Trade Cases

Leibowitz: Nostalgia shouldn't block Nippon Steel's good deal for U.S. Steel

Written by Lewis Leibowitz

All good things, including but not limited to the Holiday Season, must come to an end. The corporate independence of U.S. Steel Corporation looks like it’s coming to an end also, despite objections from some politicians and the United Steelworkers (USW) union.

On Dec. 18, Nippon Steel Corporation (NSC), headquartered in Tokyo, and United States Steel Corp., headquartered in Pittsburgh, announced their agreement to have NSC purchase up to 100% of U.S. Steel stock for $14.1 billion in cash. Numerous news reports referred to U.S. Steel as an “iconic” company. The term arguably fits U.S. Steel as it once was but is no longer.

Based on what is publicly known about the deal, NSC agreed to buy U.S. Steel’s stock for a price of $55 per share. This was a considerable premium (more than 40%) over the U.S. Steel share price on December 15, one business day before the announcement. (In addition, NSC will assume $800 million in U.S. Steel debt, bringing the value of the deal to $14.9 billion.)

As many readers will recall, U.S. Steel has been in play for several months. Cleveland-Cliffs made an unsolicited offer valued at $7.3 billion ($35 per share) in July of last year, also a more-than-40% premium over the U.S. Steel stock price at that time. U.S. Steel has been a strong performer between July and December.

In rejecting the Cliffs offer, the board of U.S. Steel indicated that there were several offers to acquire the company that needed to be evaluated. The U.S. Steel stock price rose nearly 50% from late July to mid-December. Clearly, the market expected an acquisition to happen.

The reaction to the NSC purchase of U.S. Steel has been mixed. Several members of Congress – including senators Sherrod Brown (D) and J.D. Vance (R) of Ohio, senators Shelley Moore Capito (R) and Joe Manchin (D) of West Virginia – objected to the deal as an affront to U.S. Steel’s workers and a potential danger to US national security. Senators from other states – including Pennsylvania, Florida, and Missouri – have requested Treasury Secretary Janet Yellen, the chair of the Council on Foreign Investment in the United States (CFIUS), to study the merger as a potential national security issue. That will certainly happen, because NSC and U.S. Steel themselves asked for a CFIUS review.

Cleveland-Cliffs CEO Lourenco Goncalves issued a statement in December congratulating U.S. Steel and NSC for making the deal. But last week, at a hearing before the International Trade Commission (ITC), Goncalves joined the chorus of skeptics. He also criticized U.S. Steel for not participating in the trade case seeking new tariffs on tin mill products. The ITC is set to vote on imposing duties in early February. As SMU reported last week, consumers of tin mill products strongly oppose these new duties, which could drive a lot of business offshore in food packing and other industries.

Perhaps more pertinent was the objection to the NSC acquisition by the USW, which supported the Cliffs offer. Perhaps the USW wants Cliffs and U.S. Steel to merge so that only one company making steel in blast furnaces would remain in the United States. That may not be good for the country as a whole.

U.S. Steel management recognized that the company was not viable in the long run as an independent company and accepted the best available offer in the interest of its shareholders. U.S. Steel rightly acted in the interest of its shareholders.

The USW is also behaving in its own interest by advocating for as many protective trade measures as possible. Think antidumping and countervailing duties (on such products as tinplate), Section 232 tariffs and quotas, and Section 301 tariffs on Chinese products. These all make domestic production more competitive and will give more leverage to union negotiators at contract time.

Politicians are generally eager to weigh in on big policy issues, and U.S. Steel being sold to a Japanese company seems to strike them as a big policy issue. Japan was considered a serious economic threat to the United States in the 1980s and early ‘90s. But that landscape has fundamentally changed. China, not Japan, is the big threat now.

Former Trump administration officials took opposite sides on the acquisition. Former Commerce Secretary Wilbur Ross opined in the Wall Street Journal that the objections to the merger were at least partly xenophobic. On the other side, Robert Lighthizer, President Trump’s U.S. Trade Representative, said that he would not permit NSC to purchase U.S. Steel when “there is no free trade in steel.” There certainly isn’t free trade when it comes to access to the US steel market.

Is U.S. Steel so “iconic” that it can’t be sold to a foreign company? Some clearly feel that the sale would be a setback for the prestige of the US economy. This sense of decline is what drives many politicians to oppose the merger. But since Japan is a longtime ally of the US, the strategic security of our country is not really in jeopardy.

U.S. Steel was a major pathbreaker in U.S. history. But it is no longer the powerful symbol of American strength that it used to be. In 1901, when Andrew Carnegie, J.P. Morgan, and others created U.S. Steel, the $ 1 billion market value of the company was equal to nearly 5% of the gross domestic product of the country and was America’s (and the world’s) largest corporation. Today, U.S. Steel’s value of $14.9 billion represents 0.06% of US GDP. It is ranked No. 1,466 in market value among publicly traded companies. It is also less than 0.5% of the highest market value corporation (Apple). U.S. Steel’s “iconic” status is clearly from a bygone era.

It is rare for CFIUS to block an acquisition on national security grounds. And presidential action to block the acquisition, while permissible, is even more unlikely. Still, the next few months will create anxiety. The stock price for U.S. Steel is currently about $7 per share below the $55-per-share acquisition price.

This is a transition time for the steel industry as it adjusts to new technologies, clean steel, and the new realities of world trade. American manufacturers depend on imports because the US industry cannot make enough to satisfy domestic demand. And steel users employ many more workers than do steel producers. In short, the NSC deal on balance looks like a winner for the country, as well as U.S. Steel’s shareholders.

Lewis Leibowitz, SMU Contributor

Lewis Leibowitz

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