In December 2023, Japan's Nippon Steel agreed to acquire the struggling U.S. Steel in a win-win deal that would bring much needed capital investment to help restore the ailing steelmaker's competitiveness and preserve over 4,000 union jobs in Pennsylvania and Indiana. Then politics interceded.
On Jan. 3, President Joe Biden quashed the deal, citing national security concerns.
"This acquisition would place one of America's largest steel producers under foreign control and create risk for our national security and our critical supply chains," according to a statement released by the White House.
Opposition to the acquisition came from politicians in both parties, including President-elect Donald Trump, who also vowed to kill the deal if it got past Biden.
Ironically, it is the rejection of the merger that threatens U.S. supply chains and national security in the long run. In the absence of massive investment, U.S. Steel cannot compete with cheap Chinese steel flooding the global market, a deliberate tactic aimed at weakening America's economy.
U.S. Steel was founded in 1901, in a combination arranged by J.P. Morgan that brought together Carnegie Steel, Federal Steel and National Steel into a behemoth that controlled over 60% of all domestic production. It became the largest corporation in America, with an annual production value double the size of the entire federal budget, and at its peak in 1943 employed 340,000 workers.
During the post-WWII years, the iconic corporation's fortunes flagged as costs skyrocketed and global competitors captured market share. The steelmaker resorted to closing mills, laying off workers and selling off bits and pieces to stay alive, constantly starved of essential capital for reinvestment into modernizing its facilities.
Today, it is the No. 3 U.S. producer with 14,000 employees, including just 11,000 union workers. If there was an S&P 1,000, U.S. Steel wouldn't even make the cut, ranking 1,028th in market capitalization behind Trump's Truth Social. In 2023, the beleaguered firm began soliciting a buyer.
The No. 2 U.S. producer Cleveland-Cliffs made a low-ball offer that was quickly rejected, setting the stage for Nippon's more attractive proposal. Its $14.9 billion cash bid represented a 40% premium to the market value of U.S. Steel, extending a lifeline to shareholders as well as employees.
Nippon also agreed to invest $2.7 billion in upgrading and modernizing U.S. Steel's aging facilities and to share the fruits of its $500 million annual research budget. For example, Nippon has developed a new blast furnace technology that partially replaces coke from metallurgical coal with hydrogen, slashing its carbon footprint by a third. This technology would only be available to U.S. Steel if Nippon can proceed with the acquisition.
The president's stated objection to the acquisition hinged on the potential risk that Japan could decide to hinder American steel production for defense if the two countries' national interests become misaligned. Such a geopolitical realignment would be seismic for any number of reasons, but U.S. access to domestic steel production is hardly one of them.
Consider the following:
First, the amount of steel used in American defense contracting each year represents between 1% and 3% of total U.S. production. Furthermore, the American steel industry operates at less than 75% capacity. It's not hard to do the math. And U.S. Steel accounts for just 18% of all U.S. domestic output. Meanwhile, guess how much material U.S. Steel currently provides to the Pentagon? Answer: zero.
Second, Japan is a key ally and our most important strategic partner in Asia, with 60,000 American service members stationed across seven bases in Japan. Furthermore, Japan depends upon the U.S. for 90% of its national defense imports.
Third, aside from being an important counterweight to China's influence in Asia, Japan is a critical economic partner. For instance, Japanese auto assembly plants in the United States employ 100,000 U.S. workers and produce 3 million vehicles per year, making Japan our largest foreign investor. Foreign direct investment, that is, capital from foreign investors inside the United States, is responsible for 10% of all U.S. jobs.
China is engaged in an aggressive campaign of dumping cheap steel on the global market, in part to destabilize American economic vitality. Thanks in part to the collapse of the Chinese building industry, the country's total output of steel exceeds its own internal demand by 8%. That 8% surplus is equivalent to all the steel produced annually by American mills.
Not only is rejecting the Nippon investment detrimental to our own national security, but it will likely result in job losses for workers. Given its high-cost structure and antiquated technology, U.S. Steel is not competitive in the global market and simply does not have the capital available to invest in modernizing facilities. CEO David Burritt has stated that if the deal collapses, the company would likely shutter its blast furnaces in the Monongahela River Valley and Gary, Indiana, and relocate its corporate headquarters from Pittsburgh to Alabama.
It is particularly telling that while the head of the United Steelworkers Union opposes the deal, most of the union's local leaders strongly support it. Union officials in Indiana and Pennsylvania represent that 95% of their members favor the merger, many of whom turned out for rallies in support of Nippon's offer.
As Volkswagen's successful venture in Chattanooga demonstrates, America benefits from foreign investment. Scotching the Nippon deal with U.S. Steel is an insult to a critical and loyal ally that will cost American jobs and weaken U. S. national security.
Christopher A. Hopkins, CFA, is co-founder of Apogee Wealth Partners of Chattanooga.