According to three persons with knowledge of the matter, there is a growing likelihood that the administration of Joe Biden will thwart Nippon Steel's agreed-upon $14.9 billion acquisition of United States Steel. That would be both cruel and kind to the Japanese firm's plan to overcome obstacles both domestically and internationally.
Donald Trump and Kamala Harris, the US presidential contenders, had already expressed their disapproval of the partnership. The acquisition would harm American steel manufacturing, among other things, according to a letter from the Committee on Foreign Investment in the US (CFIUS).
The problems that Nippon Steel is ostensibly attempting to resolve ought to reassure CFIUS. The great majority of the $20 billion industrial giant's 66 million tons of annual steel production capability is produced in Japan. However, with that market contracting, Nippon boss Eiji Hashimoto is being pushed to look overseas. Holding US Steel would enable it to get a capacity of 20 million tons annually in a market with a high demand for premium steel and profits that have been boosted by 25% tariffs placed on imports of the metal in 2018.
This protectionism would give Nippon's earnings a little extra defense against changes in China. The nation's real estate crisis has decreased demand, but the 1 billion tons of supply produced annually has not changed much. According to Macquarie, the ensuing overcapacity has rendered the great majority of mills unprofitable and caused a 24% rise in exports to 54 million tons in the first half of the year. Tokyo has been urged to implement restrictions by Nippon and other countries due to concerns about cheap Chinese exports.
Hashimoto has good reason to avoid the markets for the output of US Steel because of these concerns. Nippon made a public promise this week to prioritize American-produced metal for American customers and to appoint a majority of Americans to the board of his new business.
Should the United States decide to block the purchase, Nippon will be more vulnerable to business obstacles, and Hashimoto will be unable to meet his two main objectives of achieving an annual underlying profit of 100 billion yen ($700 million) and a capacity of 100 million tons. However, he has other choices, not the least of which is to work with joint venture partner ArcelorMittal to develop up to 30 million tons of yearly capacity in India.
Of course, these kinds of tasks take longer. However, they will also not include the massive 140% premium he is proposing for US Steel, which would limit the return on investment at about 5%, or roughly Nippon's cost of capital. US authorities might be benefiting Nippon stockholders, at least in that regard.