Japan Bid for U.S. Steel Runs Up Against U.S. Politics
With its $14 billion offer likely blocked, Nippon Steel now must find another way to counter glut from China
Japan’s biggest steelmaker hoped it could counter China’s export onslaught with a deal in the U.S., where it would enjoy protection from Chinese rivals. Instead, it found U.S. politics was an equally challenging foe.
The already-slim prospects for Nippon Steel’s 5401 -0.38%decrease; red down pointing triangle $14 billion proposed takeover of U.S. Steel X 3.47%increase; green up pointing triangle have narrowed further with President Biden poised to use his executive powers to block the deal, according to a person familiar with the matter.
Like many steelmakers in Asia and around the world, Nippon Steel has been hammered by Chinese competition. China is flooding global markets with steel it doesn’t need at home because of a real-estate bust, and it is stepping up supply of minerals in which it holds dominant positions. That has helped push down prices.
In a quarterly report last month, Nippon Steel said it faced an “unprecedentedly harsh business environment” because of low profit margins triggered by a glut of Chinese steel exports. In the 12 months through July, China’s exports reached 101 million metric tons—more steel than the U.S. consumed all last year.
China produces around half the world’s steel and accounts for around half of global steel consumption, according to the World Steel Association. Its exports have triggered a backlash in countries that can’t hope to compete with China’s scale. Brazil, Chile, South Africa and Turkey have raised or are considering raising tariffs on imported Chinese steel.
“It’s a little bit scary,” said Shinichiro Nakamura, president of Daiwa Steel Tube Industries, which makes steel tubing used for scaffolding in Japan. His firm doesn’t compete with Chinese rivals directly but is feeling the pressure on prices from Korean competitors that are using Chinese steel. “They have more room to squeeze costs and lower the price,” he said.
Executives at Nippon Steel and U.S. Steel pitched the deal as a way to combat China’s rise, describing it as a commercial counterpart to the military alliance between the U.S. and Japan that dates back seven decades.
Accentuating its focus on the U.S., Nippon Steel this summer withdrew from a decadeslong alliance with China’s Baoshan Iron & Steel. In recent years, the two had been fighting a legal battle over Nippon Steel’s allegations of intellectual property theft, which Baoshan denied. The relationship, once celebrated as a symbol of Japanese-Chinese cooperation in industrial development, ended with a coldly worded two-paragraph news release.
U.S. Steel’s chief executive, David Burritt, said in a June podcast that the combination with Nippon Steel would “strengthen the alliance for us to be able to take on China, not just from a military-type standpoint with somebody in the Asian theater, but also because of the steel that they actually produce in China.”
The opportunity was attractive to Nippon Steel because it could expand its U.S. business without having to worry much about Chinese competition. In May, the Biden administration raised tariffs on Chinese steel to 25%, on top of a separate 25% tariff on steel imposed under the Trump administration and other tariffs imposed over the past decade. For the first seven months of this year, imports of Chinese steel to the U.S. were down 26%, according to the Census Bureau and the American Iron and Steel Institute.
Both administrations have pushed for a manufacturing revival in the U.S. including more steelmaking at home.
Nakamura said the U.S. needed technology from allies such as Japan to revive its steel industry, which is centered on electric-arc furnaces that use recycled scrap metal rather than forging new steel. Nippon Steel promised to invest billions of dollars to upgrade U.S. Steel’s aging plants.
But Nippon Steel repeatedly miscalculated the political implications of a foreign company taking over a major employer in Pennsylvania, one of the most important swing states in this year’s neck-and-neck presidential race. Trump and Biden both came out against the deal, following the lead of local politicians and the United Steelworkers union.
Takahiro Mori, the Nippon Steel executive in charge of pushing the deal, said last month that “I believe the momentum will change” because “certain politicians have been very supportive of this acquisition.”
Vice President Kamala Harris, the Democratic presidential candidate, threw cold water on such hopes this week. She said at a Labor Day campaign stop in Pittsburgh that U.S. Steel should remain domestically owned.
Takahide Kiuchi, an economist at Nomura Research Institute, said the politicians’ statements ran counter to Washington’s push to line up allies to tame China. A move to bar the acquisition “will sow the seeds of future trouble and have bad effects on trust between Japan and the U.S.,” he said
A Japanese government spokesman declined to comment on reports that Biden would reject the deal.
Nippon Steel is on the hook for a $565 million breakup fee if the deal falls apart. Its bigger challenge would be finding a growth engine to replace U.S. Steel because its home market in Japan isn’t likely to expand.