The Past’s Dead Hand Weighs on US Steel Takeover

Over the past three years, European governments and the administration of US President Joe Biden have announced a set of ambitious plans to wean emerging markets from their addiction to coal-fired power. These plans — in Indonesia, South Africa, Vietnam, and Senegal — have shown few signs of succeeding. To understand why, look at Pittsburgh, Pennsylvania.
Washington is preparing to block a takeover of United States Steel Corp. by Nippon Steel Corp., people familiar with the matter told Bloomberg News. The deal has been opposed since it was first announced in December on the patently absurd grounds that ownership by a company from Japan — one of America’s closest allies for eight decades, and home to the largest contingent of US troops overseas — poses a national security risk.
Almost no one believes this rationale. The truth is that steel mills are a perennially protected species that have been deeply bound up with ideas of nationhood for centuries. Founded by the Gilded Age industrialist Andrew Carnegie, US Steel was America’s first billion-dollar company. It built America’s railroads, skyscrapers, and formidable 20th-century war machine. Nippon Steel’s Kamaishi and Yawata mills were likewise the cradles of Japan’s late-19th century industrial revolution.
Politics sharpens that dynamic. Pennsylvania will be causing political strategists more sleepless nights over the next two months than anywhere else in the union. A margin of just 44,292 votes in 2016 gave the state to Donald Trump — and with it, the entire election. It looks set to be the tipping-point state again this Nov. 5, and early voting will start in a matter of weeks. 
While the United Steelworkers union has been unstinting in its support for Biden and Democratic presidential nominee Kamala Harris, plenty of blue-collar workers appear to be trending toward Trump, who’s also opposed to the Nippon Steel takeover.
Anyone who’s looked at the malign nexus between politics and fossil fuels in South Africa, Indonesia or other emerging economies would recognize the dynamic.
Traditional electricity grids were built around massive, cheap, always-on coal, gas or nuclear generators known as baseload power plants. It’s hard to switch these on or off in short order, so grid managers usually added more costly “peaking” gas or hydro stations that could be sparked up briefly. The growth of renewables and battery storage broke that model. Wind and solar are so cheap that baseload power plants are going out of business left, right and center, while their volatility is putting an ever-greater premium on peaking power.
That all represents a headache for state-owned utilities stuck with vast fleets of uneconomic baseload generators, and they’re doing everything they can to slow the transition. Coal-mine workers in places like Indonesia’s Kalimantan, South Africa’s Mpumalanga, and India’s Odisha are on the same side. Politicians are loath to cross either group.
It’s not so very different in ironmaking. US Steel and Nippon Steel can be thought of as producing a type of baseload metal. Like a coal or nuclear generator, the blast furnaces they run are hard to switch off, typically operating continuously for 20 years. They’re similarly being disrupted by cleaner, more flexible technologies: In this case, electric arc furnaces, or EAFs, which can be powered up and down to match supply with demand.
No country is further down the path toward this switch than the US. Nucor Corp., the biggest EAF operator, is worth more than five times as much as US Steel these days. Their basic costs are fairly comparable, but the efficiency of Nucor’s furnaces mean it’s far better at deploying capital. Over the past decade, it has returned about 1.7 times its cost of equity and debt. US Steel had a 0.6 times ratio — an economic loss. Andrew Carnegie’s iron giant has been rusting away for decades. A takeover by the Japanese is the sort of desperate last roll of the dice it sorely needs.
US Steel’s more rapid switch toward flexible production appears to have been a decisive factor behind the bid. Its main EAF plant at Big River, Arkansas, played a major part “in igniting NSC’s interest” in a takeover, the US company’s President David Burritt told investors last December, referring to Nippon Steel Corp. Switching to EAF at its plant in Fairfield, Alabama, saved the business about $100 million a year, he said in 2022.
Politicians should be encouraging, rather than blocking, this process. In their own grudging way, both Nippon Steel and US Steel are being dragged kicking and screaming into the future. Few places in the US exemplify this process better than Pittsburgh, which has long left behind its heavy industrial past to reinvent itself as a booming center for healthcare and services.
During an election year, it’s natural to see politics being played in Pennsylvania, Kalimantan, Mpumalanga, Odisha or Yawata. Let’s hope the game ends once the ballots are in, though. The future for such places will be cleaner, healthier, more profitable — and with better jobs. Clinging to a vanished history won’t save blue-collar workers from their date with destiny.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
David Fickling is a Bloomberg Opinion columnist covering climate change and energy. Previously, he worked for Bloomberg News, the Wall Street Journal and the Financial Times.
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