Price: Is It Nippon Steel USA or a partnership? And what does that mean for imports?

Nippon Steel says in its own documents that U.S. Steel will be a “wholly owned subsidiary”. (Editor’s note: See slide 10 in the presentation here.)

The document makes clear that Nippon Steel, through Nippon Steel America, will have “100% ownership of [the] common stock.” (See slide 4 here.) So if you want to own an interest in U.S. Steel’s future success, you will need to buy shares in Nippon Steel on the Nikkei stock exchange. It certainly will not be in your domestic S&P 500 ETF.

The term “partnership” might be bandied about. But by any legal definition, this is not a partnership because there is only one single owner: Nippon.

True, the “Golden Share” and a national security agreement give the US government the certain rights. Those rights are below:

• To appoint and remove one independent director
• Consent rights on specific matters such as changing U.S. Steel’s name and headquarters or redomiciling U.S. Steel outside the United States
• Transferring production or jobs outside the United States
• Material acquisitions of competitors
• Certain closure and idling decisions for existing facilities (except temporary idling)
• Actions on trade, labor, and sourcing outside the United States

The government has no other voting rights, no right to receive dividends, and it can’t transfer the share. Other provisions about having U.S. citizens in key management roles and certain board positions are little more than window dressing. In the end, Nippon controls the board and management regardless of citizenship, subject to certain important, but limited, U.S. government veto rights.

This raises a few interesting questions

First, with the collective bargaining agreement expiring just before the midterm elections, is the President Trump prepared to be leveraged in labor negotiations? We doubt that the president intends to be involved. But what about the United Steelworkers (USW) union leadership, which has opposed the deal? One can only assume they intend to work every angle.

Second, and perhaps more critically for the steel industry’s overall health, the US industry has shown great resilience because the government has allowed old capacity to exit and new capacity to enter. If an administration blocks rational market behavior by Nippon in the United States, it may just force another domestic company to permanently shut plants if we have excess capacity. This can only be avoided by reducing import supply further.

There are other interesting details in Nippon’s presentation on the acquisition. To start, the business plan assumes a 10 million metric ton increase in domestic industry production at the expense of imports. That’s great if it happens. But are Japanese, Korean, and European steelmakers, among many others, willing to give up their exports as part of any Trump tariff negotiations? We are not holding our breath.

Just about every foreign government wants to be exempt from tariffs or quotas. Will Japan voluntarily step up first and agree to terminate its exports? And, if Nippon has the resources to buy U.S. Steel and invest at least $11 billion in new plants and equipment at U.S. Steel, will Nippon also renounce Japanese government subsidies to build a standard EAF in Japan? Given the U.S. Steel acquisition and declining Japanese and export demand, Nippon should be downsizing Japanese production ASAP.

Separately, Nippon calculates far more indirect steel imports into the United States than other industry sources. This implying that we have a much greater scrap reservoir domestically (and implicitly in Europe) than various third-party estimates assume. If this is true, there is a much larger scrap reservoir to be harvested.

Wider scrap availability should also lead to wholesale changes in all decarbonization calculations for the Europeans and others. (Sorry, EUROFER and Responsible Steel.) In the same vein, Nippon will be installing a DRI facility in Arkansas. A new Hyundai DRI facility is also coming online. So it makes no sense to us that the federal government should spend money and scarce government resources relining or replacing blast furnaces or building DRI modules to keep making virgin iron units with Bidenesque subsidies. The market is building new, efficient natural gas-based DRI facilities to meet these needs.

Nippon is also rebuilding and modernizing a blast furnace in Gary, Ind., on its own dime. This is a sharp contrast to primary aluminum, rare earths, and many other critical materials that require government support to re-shore capacity.

In the end, Nippon is paying a 148% premium to take over U.S. Steel. The senior management certainly earned their bonuses to get the deal through. The heal has enriched U.S. Steel Corporation shareholders. And, if the investment plans work, both the U.S. Steel employees and Nippon Steel shareholders should benefit as profits are repatriated to Japan. So, answer the question yourself: Is it Nippon Steel America, DBA United States Steel, or is it a partnership?

Editor’s note

This is an opinion column. The views in this article are those of experienced trade attorneys on issues of relevance to the current steel market. They do not necessarily reflect those of SMU. We welcome you to share your thoughts as well at info@steelmarketupdate.com.