Today, we'll discuss something you don't hear much about, but probably should the American steel industry, particularly the ongoing saga of how Japan's Nippon Steel wants to buy an iconic American firm, U.S. Steel.
What would this kind of politicking mean to American steel, if not the U.S. economy, more broadly? Let's tap this furnace, so to speak, but first, let's review the Trump-Harris debate the other night on ABC News.
Long ago, I gave up watching network news. It's not really news, anyhow; it's just big-money broadcast television laced with heavily curated propaganda. I have better things to do than observe a talking head narrate a list of stuff for half an hour. I'd rather read a book.
Still, on Sept. 10, I took one for the team and watched the two candidates. At the outset, I sort of believed ABC News’ declaration that they didn't give the questions in advance to either side. But I also wondered what that means and if it matters. At least as I perceived the spectacle, it seemed more like the Harris campaign had provided the questions to ABC.
Characteristic of mainstream media content, the overall tone of the two stuffed-shirt moderators was heavily tilted anti-Trump. And when Kamala took questions from the ABC payrollers, she had an easier time of it while still evading any solid answers to hard questions.
Then again, give Harris some credit because, apparently, she is coachable, which is definitely something that the people who really run the country want in their bought-and-paid-for politicians, certainly their wannabe presidents.
Debate-wise, Kamala's handlers pumped a list of scripted, focus-grouped sound bites into her head, which showed, as the effort paid off.
The repetitious verbal drills if not (perhaps) the electroshock treatments worked, and stifled the Democrat candidate's up-to-now trademark vacuousness: those odd quirks that we've seen many times when Kamala Harris begins to speak, and then rapidly descends into giggles, and word salads about things at the edges of her envelope of knowledge.
Consider how, up until just a couple of months ago, Harris was the least popular vice president in modern history. Party insiders openly wondered how President Joe Biden could ditch her and not take a huge political hit. And then?
Well, you know what happened... Old Joe got the proverbial heave-ho, and now he's baking in the sun at the beach while staff do the lifting.
Meanwhile, Kamala-Mamala is the Democratic Party nominee, feted widely and the toast of towns across the land, at least in jurisdictions where lots of ballots will get counted.
Her backers will crawl over broken glass to get her elected. "By any means necessary" is their catchphrase, n'est-ce pas?
Obviously, Kamala and Trump disagree on all manner of issues, from federalized abortion policy to the Afghanistan debacle; down to how many pet cats are being stolen and barbecued by illegal migrants who entered through the country's wide-open borders.
But! There's one issue on which these two candidates do not disagree: something a bit obscure, yet really important, and which returns us to the steel industry.
Below, I show you the sad decline of an American industrial titan, and what it means for the future. Read on.
By Byron King
Andrew Carnegie once called steel "the eighth wonder of the world." Take two pounds of iron ore, two pounds of coal, half a pound of limestone, add a dash of manganese and you wind up with a pound of solid steel, from which miracles can flow.
Carnegie was an American icon and key to the iron and steel business in the late 1800s. In 1901, U.S. Steel was formed. As the 20th century unfolded, U.S. Steel was there for America, pouring metal and engineering it into everything from rails and bridges to the beams of the Empire State Building, to Navy ships, Detroit cars, refrigerators and much else.
At its peak, U.S. Steel was among America's largest employers, with over 340,000 workers in mines, mills, rail yards, factories, labs and offices across the land. From 1901-1991, the company's shares were a component of the Dow Jones Industrial Average.
But today, Mr. Carnegie's legacy company (U.S. Steel: X) is a shadow of its past. Its market cap is about $7.3 billion, far below replacement cost for its assets and facilities. It's nearly invisible compared with $3 trillion behemoths like Apple, Microsoft and Nvidia.
U.S. Steel ranks about 25th in global steel output, which is far behind a host of steelmaking names, mostly foreign companies of which you likely never heard.
U.S. Steel requires significant levels of new investments, and large-scale updates to remain competitive in domestic markets, let alone across the world. How can a $7 billion outfit that ranks 25th in the world in its sector raise that kind of money?
(Hint: It can't.)
In late 2023, Japan's Nippon Steel offered $14.9 billion for U.S. Steel, all cash. That, along with the promise to assume debt, honor union contracts, invest about $2.7 billion into the American firm plus keep the company headquarters in Pittsburgh.
By background, Nippon ranks fourth in global steel output and has long been considered a world-class technology leader in the metals business. It's profitable, and its OTC shares (Nippon Steel Corp.: NPSCY) pay a dividend of 4.8%.
The United Steelworkers Union (USW) objected to Nippon. In a statement, the union wrote: "Neither U.S. Steel nor Nippon reached out to our union regarding the deal, which is in itself a violation of our partnership agreement that requires U.S. Steel to notify us of a change in control or business conditions."
In other words, the USW believes that it should have been consulted early on by both Nippon and U.S. Steel. The union has a long list of other issues concerning a Japanese company forming a U.S. shell to take over a vast assemblage of U.S.-based industrial assets. There's an even more interesting background to the whole tale in no less than The Washington Post. Yes, this has become very political.
The USW is a big union with about 1.2 million members nationwide. And we're talking about a takeover of U.S. Steel, an old business name rooted deeply in the firmament of politically important Pennsylvania. And it's not hard to write the next act in this script.
In Washington, D.C., per CNN: "President Joe Biden is prepared to block Japan's Nippon Steel's proposed acquisition of U.S. Steel... a move that would deal a major blow to the $14 billion merger that has become a lightning rod in an election year as candidates on both sides of the aisle vow to protect American manufacturing."
Wannabe President Kamala Harris says so, too: "U.S. Steel should remain American-owned and American-operated." Even Mr. Art-of-the-Deal, former President Donald Trump, opposes the Nippon takeover: "I will stop Japan from buying United States Steel," Trump said recently. "They shouldn’t be allowed to buy it."
This one-sided, anti-Nippon politicking is about union votes in an important state in an election year. Neither Biden-Harris nor Trump wants to cross swords with the USW, although many of U.S. Steel's actual workers support the Nippon takeover. And U.S. Steel has threatened to move its headquarters from Pittsburgh if the Nippon deal fails.
Meanwhile, Japan is a treaty ally of the U.S., and people at the State and Defense departments are counting on Japan in the looming push against China. So let's all get together and insult Japan and the Japanese, right? Oh, wait...
And consider that without the takeover and infusions of new capital from Nippon, many U.S. Steel legacy facilities will continue to age out and fade into obsolescence. It's fair to ask what that does to the medium- and long-term prospects of current workers. Right; good luck.
If the Nippon takeover falls through, an outfit called Cleveland-Cliffs could take over U.S. Steel. That would place nearly 100% of U.S. pig iron production in the hands of one company. So right away, there's a major antitrust issue, along with long and expensive litigation with the Federal Trade Commission and Department of Justice.
I mentioned pig iron. Most industry outsiders fail to understand the difference between pig iron production and arc furnace scrap steel; the two are complementary but quite different. You can melt down old washing machines, car parts, engine blocks, building materials, scrapped ships, etc., and get something called "steel."
Yes, but that metal has all impurities that will never come out. In many respects, melted scrap doesn’t deliver the highest-quality steel.
Arguably, the highest and best-quality steel is made or blended or alloyed from an original form of iron ore, historically melted down in big blast furnaces, but more recently available faster and at lower cost via a process called "direct reduced iron (DRI)."
DRI sample from a modern steel mill. BWK photo.
DRI is produced using natural gas, of which the U.S. has much, and running said gas through entirely new forms of steelmaking technology, which U.S. Steel and Cleveland-Cliffs have not built out.
In other words, U.S. Steel and Cleveland-Cliffs are decades behind the world technology curve regarding DRI. At the same time, a company like Nippon has the technology expertise and the cash to invest in upgraded iron production.
To wrap up, the USW, Biden, Harris and Trump can complain about "U.S." Steel getting bought by Nippon or not. But at the end of the day, absent new severe investment in plants, equipment, worker training and more, the country's steel industry will become older and further out of date.
So if not Nippon, who will write the big checks? Looking ahead, America's legacy steel industry will become increasingly legacy and fall behind the rest of the world.
Of course, the U.S. will retain a steel industry. But much, indeed most, of that steel industry will be scrap melt, which is nice but not the best case. All that, along with a declining amount of domestic pig iron, which is essential for the highest-quality alloys.
If you want to get strategic about it, losing the pig iron component of your steel industry is not the place to be. Yes, the U.S. can import pig iron... from Russia, perhaps. Oh, whoops. You see this problem, yes?
The story of U.S. Steel perfectly illustrates what's happened to America's once-great industrial machine.
The Daily Reckoning