(Bloomberg) — U.S. President Joe Biden is said to be planning to reject Nippon Steel Corp.’s bid. worth $14.1 billion to acquire United States Steel Corp. to terminate purchase for reasons of national security. A letter from the Ministry of Finance in August provides the justification.
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The arguments against the takeover are laid out in a letter to steelmakers written by the Treasury Department on behalf of the Committee on Foreign Investment in the US, the secretive panel charged with scrutinizing foreign deals for US companies. Cfius relies heavily on a new argument: that the Japanese company poses a threat to an industry that is crucial not only for the production of military equipment, but also for infrastructure.
If Biden blocks the sale on such grounds, it could expand the government’s definition of national security to include threats to the U.S. economy, rather than the typical concerns of espionage, data collection or technology theft. That potentially opens the door to additional powers for Cfius and by doing so the committee risks exposing itself to criticism that its reasoning is politically motivated.
Bloomberg News reported Tuesday that Biden plans to formally block the foreign takeover of US Steel once the deal is referred back to him later this month. Shares of the iconic American steelmaker fell 9.7% to $35.26 after the report, well below Nippon Steel’s $55 per share offer price, and have fallen further. The stock fell as much as 3.4% in New York on Thursday.
The Treasury Department declined to comment. The White House has said the CFius process is still ongoing.
The Treasury Department’s Aug. 31 letter identifies national security concerns arising from the acquisition, noting that “such risks relate to possible decisions by Nippon Steel that could lead to a reduction in domestic steel production capacity.”
To reach that conclusion, Cfius relied on the Commerce Department’s analysis “which found that a robust commercial steel market is essential to national security.” The committee used both classified and non-classified information, including assessments from trading experts, press releases and company submissions, according to the letter obtained by Bloomberg News. The Treasury Department cited a study supporting Trump’s 2018 steel tariffs as the basis for the national security analysis.
No alternative
The letter stated, in part, that there is “no domestic alternative to replace the lost production capacity and the variety of steel products that are being produced on a large scale in the short term.”
U.S. steelmakers are unable to meet domestic critical infrastructure and commercial demand alone, leaving the market dependent on imports to fill the demand gap, the letter said. That raises concerns about hypothetical scenarios in which U.S. consumers would be unable to obtain specific steel from abroad due to shipping disruptions and would no longer have access to such products from domestic factories.
“A continued loss of viable commercial manufacturing capabilities and related skilled labor will jeopardize the U.S. steel industry’s ability to meet the full spectrum of national safety requirements,” the report said.
Cfius is concerned about the loss of capacity in the US and points to Nippon Steel’s large manufacturing base in India, with its low-cost steel mills. Manufacturing in India costs on average about 20% less than in the US, while labor costs are significantly lower. India – described in the letter as a “strong” exporter – is one of the Japanese company’s largest manufacturing markets outside China. Nippon Steel’s factories in India are widely regarded as some of the company’s most efficient plants with the latest technology.
To be fair, shipping large quantities of steel across oceans is expensive.
Nippon Steel also has a presence in China, with the letter noting that these assets represent 5% of the company’s global manufacturing capacity – a concern for the Biden administration.
Nippon Steel said in an emailed statement that any suggestions that the company could take action to stop US Steel’s production in the US in favor of its operations in India or elsewhere are emphatically false and have no basis in fact.
Conflicts over commercial matters
In terms of US industry, Cfius underscored how blast furnaces used in traditional steelmaking are still needed to make certain products essential to infrastructure. The implication is that there is currently no domestic alternative to replace the lost production capacity of integrated factories. In the event of war, the national security concern would be that foreign steel might not reach U.S. shores, underscoring the need for domestic capacity.
The letter emphasizes that a competitive U.S. steel market is critical to end users, many of whom are in “industries critical to national security,” including the U.S. highway system, bridges and ports.
The committee also mentioned potential conflicts that a takeover of US Steel could cause in trade matters, arguing that decisions on anti-dumping and countervailing duties cases “will be influenced by Nippon Steel and may take into account Nippon Steel’s commercial interests and competitive position in the global steel market. , which are broader than US Steel’s domestic interests.”
Nippon Steel said in September that it would not interfere with US Steel’s decisions on trade issues. A “trade committee” would be created, made up of American citizens, to make recommendations to the US Steel Board.
Cfius, which has been assessing the proposed takeover for much of this year, must submit its decision to Biden by Dec. 22 or 23, people familiar with the matter said this week.
(Adds shares in 4th paragraph, Nippon Steel commentary in 14th paragraph.)
