Aims and Challenges of Nippon Steel's Acquisition of US Steel Voices from the Past, Voices for the Future
Nozomu Kawabata (Professor, Graduate School of Economics and Management, Tohoku University)
Nippon Steel Corporation announced the acquisition of U.S. Steel Corporation (USS). The acquisition is subject to approval by USS shareholders in April of next year. The total purchase price is $14.126 billion (2.01 trillion yen), a 40% premium over U.S. Steel's 12/15 share price. Japanese financial institutions will provide the debt financing for this acquisition. The acquisition will raise Nippon Steel's debt-to-equity ratio from 0.5 to 0.9. Nippon Steel's global crude steel production capacity will increase from 66 million tons to 86 million tons, approaching the target of 100 million tons, of which 47 million tons (55%) will come from Japan and 39 million tons (45%) from overseas.
A closer look at USS Steel's crude steel production capacity shows that it is 15.8 million tons in the United States and 4.5 million tons in the Czech Republic, for a total of 20.3 million tons. Of this total, the electric furnaces (EAF) of U.S. subsidiary Big River Steel is 3.3 million tons, and the rest is thought to be blast furnaces (BF) and basic oxygen furnaces (BOF). An additional 3.0 million tons of EAF capacity will be added in 2024. In other words, one year later, the crude steel production capacity of the USS will be 23.3 million tons, of which 6.3 million tons (27%) will be electric furnaces. In the U.S. steel industry, more than 60% of crude steel production is already by EAF method.
Here is my comment. Nippon Steel aims to expand its global crude steel production capacity and global market share. Until the mid-2010s, Nippon Steel had been locating only the downstream processes of rolling, and fabrication overseas. However, since its joint acquisition with ArcelorMittal of Essar in India in 2019, the company has adopted a strategy of acquiring integrated companies involved in the entire iron and steelmaking process. When the deal is completed, 45% of the " Nippon" Steel Corporation's production capacity will be overseas.
With the acquisition of USS, Nippon Steel now has a global reach that encompasses developed and emerging markets in terms of location, high-end and general-purpose product markets in terms of product grade, and blast furnace, basic oxygen furnace, and electric furnace methods in terms of technology. However, it is not as if the company is unnecessarily expanding its reach in all directions. The company appears to be pursuing two distinct goals: one addressing present needs and the other focused on future objectives. At present, they are securing the market by acquiring integrated blast furnace-based steel mills that are competitive in the mass production of high-end products. In the future, they are expanding the electric furnace method, which emits less CO2, to meet the environmental regulations of achieving carbon neutrality by 2050 in developed countries and Southeast Asia and by 2070 in India.
In particular, in the case of USS, it is clear that blast furnaces represent the past to the present, and electric furnaces represent the present to the future.
USS has only two integrated blast furnace steel mills in the U.S. anymore, Gary Works and Mon Valley Works. Of these, Gary Works is the only one in full-scale integrated production. Mon Valley Works is merely the name given to the three integrated steel mills and one rolling mill that once existed. Many of the facilities there closed because they could not withstand competition from imports and electric furnace-based mini-mills. The remaining facilities are connected by river transport to create the appearance of integrated production. Mon Valley represents the glory of the past.
On the other hand, Big River Steel, which USS acquired in 2019, has a state-of-the-art EAF, compact hot strip mill, cold rolled mill, and galvanizing facilities. Big River Steel manufactures automotive steel for General Motors and even the electromagnetic steel needed for electric vehicles. The raw materials charged to EAF appear to be a mixture of scrap, pig iron, and direct-reduced hot briquet iron (HBI). The production of high-grade steel by electric furnaces is already expanding. The future is here.
While Nippon Steel Corporation manufactures electromagnetic steel sheets from electric furnace steel at its Hirohata Works in Setouchi, this technology is less established than the traditional BF-BOF methods, which have been the company's forte. Although the company is probably a provider of B.F. and BOF technology to USS, it is more likely to absorb know-how from USS in large EAF operations and the production of high-grade steel using EAF steel.
However, if the current strategy is to use BF-BOF and the future is to use EAF, a transition strategy is needed between the two. How long will BF-BOF be used, and can the switch from those to EAF be made smoothly from a managerial standpoint and considering the interests of the local economy and workers? How practical is partial hydrogen reduction in a B.F.? When will the decision to invest in 100% direct hydrogen reduction be made, and where will it be located? As the Japanese government subsidizes both new technologies, there should be a political constraint that the first unit should be built in Japan. But what will Nippon Steel do when it becomes more profitable to build overseas (About the transition strategy of the Japanese integrated steelmakers, see Kawabata 2023) ?
As with other steel mills, Nippon Steel will have a group of steel mills that represent the past and a group of steel mills that represent the future simultaneously in U.S. Steel. Will it be the voice from the past or the voice of the future that decides the fate of Nippon Steel? In the new era of the steel industry, which is to achieve carbon neutrality, the company still faces many challenges. We can look forward to the social effects of its actions, but we will also have to monitor them closely.
＊Aerial photography by Google Maps
U.S. Steel Mon Valley Works
Edgar Thomson Works (Ironmaking and steel making)
Irvin Works (Hot rolling, cold rolling and galvanizing)
U.S. Steel Big River Steel (Factory can be seen in the lower right)
