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The Japanese giant is banking its growth plans on acquiring US Steel, but political opposition is derailing the effort. What happens if the deal doesn’t go through?

When Nippon Steel Corp. announced its agreement to buy respected United States Steel for $14.9 billion, the most attractive aspect of the deal was not the negative reaction from American politicians and labor activists, as it would soon be.

It was the price tag.

Nippon Steel’s $55-per-share all-cash offer represented a 28 percent premium to U.S. Steel’s last closing price and a significant 40 percent premium to Cleveland-Cliffs’ $33-per-share offer made by Cleveland-Cliffs in July last year, which US Steel rejected. Added to this was a substantial break-up fee of $565 million if the deal falls through due to regulatory and political resistance.

In addition, the Japanese giant promised to invest another $1.4 billion in the company and honor its existing contract with the United Steelworkers, which means no layoffs or plant closures. It has since dissolved its joint venture with a subsidiary of China Baowu Steel Group, the world’s largest steelmaker, as part of a global overhaul and perhaps to allay U.S. policymakers’ fears of Chinese influence.

But 10 months later, the deal is in doubt as politicians from both parties oppose it. “I would block it immediately,” presidential candidate Donald Trump said, and his opponent, Vice President Kamala Harris, also opposed it. The Committee on Foreign Investment in the United States (CFIUS) is now preparing its recommendations, which are not expected until after the November election.

The Biden White House will not make any final decision until it weighs in on CFIUS. And Nippon Steel is reportedly prepared to go to court if the deal is rejected.

But why is Japan’s largest steel company so keen on buying US Steel? And what would it mean if it couldn’t make a deal?

The answer dates back to 2021, when Nippon Steel released a long-term strategic plan that included increasing global steel production from 66 million to 100 million metric tons per year. The company also plans to close five of its 15 blast furnaces and switch production to less-polluting electric arc furnaces, while cutting 10,000 jobs. With the savings it has accumulated, it aims to expand around the world, minimizing its dependence on a shrinking domestic market held back by a mature economy and a shrinking population. Steel demand in Japan is already down 40% from its 1990 peak, according to a report from the Washington Progressive Policy Institute (PPI).

This contrasts with the global iron and steel market, which is expected to grow from $1.6 billion in 2022 to $1.93 billion in 2027, according to MarketsandMarkets, a global market research company. Much of this demand will come from developing economies, driven by industrialization, infrastructure development and growing local construction capabilities.

Nippon Steel is already expanding and modernizing its production facilities in other parts of the world. It now has operations or joint ventures in Brazil, India, Sweden and Australia; in August the company announced a new investment of almost $500 million in its subsidiaries in Thailand. But the U.S. is also an important part of his master plan, says Yuka Hayashi, a senior fellow at PPI, because it is still the world’s largest market and is expanding faster than other industrialized economies such as Europe and Japan itself. Add to this the fact that the US is erecting barriers to imports of vital materials such as steel, in part to reduce dependence on giant Chinese steel producers.

“The United States has passed legislation to stimulate domestic production,” Hayashi notes, including the Inflation Reduction Act of 2022 and the Infrastructure Investment and Jobs Act of 2023. To benefit, “you need to manufacture in the United States. Therefore, it is now difficult for companies to export these products to the United States. And it will be so under Trump and under Harris.”

In addition, both in the United States and in developing countries, Nippon Steel believes its domestic expertise makes it an attractive partner in an industry much of which is still undergoing modernization. “They are one of the leading producers of lightweight, high-strength steel sheets and there is strong demand for them around the world,” notes Cicero Machado, senior wholesale asset manager at Wood Mackenzie.

Transferring that advantage to a declining manufacturer like U.S. Steel could revitalize the Pittsburgh-based company, he said. According to a recent report published in the journal Michigan Economic JournalIt will also become a serious competitor globally, Machado adds, as coking coal, iron ore, crude steel and finished steel production facilities “span the entire production process, all the way up.”

Nippon Steel has already hinted at what it might do if Washington says no—and even if he says yes. Just hours after announcing the US Steel deal last December, Nippon Steel President (now CEO) Eiji Hashimoto said the cash-rich company was open to “any other good opportunity that comes along.”

“I don’t know if they talked about what they would do” if the deal fell through, says Hayashi, “but if they couldn’t get it, they would look to other countries.” While losing US Steel won’t make Nippon any less competitive, it will still have to take into account the demographics of its home market, Machado said. “It doesn’t work in their favor,” he says, “so they should look for another market that they can eventually enter.”

It likely won’t be China, he says, where demand is already declining, large domestic producers are struggling with excess capacity, and Nippon Steel itself has already signaled it wants to take less risk. That leaves other emerging markets, some of which, like India, promise “phenomenal” growth, if not US stability.

The bigger question will concern other Japanese corporations that are struggling with the same demographic problems at home as Nippon Steel. Japan overtook the UK in 2019 as the largest source of foreign direct investment in the US, Hayashi notes. Since then, companies ranging from food products to pharmaceuticals have sought acquisition opportunities there; automakers used to be the only major Japanese manufacturers in the United States. If Washington rejects Nippon Steel, it will create a new note of uncertainty not only for the steel company but also for other Japanese companies.

“FDI will look very risky,” Hayashi warns, “as the US government could suddenly back out of a deal that would have only been approved last year.”

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