Shortly after the Committee for Foreign Investment in the U.S. (CFIUS) announces its determination that the proposed merger between U.S. Steel and Nippon Steel does not pose any risk to national security, the Biden Administration will have fifteen days to decide whether to allow it to proceed. It should allow it to proceed for the simple reason that there are no other palatable options.
U.S. Steel received a bid from a domestic steel producer, Cleveland Cliffs, when it put itself up for sale in 2023, and some suggest that the combination of two domestic steel companies would be a superior outcome than a foreign takeover.
However, a U.S. Steel--Cleveland Cliffs combination makes little economic sense and would never pass muster with the regulatory authorities. It would be deceitful for the Administration to pretend that it would constitute a viable alternative to the Nippon Steel transaction.
Both President Biden and Donald Trump denigrated the Nippon Steel takeover, and the strong opposition from the leadership of the United Steelworkers Union certainly played a part in their opposition. The union leadership has indicated they would prefer the company join forces with Cleveland Cliffs. Its voluble CEO, Lourenco Goncalves, has been loudly criticizing the merger and encouraged the regulators to scotch it in favor of his own company’s takeover proposal.
A Cleveland Cliffs takeover would create a single company controlling the market in domestic rolled steel, which automobile manufacturers rely on, and the antitrust authorities would almost certainly reject it.
A merger with Cleveland Cliffs would also result in the combined company having sole ownership of Minnesota's taconite operations, leaving Minnesota miners subject to an effective monopsonistic buyer for their services. It’s hard to think of a worse outcome for the affected workers there.
Goncalves would like the Nippon takeover to fail: If that occurs, U.S. Steel would have trouble recapitalizing to expand its operations and it would likely either sell off operations or simply scale back. Any outcome besides a Nippon Steel takeover--a U.S. Steel merger with Cleveland Cliffs or a diminution or demise of U.S. Steel--benefits Cleveland Cliffs.
It isn’t clear that its bid was even in good faith. Its $7.3 billion bid was just half of Nippon Steel’s bid, and Nippon has already committed to an investment of over $3 billion into the company’s Pennsylvania operations, along with over $300 million in its Indiana plants.
It is also uncertain whether Cleveland Cliffs could obtain enough capital to close an acquisition and make the sorts of investments that Nippon Steel committed to--even if it were able to obtain the plant at a 50 percent discount from its market price.
In the last year, Cleveland Cliffs has taken steps to take over Canadian steelmaker Stelco as well as the U.S. operations of Russian Steelmaker NLMK, transactions totaling over $3 billion. It’s already taken steps to borrow the money for those transactions, and credit ratings agency S&P suggests it is approaching a debt threshold. Borrowing billions of dollars more when it is barely earning a profit would be difficult, and there is no indication that Cleveland Cliffs management could profit from this merger, other than by exploiting the monopoly it would engender and which would invariably be prohibited.
A merger of U.S. Steel and Nippon Steel is clearly the transaction that would have the greatest scope for expansion, which should be what the government, shareholders, and workers desire: Indeed, rank and file workers--along with a few union officials--recently bucked the United Steelworkers’ leadership to express support for the Nippon Steel takeover because they said they thought it provided the best opportunity to create new jobs and protect existing jobs. The apparently-widening gap between union president David McCall and the steelworkers on the merger suggests that the union may have had interests other than the workers’ best interests when deciding to oppose the merger.
A stand-alone U.S. Steel would be unable to tap capital markets to expand or even maintain current production, and a Cleveland Cliffs takeover--if it were even allowed--would also inevitably reduce capacity if it were able to exploit a rolled-steel monopoly. If the government is truly desirous of a competitive domestic steel industry, it must bless a U.S. Steel--Nippon Steel merger.
