America's Blocking of U.S. Steel Deal Hurts Japan Alliance and U.S. Workers
Nippon Steel’s persistent proposal to acquire U.S. Steel has seemingly come to the end of the road as President Biden and President Trump both remain firmly opposed to the deal.
On the other hand, supporters include U.S. Steel executives, shareholders, and relevant labor unions. We live in a strange world.
Especially since South Korea’s Hanwha Ocean is acquiring America’s iconic Philadelphia Shipyard for $100 million.
Since this U.S. Steel transaction also involves one of America’s most iconic companies as well as Japan, our most important ally, it is a political hot potato for sure. In addition, the proposal landed amid a heated election 2024 with the company based in the key swing state of Pennsylvania.
U.S. Steel is not the titan it once was.
It is now the fourth-largest steelmaker in America by revenue; and the leader Nucor (NUE) has a market value four times greater than U.S. Steel’s.
From the largest company in the U.S. by market capitalization in 1901, it now ranks as the 779th largest.
To understand where we sit today, we need to look back at the history of steelmaking in America.
Frontier Group research points out that between 1920 and 1955, the amount of steel that could be produced by a single U.S. production worker in an hour more than quadrupled. More recently, between 1990 and 2021, steel mill employment in the United States fell by 58%, while productivity more than doubled.
The trend is clear. American steel mills now produce roughly the same amount of steel with increasingly less workers so only about 10% as many people work in the U.S. steel industry as they did in the 1950s.
Increasing productivity is one (good) thing, decreasing demand is another.
By 1980, almost all U.S. households already had a car, and more than half had two or more. Then, advancements in technology moved producing steel from the iron ore and coal steelmaking that made western Pennsylvania legendary to manufacture of steel from scrap in less labor-intensive “mini mills.” This is basically recycling and accounts for about 30% of steel manufactured worldwide today.
Putting the politics and history aside for a moment, let’s explore if this deal is good for America and then what investors should do if they now hold U.S. Steel (X) or are considering buying it.
Let’s begin with that in poker terms. America’s ace in the hole is its openness to international investment. This is especially true at a time when America clearly needs capital investment to rebuild the sorry state of its industrial and defense base.
International direct investment has been and is important to American jobs, manufacturing, innovation, and economic growth. By investment I mean foreign direct investment (FDI) – when companies headquartered abroad build facilities, purchase equipment, hire workers and create products and services in the United States.
For the most part, America treats international companies investing and operating here on par with American companies. Therefore, America consistently leads the pack as the world’s top destination for FDI. This is important because oftentimes international investment drives exports.
These subsidiaries of international companies make a significant contribution to America’s economic growth. Roughly, 20% of the American manufacturing workforce and about half of all American manufacturing jobs created in the last five years are due to international investment. International investment accounts for nearly 7 million high-paying jobs in America, and these subsidiaries of international companies produce 22% of total U.S. exports.
Now let’s get back to ally Japan and the current proposal for Japan’s Nippon Steel to acquire U.S. Steel.
Nippon Steel, the world’s 4th largest steel company will do more than just inject new capital and technology into U.S. Steel, which is currently ranked 27th in the world. Under the agreement, U.S. Steel would retain its iconic name and Pittsburgh headquarters, and steel will remain mined, melted, and made in America. Importantly, Nippon Steel will honor all pay and benefit agreements with the United Steelworkers.
After all, even after the buyout, U.S. Steel would keep its name and the transaction would allow the merged company to be the world’s second-largest steelmaker, after China’s Baowu Group. China now makes 50% of the world’s steel.
U.S. Steel’s aging blast-furnace facilities in Mon Valley, Pa., and Gary, Ind., still need major fixing, and it lacks the funds or the credit line to fix them.
In 2023, U.S. Steel’s revenue fell 14% and profits fell 65% and it is likely that if Nippon Steel doesn’t come to the rescue, U.S. Steel’s Mon Valley Works with 3,000 workers would be closed, and the company would probably move headquarters from Pittsburgh to Arkansas.
What I hate the most about the Nippon Steel deal ?
US Steel chief executive Dave Burritt stands to receive a $70 million change-in-control bonus if the merger deal goes through.
This is outrageous.
But if America is to strengthen its Pacific alliances and move from debt-fueled to investment led economic growth, it needs to be open to reciprocal international capital and investment.
Reliability and consistency matters in foreign affairs because trust is the coin of the realm.