What's the Deal with US Steel?

Quite a morbidly amusing case is currently unfolding in the media. US Steel has been struggling for some time, due to the compounding factors of “low steel prices, high labor costs, and outdated mills” (Seeking Alpha). What the business needs now is a massive capital infusion–something the Japanese Nippon Steel was prepared to provide, to the tune of $14.9 billion–plus a few billion more towards reinvigoration of some failing factories. Certainly, a portion of that payment would go to executives and stakeholders. It is also surmised that Nippon would seek to cut costs through improving facilities and increasing automation; thus, they might save the business itself, but partly by means of taking away some American jobs. Then again, without the acquisition, the steelmaker is likely to fall apart on its own, which would impact far more jobs. Unions, naturally, do not like the idea of jobs or wages being cut. Yet, both US Steel and Nippon as corporations were in agreement on the purchase price and terms.

Yet, before the deal could go through, Biden displayed clear servility toward the unions. He used his veto power to cancel it, even in light of various last-minute concessions made by Nippon (Reuters). The amusing aspect of the whole story is that, ever since the possibility of the deal became known, both Biden and Trump actively opposed it, causing both conservative and liberal media to align for once. Conservatives support the deal because Biden opposes it; likewise, liberals support it because Trump has spoken against it. As a result, the vast majority of reporting is against the current chain of events. The question remains, ever more potent: should the deal have gone through? The dealmaking parties certainly think so–they have already filed suit in the U.S. Court of Appeals for the District of Columbia and the U.S. District Court for the Western District of Pennsylvania (AP News).

For those unfamiliar with the intricacies of the steel industry, I will first address the various issues that led to the decline of US Steel. This company was initiated as a conglomerate of existing steel manufacturers, in order to eliminate duplicity in the industry and thus achieve further economies of scale. Following the company’s inauguration in 1901, which was organized by JP Morgan, it was the largest company in the world–the first corporation to be worth a staggering billion dollars. By 1917, they employed 268,000 (Construction Physics).

Immense market share and domestic power bred complacency with time. Rather than welcoming the cost of innovation and development, US Steel was belligerent toward progress. Local and foreign manufacturers, over many decades, made a speedier shift into modern steelmaking capacities. Notably, the initial stages of that shift were cost-heavy and return-poor, supporting US Steel’s presumption that their advantage was insurmountable. However, time proved this incorrect, and the company regularly fell behind the curve of innovation. The head of the new US Steel, Elbert Gary, was effectively free to set prices due to the initial lack of competition. Rather than passing savings in production costs to the consumer, he had the company pocket them. This served company interests until competition began to mean something again–at which point, the artificially inflated prices could no longer be forced upon consumers.

Monopolistic privileges allowed US Steel to fall behind the curve in terms of innovation. On multiple occasions, new technologies were introduced to the steel market, often to US Steel first, only for them to pass. Only later, once other manufacturers began to see an advantage from the early implementation of new technology, would US Steel incorporate it to catch up to the competition. They took extreme liberties thanks to their overwhelming market share. Those liberties, and consistently high pricing irrespective of market fluctuations, allowed them to pay strong wages to their employees, satisfying unions. Meanwhile, international producers were adopting new technologies quickly, paying less for labor, and generally rapidly catching up to US Steel.

Imports gradually accounted for more and more of steel purchasing in the US, and the introduction of the minimal domestically was another threat. Over time, US Steel bled market share–it has survived to this day, but with a dramatically decreased influence. They only began to invest substantially in minimal technology, an invention of 1969, as recently as 2020. Nippon Steel’s current profit per ton produced is three times that of US Steel–thanks to lower labor costs and more efficient technologies (Nikkei). US Steel was able to ignore innovation for a time, and get away with it, but we are now seeing the long-term fruits of such a practice.

More than anything else, Nippon’s willingness to pay a whopping 40% premium over the share price (at time of offer) highlights the major mismanagement at US Steel. The Japanese firm clearly sees immense opportunity to do more business in the US market, if only the capital can finally be invested to bring US Steel’s manufacturing up to par. They even offered $2.7 billion on top of the purchase price to invest in existing facilities and improve them. Yet, despite the attractive offer, and the willingness of both sides to close the deal, Biden vetoed it. Both sides are unhappy with this outcome. In fact, Nippon is now required to pay more than $500 million in penalties to US Steel, since the deal did not go through, thanks to a termination clause in the merger agreement (US Steel). This is a staggering amount, and more than 8% of US Steel’s market capitalization as of January 5, 2025. Even if that fee is paid out, US Steel is falling apart, and more than likely to reward the C-suite before investing in innovation, absent an acquisition. Both sides of the deal seem to fare worse in light of the veto.

So, why the block? Biden cites national security interests as his motivation. The idea is that the sale of a US-owned company to Japan undermines national security in some manner. Nippon has, in the past, been known for dumping low-cost steel into the American market. As recently as September 2023, the Commerce Department accused them of doing so (Bloomberg). An anti-dumping tariff margin of 29% was charged on them, well above the preexisting duty level of 1.39%, to offset the negative economic impact that may have occurred otherwise. Over the period of alleged steel dumping, domestic prices dropped by a substantial degree of 9.3%. However, steel prices in the US had already been falling since the beginning of 2022, so the impact of Nippon’s steel dumping, ceteris paribus, appears debatable.

To Nippon’s credit, due to the high cost of steel in the US, relative to that of other nations at the time, it is understandable how dumping into the domestic market could have been tempting at the time. While it is always a frustrating, arguably unfair practice to the affected parties, domestic companies have also engaged in dumping in the past. The US has stood accused by Mexico, Canada, and others of the practice. Ultimately, it is only reasonable that the highest extent of steel dumping be into the US market, given the oft-artificially sustained prices and wages in our country compared to elsewhere.

Unions, in large part, may be thanked for the wage factor. Through their influence, wages are kept far higher than most other nations would ever allow, necessitating higher steel prices. In fact, unions hold much responsibility for the political opposition to the deal. The threat of decreased jobs in the industry, a historically proven result of automation and innovation, as well as lowered wages, lead to their staunch opinion.  Both Trump and Biden sought, in decrying the deal, to court the union vote.

While union leaders and members may well be on the same page in this issue, union leaders have often been proven to be out of touch with union members–in fact, many members join a union out of sheer necessity. If they worked apart from one, they would have minimal job protection relative to members, and even an unspoken target on their back due to their unaffiliated status. Over the last few elections, union leaders have largely proffered their support to democratic candidates, but those they represent lean more republican.

A Rasmussen poll from 2016 found that only 20% of US voters think most union leaders do a good job representing their members. On the flip side, 57% claimed that union leaders are out of touch with most of their members (Rasmussen). The margin of error here is plus or minus 3%, with a 95% confidence level. In essence, the numbers are well-representative of the average American voter. So, it would seem that politicians are perhaps not truly courting votes by courting unions, but rather trying to appease leaders and prevent negative political events such as strikes, which union leaders do have the authority to call for.

In the end, a former steel industry behemoth may fade into obscurity, thanks to this exact fear of strikes. The company is failing and desperately needs a cash infusion. Yet, unions fear the resultant reorganization, loss of jobs, and cuts in salaries. I say unions in general, because, out of touch leaders or not, union members would likely prefer to keep their salaries inflated, whether or not that is sustainable in the long run.

Biden may cite the protection of national interests–however, there is no better way to protect against Japanese malpractice than to remove their conflicts of interest. The acquisition of US Steel, with the many caveats and concessions agreed upon by Nippon, would have more closely aligned the interests of both nations. Agreements would have ensured Nippon continued to operate US facilities–in fact, as I mentioned previously, they committed billions to the renovation of existing domestic plants (Nippon). If the acquisition had gone through, Japan would have also been incentivized to keep prices higher in the US market, due to their increased presence there, and exposure to domestic sales prices and production costs altogether, which would mitigate much of the advantage of dumping foreign-made steel in our country.

All in all, this deal would have been more than likely to ameliorate the seemingly inevitable downfall of US Steel. On top of all that, relations between the two allied nations would have improved even further in the wake of such a deal. Some say that this veto, and the concurrent legal trouble, fees, and general headache, will discourage foreign investors from investing in the US. In my mind, partisanship or otherwise, the known facts seem to signal that the deal should have gone through. Yet perhaps the government is aware of some unknown facts that change the picture a bit. Either way, I hope US Steel makes good use of that $565 million termination penalty–or maybe the CEO will just get a new yacht. Who knows, really?

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Works Cited

Deaux, Joe. “US Raises Import Tariff for Nippon Steel after Review.” Bloomberg.com, Bloomberg, 18 Nov. 2024, www.bloomberg.com/news/articles/2024-11-18/commerce-slaps-tariffs-on-nippon-steel-amid-anti-import-promise. Accessed 6 Jan. 2025.

Hussein, Fatima. “Nippon Steel, US Steel File Lawsuit after Biden’s Decision to Block $15 Billion Deal.” Apnews.com, AP News, 6 Jan. 2025, apnews.com/article/nippon-us-steel-biden-pennsylvania-eacf51a38e26280080f49fb280cb70a6. Accessed 6 Jan. 2025.

“Most Say Union Leaders out of Touch with Members.” Www.rasmussenreports.com, 10 Aug. 2016, www.rasmussenreports.com/public_content/politics/general_politics/august_2016/most_say_union_leaders_out_of_touch_with_members.

Motowaki, Kensho. “Nippon Steel’s Profit per Tonne Is Triple U.S. Steel’s, Double Others’.” Nikkei Asia, 11 Oct. 2024, asia.nikkei.com/Business/Materials/Nippon-Steel-s-profit-per-tonne-is-triple-U.S.-Steel-s-double-others. Accessed 6 Jan. 2025.

Nippon Steel Corporation. “Nippon Steel Corporation and U. S. Steel Condemn U.S. Government’s Unlawful Decision to Block Proposed Acquisition of U. S. Steel - Companies Will Take All Appropriate Action to Protect Their Legal Rights -.” Nipponsteel.com, 3 Jan. 2025, www.nipponsteel.com/en/news/20250103_100.html. Accessed 6 Jan. 2025.

Potter, Brian. “No Inventions; No Innovations, a History of US Steel.” Www.construction-Physics.com, 29 Dec. 2023, www.construction-physics.com/p/no-inventions-no-innovations-a-history.

Schwartz, Harrison. “U.S. Steel’s Long-Term Survival Is Uncertain without Capital Infusion.” Seeking Alpha, 3 Jan. 2025, seekingalpha.com/article/4747515-us-steels-long-term-survival-is-uncertain-without-capital-infusion. Accessed 6 Jan. 2025.

Shepardson, David, et al. “Biden Blocks Takeover of U.S. Steel by Japan’s Nippon Steel.” Reuters, 3 Jan. 2025, www.reuters.com/markets/deals/biden-reveal-decision-us-steel-acquisition-early-friday-cbs-news-reports-2025-01-03/.

United States Steel Corporation, and Nippon Steel North America, Inc. “Agreement and Plan of Merger.” filed with the Securities and Exchange Commission, 18 Dec. 2023.

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