Japanese Deal to Buy US Steel Should Proceed to Bolster Ties

Although it’s a political hot potato, there’s no reason in my mind why Nippon Steel NPSCY and T:5401 shouldn’t be allowed to proceed with its US$14.1 billion deal to purchase U.S. Steel X.

President Biden welcomed Japanese Prime Minister Fumio Kishida with a banquet in his honor last night, with the likes of Amazon AMZN founder Jeff Bezos, Apple AAPL CEO Tim Cook, Blackstone BX president Jonathan Gray, Softbank Group SFTBY and T:9984 founder Masayoshi Son … and Robert De Niro and his “plus one” on the guest list.

It’s part of a state visit that continues today with three-way talks that also include Ferdinand Marcos Jr., the president of the Philippines. It’s the first time those leaders, lynchpins of democracy in the Asia Pacific region, have met for a trilateral summit.

The White House says this is a “tremendous week” for President Biden’s Indo-Pacific strategy. And it’s true that Biden has done plenty to build bridges with American allies in Asia, after a period of relative diplomatic neglect by the United States.

Kishida and Biden have brushed aside questions about the U.S. Steel deal. But it is strange to see the United States and Japan reaffirm their military alliance, which the leaders say is seeing a significant upgrade, while the US Steel merger is being opposed on nationalist sentiment and national-security concerns.

I get it. It is chastening to see a major steel producer “fall” into the hands of a foreign company. We immediately think of tanks and munitions coming under the command of, in this case, a World War II enemy.

But the truth is that the US steel industry is not competitive. Chinese producers are able to churn the metal out at a fraction of the cost, leading to accusations they’re “dumping” it below cost. It’s painful to see the Rust Belt rust away, but the US future is in higher-end tech, not cheap, 20^th century production lines.

What’s more, Nippon Steel already owns and operates steel production in the United States, with a 50-50 joint venture with ArcelorMittal (MT). The partners purchased a steel-processing plant just outside Mobile in Calvert, Ala., in 2014. So AM/NS Calvert has been producing 5.3 million tons of flat-rolled carbon steel per year for a decade already, without issue.

ArcelorMittal itself was formed by the hostile takeover of Luxembourg-based Arcelor, a rollup of three European steel producers, by Indian rival Mittal Steel. You can see the shape of things to come. Mittal already gobbled up close to a dozen U.S. steel producers, including International Steel Group, formed to buy the assets of bankrupt US steel companies.

The Committee on Foreign Investment in the United States is reportedly currently reviewing the US Steel-Nippon Steel tie-up, an investigation that may take months, potentially leading even into next year. 

But that committee, which never normally confirms its investigations, normally scrutinizes acquisitions by companies based in nations with an adversarial relationship with the United States. It’s not clear if the committee should or even could block a buyout by a company from an ally – an increasingly important ally, at that.

Pillar II of Defense Alliance

The United States, the United Kingdom and Australia are now considering including Japan in the second generation of the AUKUS defense partnership. Where “Pillar I” involves the development of nuclear-powered submarines, and would involve only those three nations, Japan is top of the list for inclusion in “Pillar II” to deliver advanced military capabilities with “like-minded partners” such as Japan.

The United States needs to keep allies like Japan and the Philippines close, at a time of greater protectionism, authoritarianism, and waning prospects in many nations for democracy. It needs talks like those taking place today, and deals like this.

Nippon Steel’s bid to buy US Steel will find stern opposition from labor unions – it’s notable that Biden invited David McCall, president of the United Steelworkers, to Kishida’s state dinner – as well as the US Justice Department, which will examine it on antitrust grounds.

The two companies hoped the merger would happen in Q2 or Q3. But it looks like the reviews may push it past the November presidential election, and if that happens, it’s sure to be a vote-grabbing issue. Biden has said he would prefer US Steel to remain domestically owned, but hasn’t said he would block the deal. 

Donald Trump, on the other hand, has said he would seek to block the buyout, even though it would help with the balance of payments offsetting the kind of trade deficits that the Republican challenger rails against.

If Nippon Steel does successfully buy US Steel, it would control around 20 million tons of steel capacity in the United States. Cleveland-Cliffs CLF, the largest US flat-rolled steel producer, had a 2023 steel product volume of 16.4 million tons. So the Justice Department review will consider what level of competition Nippon Steel would continue to face. 

The greater issue, though, is that China in 2023 produced 1.02 billion tons of steel, compared with the 80.7 million produced in the United States, and the 87 million made in Japan. India was a distant second to China, at 140 million tons.

Cleveland-Cliffs had proposed a US$7.3 billion deal to buy US Steel in 2023. But that merger, which was endorsed by the United Steelworkers, was rejected by US Steel, which said it had received other offers. And indeed the US Steel share price, at US$42.61, is well above the US$35 per share that Cleveland-Cliffs said its offer was worth. The stock is up 87.5% since the bidding war began last August.

Nippon Steel, which already employs around 4,000 US workers, has pledged not to cut jobs if it is successful in its purchase, to keep US Steel’s commitments, and to move its US base from Houston to the US Steel headquarters in Pittsburgh. It is also offering access to its 2,000 North American patents and higher-end technology for producing, for instance, electromagnetic steel sheet.

US Steel would rather accept its offer, at double what a domestic rival was willing to pay. Whether that’s acceptable in an election year is highly questionable. But US Steel has long suffered from higher wages and production costs than can be achieved abroad. 

The alternative is likely wilting away in the face of foreign competition, and imported steel from China and India. The gradual attrition would ultimately result in far higher job, and investor, loss.

At the time of publication, Alex Frew McMillan had no position in the securities mentioned.