To Revive U.S. Steel, Allow Its Transfer To Better Hands

Authored by James Glassman via RealClear Wire,

Remember U.S. Steel? It isn’t what it used to be. Founded in 1901 by Andrew Carnegie and J.P. Morgan, the company was the symbol of American industrial power. But employment peaked 80 years ago at 340,000; it’s now 23,000. Once the largest corporation of any kind in the world, U.S. Steel now ranks 27th among global steel producers — and dropping. “It’s done nothing for decades,” according to steel industry analyst Charles Bradford. 

Stagnation in steel is hardly inevitable. In 1969, another American steelmaker, Nucor, pioneered the electric arc mini mill, which recycles scrap metal, but U.S. Steel is still devoted to less efficient blast furnaces that produce three times the CO2 emissions. Nucor is now the number-one steelmaker in the country by far, its stock rising by a factor of 12 in the last two decades.

The obvious solution to U.S. Steel’s problem was to find a deep-pocketed purchaser — and that’s what it did. The company in December accepted an offer by Nippon Steel Corp., the world’s fourth-largest steel producer. Nippon agreed to pay $14.9 billion for the company, a surprisingly large all-cash sum – a 142% premium to the price of the stock on Aug. 11. That’s when Cleveland-Cliffs, a blast-furnace producer about the same size as U.S. Steel, made the original attempt to buy the company. In the end, Nippon outbid Cleveland-Cliffs, which wanted to pay with cash plus shares of a stock that’s been lackluster.  

U.S. Steel also worried that a combination of the second- and third-largest American steelmakers would draw opposition from aggressive Biden antitrust regulators. Still, despite its defeat, Cleveland-Cliffs mobilized legislators to try to kill the Nippon acquisition. Pennsylvania Democratic Sen. John Fetterman called the purchase “absolutely outrageous.” Donald Trump is also opposed: “I think it’s a horrible thing.” 

Customers gathered recently at the Tampa Steel Conference disagree. Along with most U.S. Steel workers, they are thrilled with the deal. The head of the United Steelworkers of America called the sale “shortsighted,” but the union is probably just trying to gain negotiating leverage. Actual U.S. Steel employees were more worried about their company continuing to wither away and about potential layoffs with a Cleveland-Cliffs acquisition.

Sure, we can shed a brief tear over a Japanese company buying an American icon, but what U.S. Steel needs is not nostalgia but capital and up-to-date technology.  Nippon has a shot at providing both and thus reviving an American icon.

U.S. Steel is not alone in its distress. Much of the American steel industry is fragmented and starved for investment. A wave of buyouts and consolidations is the sector’s best hope. “We don’t need one or two deals,” said Waldo Best, an industry analyst with Morgan Stanley Dean Witter & Co. “We need 10 or 20.”

If a foreign company offers a route to success that will benefit American investors, consumers and workers, is there really a problem? Sen. J.D. Vance (R-Ohio) seems to think so. He argues that “the foreign ownership of assets of such national importance could jeopardize our security.” But “foreign” in this case refers to Japan. As the State Department puts it, “The U.S.-Japan Alliance is the cornerstone of U.S. security interests in Asia and is fundamental to regional stability and prosperity.”

Japan is a bulwark against the real foreign threat to the U.S. economy and security, which is China. The House Select Committee on the Chinese Community Party in December recommended that Japan be added to the “white list” of foreign states – now just the U.K., Canada, New Zealand, and Australia – that are exempt from various requirements of CFIUS, the Committee on Foreign Investment in the United States, which must approve deals with a possible effect on national security.

China produces more than 10 times as much steel as the United States, and eight Chinese companies rank among the world’s top dozen steel producers. If we’re really worried about steel for national security reasons, we should be enhancing the position of our closest allies like Japan and welcoming them when they want to put billions into U.S. manufacturing.

The best antidote to the Chinese challenge – and the best chance of reviving an American icon — is not to block investment but to encourage it. And the higher the price someone is willing to pay for U.S. assets, the better.

James K. Glassman, formerly a senior fellow in economics and technology at the American Enterprise Institute, served as Under Secretary of State for Public Diplomacy and Public Affairs and as a member of the SEC’s Investor Advisory Committee.