Leibowitz: Biden block of Nippon-USS deal has broad, mostly bad consequences

After more than a year of raging debate, it seems that nobody was convinced by arguments. Nippon’s worker-centered concessions, including safeguarding the jobs of U.S. Steel’s unionized workers and committing to more than $2 billion in investments for the aging plants at Gary, Ind., and the Mon Valley complex in Pennsylvania, were not mentioned in the president’s announcement on Friday.

The only rational justification for this decision is political. The president wants to support the United Steelworkers (USW) union leadership. Many of the union workers supported the Nippon deal because it means long-term employment security.

National security is not remotely involved, despite the president mouthing those words. I am troubled by the hijacking of this decision by politics. And now that the election is over, that hijacking continues.

If the goal is to ensure the long-term health of the United States steel industry, that goal is easily attainable. Three-quarters of the steel made in the US today is produced in electric furnace mills. So, the health of the industry as a whole is not seriously in doubt. But the health of the “integrated” sector of the industry is questionable.

The integrated sector consists of two companies: U.S. Steel and Cleveland-Cliffs. Both have blast furnace facilities that were built many years ago. By most accounts, those facilities need massive investments to become more competitive. U.S. Steel once had many facilities. But now, on the steelmaking side, it’s been largely reduced to three major ones: Mon Valley Works, Gary Works, and Big River Steel – an EAF plant in Arkansas that US Steel acquired in 2021. Big River’s workers are not unionized.

Cliffs grew through acquisition of plants in 2020. The company was originally in the iron ore business. It integrated downstream through the acquisition of formerly independent AK Steel. (Ironically, AK was a company owned in part by Japan’s Kawasaki Steel, which was the “K” in the name.). Cliffs then acquired the US assets of ArcelorMittal. AM in turn had acquired many of those mills from International Steel Group (ISG), headed by Wilbur Ross, the former Secretary of Commerce. ISG had been formed from bankrupted assets of Bethlehem Steel, Inland Steel, and a few other steel producers that folded in the early 2000s.

All these assets are old. They need considerable modernization to compete not only against imports but also against the electric furnace mills. If they are to meet climate goals, the bill for modernization will skyrocket. Blast furnace production is vastly dirtier than electric furnace production.

The industry that needs blast furnace steel the most is the auto industry. The vast majority of steel necessary for car making comes from Cliffs or U.S. Steel. A combination of those companies would create a monopoly, as far as the auto industry is concerned. Normally, a merger like that would likely be blocked for antitrust reasons.

Given the reality that “change is the only permanency,” what is in store for U.S. Steel? First, there are the inevitable court challenges. The Council for Foreign Investment of the United States (CFIUS) will formally block the Nippon acquisition on “national security” grounds shortly before Inauguration Day on Jan. 20. The legal challenge will mainly be on procedural grounds – the failure of CFIUS to consider “mitigation” of any national security risks, for example. That’s because courts are notably reluctant to second-guess presidential decisions regarding risks to national security. The litigation will take two years or more to play out.

While all this is going on, the investment that US Steel needs to improve its competitiveness will be on hold. The company is likely to fall further behind its rivals, especially those in the electric arc segment.

Nippon Steel is not likely to give up on this deal without a court fight. If the deal does not go through, Nippon will owe U.S. Steel a “breakup fee” of $565 million. Litigation is not that expensive. I expect the court fight to be vigorous.

I am not privy to any internal discussions between U.S. Steel and Nippon. But Nippon’s goals are to be a bigger player in the US market, one of the world’s most dynamic. Japan’s economy is not exactly humming, its population is decreasing, and many large Japanese companies are looking to other markets for growth. (Honda and Nissan are in merger talks as we speak.) If Nippon Steel cannot acquire major US assets, it may have to build them. I would imagine that Nippon would not want to locate those plants where the workers are likely to be members of the USW.

In the long run, U.S. Steel has very few options other than acquisition by a deep-pocketed suitor (like Nippon) and shrinking the company to cut its losses. The assets most likely to be on the chopping block are Mon Valley and Gary (maybe both). The workers at those plants are unwilling participants in an experiment about how a formerly iconic company can deal with inexorable change. Their options are few, and the consequences could be dire.

Editor’s note

This is an opinion column. The views in this article are those of an experienced trade attorney 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.