New Japan Steel to acquire US Steel? US and Japan quarrel

As we feared in our last piece, the US has really ticked off Japan.

Over here: Biden puts his foot down and blocks the world's fourth-largest steelmaker Nippon Steel's (NSSY) bid to take over United States Steel (X). The US president decided this was a threat to US national security.

Over there: Japan's trade minister, Hiroshi Kajiyama, is furious. "The Biden administration's decision is completely incomprehensible at this point ... which is truly regrettable," said Kajiyama on a call with reporters. And even angrier: The head of NSSY, who said Biden had "sent a terrible message to any company (especially in an allied nation) that thinks about making large investments in the United States," and would discourage other Japanese companies from making such bids in the future.

No one is more furious, though, than US Steel's CEO David Burritt: "I know there are Communist Chinese leaders dancing in the street because of this," he said. (You might not know this but China only "leads" the world in steel-making since 2006.)

We don't know if it was this last bit that got Biden's goat or the fact that NSSY, as part of its deal with USS, vowed to "preserve USS's American heritage," even keeping its name and headquarters in Pittsburgh. But somehow the world's richest man, in charge of the world's richest country has decided that steel-making is a matter of national security...for a country that hasn't produced an annual surplus of steel since 2015.

How did we get to this point?

The story is long but basically it looks like this: USS is old (founded in 1901) it's debt-laden, in trouble ($1.145bil since 2013) and its share price, even after the Biden decision dropped 33% since the beginning of 2022, is under a dollar, so its management started seeking a buyout. First, an American company (Cliffs Natural Resources) made an offer ($7.2 billion). USS thought that was too cheap, so they held off. Then NSSY made an offer ($14.9billion), almost twice as much. NSSY thought USS was worth it.

USS and many of its shareholders thought they might be right. 98% of those who voted on USS's future thought the NSSY bid, despite its many guarantees, was better. NSSY thought it was a done deal. So did the Japanese government and even many people in the US. NSSY hired the biggest names...including the former Senate Majority leader Harry Reid. The head of NSSY even went to meet the president's national security adviser.

But Biden refused all this and, at the end of the year on New Year's eve blocked the deal outright. The president told shareholders and workers and even the Japanese that it all came down to national security:

"America's national strength originates with and is sustained by the backbone of America's industrial base. It begins with the workers who mine and refine iron ore; those who pour and shape our steel; all those who rely on a strong, robust steel industry to build things and grow our economy. Our manufacturing and heavy industries are central to the national security and economic well-being of this great nation...and our steel industry is central to it all…We simply cannot afford to allow [it] to be compromised in a manner that reduces our economic or national security."

And if Biden didn't understand this, apparently Donald Trump did. The former president, who will soon return as the US president, has already called on his supporters to reject USS "giving the great company of US Steel to Japan. What are they thinking? If it was me, I would stop it in an instant. Absolutely."

It's almost like the Japanese knew that Trump was coming back and wanted to complete the process before he did. So all the players rushed to get this deal done. NSSY even offered to put up $2.4bil to get the Trump and Biden administrations off its back.

That didn't work. What will the result be? Here come the ripples…

1. A very angry NSSY, which will have to now pay a $565 million "breakup fee" to USS, may sue the government for its "wrongheaded decision," in blocking the deal.

2. Japan is already feeling humiliated that the US would do this to such a loyal economic partner and has warned it could "lose faith" in future US-Japan investments. The Japanese are already threatening to sue the US as well, claiming that the deal was perfectly reasonable since it didn't require USS to "supply products only to Japan," nor close any facilities in the US.

3. The Japanese people: According to a Reuters reporter we heard, "many here feel" like the victims: "[The Japanese] are feeling very, very hurt. I spoke to many ordinary Japanese [who] said, You know, Japan has always been the closest, most faithful US ally, and even when America turns on the biggest bully in town -- meaning China - it doesn't discriminate and picks on Japan. How can we still believe in US investment security and military security?"

4. A furious USS shareholder class that was planning on getting their money out of a company that they thought was doomed...now wonders where they will get their money now that a buyout by the NSSY or anyone else seems unlikely.

5. An even worse problem at USS, now that it seems doomed to go it alone without $14 billion dollars of fresh cash. We have it on good authority that "USS, now with much less capital to revamp its business, seems doomed to lag behind Chinese producers and close even more plants in the future."

The end of this story may be a record number of lay-offs at USS. That's not really a national security matter - but that is what this story is about: a national interest that the US government is constantly inventing to get its way.