The Japanese giant is betting its growth plans on its U.S. Steel acquisition, but political opposition is derailing the effort. What happens if the deal doesn’t go through?
When Nippon Steel Corp. announced its $14.9 billion agreement to purchase venerable United States Steel in December, the most eye-catching aspect of the deal was not—as it soon would be—the negative reaction from American politicians and labor activists.
It was the price tag.
Nippon Steel’s $55-a-share, all-cash offer represented a 28% premium over U.S. Steel’s most recent closing price and a hefty 40% premium to the $33-a-share bid by Cleveland-Cliffs in July of last year that U.S. Steel had rejected. Thrown in was a substantial $565 million break-up fee if the deal should founder on the shoals of regulatory and political resistance.
Beyond that, the Japanese giant pledged to invest another $1.4 billion in the company and honor its existing contract with the United Steelworkers, meaning no layoffs and no plant closings. Since then, it has dissolved its joint venture with a subsidiary of China Baowu Steel Group, the world’s largest steelmaker, as part of a global realignment and, perhaps, to allay US policymakers’ fears of Chinese influence.
But 10 months later, the deal is in doubt as politicians from both parties line up against it. “I would block it instantaneously,” said presidential candidate Donald Trump, and his opponent, Vice President Kamala Harris, has opposed it as well. The Committee on Foreign Investment in the United States (CFIUS) is now preparing its recommendation, which is not expected until after the November election.
No final decision will come from the Biden White House until after CFIUS weighs in. And Nippon Steel reportedly is prepared to go to court if the deal is rejected.
But why does Japan’s largest steel company want so badly to buy U.S. Steel? And what would it mean if it can’t seal the deal?
The answer goes back to 2021, when Nippon Steel released a long-term strategic plan that included boosting its global steel production from 66 million to 100 million metric tons annually. It also plans to close five of its 15 blast furnaces and shift production to less-polluting electric arc furnaces while cutting 10,000 jobs. With the savings, it aims to expand globally, minimizing its dependence on a dwindling domestic market, constrained by a mature economy and shrinking population. Steel demand in Japan is already down 40% from its peak in 1990, according to a report this year from the Washington-based Progressive Policy Institute (PPI).
That contrasts with a global iron and steel market that is expected to grow from $1.6 billion in 2022 to $1.93 billion in 2027, according to MarketsandMarkets, a global market research firm. Much of that demand will be in emerging economies, fueled by industrialization, infrastructure development, and growing local construction capabilities.
Nippon Steel is already expanding and upgrading its production facilities in other parts of the world. It now has operations or joint ventures in Brazil, India, Sweden, and Australia; in August, it announced nearly $500 million in new investment in its subsidiaries in Thailand. But the US is also a big part of its master plan, says Yuka Hayashi, a senior fellow at the PPI, because it is still the world’s largest market and is expanding more rapidly than other industrialized economies such as Europe and Japan itself. Add to that the fact that the US is erecting barriers to imports of vital materials like steel, in part to stem dependence on the behemoth Chinese steel producers.
“The US has passed laws to encourage domestic production,” Hayashi notes, including the 2022 Inflation Reduction Act and the 2023 Infrastructure Investment and Jobs Act, and to benefit, “you need to produce products in the US. So, it’s hard for companies to export these products to the US now. And this will be the case whether it’s under Trump or Harris.”
Additionally, in both the US and the developing world, Nippon Steel thinks its internally developed expertise makes it an attractive partner in an industry much of which is still modernizing. “They are one of the leading producers of lightweight, high-strength steel sheets, and there’s a big appetite for that globally,” notes Cicero Machado, senior manager of bulks assets at Wood Mackenzie.
Transferring that advantage to a declining producer like U.S. Steel could revitalize the Pittsburgh-based company, he says. The combined company would instantly have a presence from Japan to Slovakia to the American Midwest producing 86 million tons of steel a year globally, making it the third largest producer worldwide (it is currently the fourth), according to a recent report in the Michigan Journal of Economics, when Nippon Steel’s existing US subsidiaries are factored in. It would also be a formidable competitor globally, Machado adds, with facilities producing coking coal, iron ore, crude steel, and finished steel goods, “covering the entire manufacturing process, all the way up.”
Nippon Steel has already provided a hint of what it might do if Washington says no—and even if it says yes. Just hours after the U.S. Steel deal was announced last December, Nippon Steel President (now CEO) Eiji Hashimoto said that the cash-rich company was open to “any other good opportunity that comes up.”
“I don’t know if they have talked about what they will do” if the deal falters, says Hayashi, “but if they can’t get it, they will look for other countries.” While losing the U.S. Steel tie-up will not make Nippon less competitive, it must still reckon with the demographics of its domestic market, Machado points out. “It’s not playing in their favor,” he says, “so they should be looking for another market they can eventually tap into.”
That would likely not be China, he says, where demand is already declining, the big domestic makers are struggling with overcapacity, and Nippon Steel itself has already signaled it wants less exposure. That leaves other developing markets, some of which, like India, promise “phenomenal” growth if not the stability of the US.
The bigger question will be for other Japanese corporations struggling with the same demographic challenges at home as Nippon Steel. Japan overtook the UK in 2019 as the biggest source of foreign direct investment into the US, Hayashi notes. Since then, a wider variety of companies have been looking for opportunities to make acquisitions there, from food to pharmaceuticals; formerly, automakers were the only major Japanese manufacturers in the US. Should Washington turn Nippon Steel down, it will introduce a big new note of uncertainty not only for the steelmaker but for other Japanese companies.
“FDI would look very risky,” Hayashi warns, “since the US government could suddenly say no to a deal that would have been approved just last year.”
