline. China is a mortal threat, leaving only the U.S. and India as viable, and growing, markets, with U.S. Steel as the perfect fit for Nippon Steel’s business model and technologies. It also provides a unique means to leverage its expertise for the benefit of its shareholders, which explains why Nippon Steel made, by far, the best offer for U.S. Steel, at $55 per share in cash versus the bid by U.S.-based Cleveland-Cliffs, fraught with antitrust concerns, of $35 per share in cash and securities.
And yet the deal will die. The life-saving capital and technology transfer to modernize U.S. Steel’s blast furnaces will not occur. U.S. Steel, and the U.S., will not benefit from Nippon Steel’s advanced efforts to substantially reduce CO2 emissions for integrated steel manufacturing. U.S. auto manufacturers and other customers will not be able to buy new, leading-edge products. Employees will lose growth opportunities and the ability to benefit financially from improved economic performance. The press narrative on U.S. Steel will revert instantly from iconic U.S. manufacturer to the customary scathing coverage of big steel as the enemy of unions, centered on closures. Not least, U.S Steel shareholders will return to decades of stock stagnation, as the stock has plummeted back to $30, versus the $55 cash offer, with no financing contingencies, on the firm expectation that President Biden will officially kill the deal within the month.
The final word belongs to our last unabashed pro-capitalist president, Ronald Reagan. “Status quo, you know, is Latin for ‘the mess we’re in.’”
Flickr, CC BY-SA 2.0.
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