Nippon's acquisition of U.S. Steel could prove to be palatable for auto industry, analyst says

Japan's Nippon Steel plans to acquire U.S. Steel Corp., the storied American industrial giant and major supplier to the North American auto industry, in a deal worth $14.9 billion.

The move comes after a bidding war in August when rival steel producer Cleveland-Cliffs offered $7.25 billion for U.S. Steel.

Nippon's acquisition would have significant ramifications for the auto industry, which both companies count as a major customer base. But the move could prove more palatable to U.S. automakers than the Cleveland-Cliffs offer, which the industry opposed over antitrust concerns, said John Anton, lead steel expert at S&P Global Market Intelligence.

"I would imagine the automakers would be pleased," Anton said, adding that the move would not meaningfully consolidate the U.S. market. "Therefore, more competition would generally be considered good for buyers."

Nippon has offered $55 a share in cash. U.S. Steel's shares have suffered following several quarters of falling revenue and profit, making the Pittsburgh company an attractive takeover target for rivals looking to add an auto industry steel supplier.

In 2022, Nippon was No. 3 in steel production, with 58.9 million metric tons of output globally, according to the World Steel Association. But in terms of annual capacity, it ranks as the world's second-largest steel maker, with about 86 million tons of capacity, trailing only China's state-owned China Baowu Steel Group.

The proposed acquisition, which is subject to approvals, appears to bring an end to a monthslong bidding war that has been of major concern to the auto industry. The Alliance for Automotive Innovation, which represents automakers, warned in an October letter to Congress that the proposed Cleveland-Cliffs-U.S. Steel deal would increase costs and slow electric vehicle sales, noting that 100 percent of electrical steel production in the U.S. would have been consolidated under that combined company.

Electrical steel is currently a niche segment but it is an increasingly important product for the auto industry. It accounts for only about 1 percent of global steel production, but that figure is expected to rise as auto companies produce more electric motors for EVs.

Domestic production of electrical steel used by the auto industry for EV motors will primarily come from U.S. Steel as it ramps up production at its Big River Steel facility in Osceola, Ark., which the company acquired in 2021. That operation expects to produce up to 200,000 tons a year of nongrain-oriented steel, the type used in EVs.

Meanwhile, Cleveland-Cliffs dominates the domestic supply of grain-oriented steel that is used in transformers. The proposed Cleveland-Cliffs-U.S. Steel deal would have moved production of virtually all electrical steel, as well as 100 percent of U.S. blast furnace production, under one corporate roof, raising antitrust concerns.

Nippon has several U.S. operations that employ about 4,000 people, including its joint ventures, in addition to producing electrical steel overseas. But its proposed acquisition should face less scrutiny from automakers because it would not monopolize the U.S. supply of electrical steel, Anton said.

U.S. Steel would remain the primary U.S. source for automotive electrical steel, Anton said. EV makers "will likely view it as a positive."

Nippon, which entered the U.S. market in the 1980s, said in a statement that it would benefit from synergies in "cost-effective operations, energy savings and recycling" and singled out Big River Steel as a particularly prized asset for its "state-of-the-art" capabilities.

"Together with U.S. Steel, [Nippon] will be well-positioned to capitalize on the growing demand for high-grade steel, automotive and electrical steel, and provide excellent products and services," the company said in a statement.

Takahiro Mori, executive vice president of Nippon, said the company will continue with U.S. Steel's existing plans for Big River Steel, including completing the project while still operating legacy steel-making assets. Mori didn't rule out changes down the road.

"We are supportive of U.S. Steel's plan," Mori told Bloomberg. "After a few years we may think in another way, but at this moment we are just following the current plan."

The proposal comes amid geopolitical uncertainties and a U.S. push to use federal EV incentives and tariffs to foster a more robust domestic EV supply chain, which had become reliant on imported parts and raw materials.

But creating new electrical steel capacity could take years and cost companies hundreds of millions of dollars — which would make purchasing Big River Steel more appealing for Nippon.

Nippon has been seeking growth abroad as it struggles with a slowdown in its home demand, a rapidly weakening yen and a surge in competition across Asia. The steel producer has been shutting blast furnaces in Japan because of weak needs there and eyeing overseas assets for growth at the same time.

In a presentation, Nippon said it intends to expand its U.S. presence to benefit from a growing American population, cheap energy and a renewed focus on building infrastructure. The company said it has secured commitments to finance the transaction from Japanese banks.

While auto companies are major customers for both U.S. Steel and Nippon, other industries are vital as well. About 22 percent of U.S. Steel's product mix is automotive, compared with 44 percent in service and 15 percent in construction.

The transaction is expected to close in the second or third quarter of 2024, subject to approvals. Those regulatory approvals include the Committee on Foreign Investment in the U.S. Mori said he is confident on clearing the hurdle, pointing to Japan's strong relationship with the U.S.

Under the terms of the deal, U.S. Steel will keep its name and headquarters after the acquisition. The Japanese company said it would honor U.S. Steel's agreements with the United Steelworkers union, which has said it would not support any foreign bidders for the company.

Bloomberg and Reuters contributed to this report.