In one of his last major acts as U.S. President, Joe Biden blocked the sale of U.S. Steel to Nippon Steel today, killing a $14.1 billion deal in the process. In his prepared statement, the President said:
“…this acquisition would place one of America’s largest steel producers under foreign control and create risk for our national security and our critical supply chains… U.S. Steel will remain a proud American company – one that’s American-owned, American-operated, by American union steelworkers – the best in the world.”
For people of a certain age, the prospect of Nippon Steel owning U.S. Steel is hateful. They remember when Japan and the United States were at war with one another. While the level of enmity may have diminished over the decades, it still burns inside of many. A Japanese firm owning U.S. Steel? Never.
However, for younger generations, let’s face it: U.S. Steel is basically a non-entity. It doesn’t factor into the conversation. It isn’t relevant. And why would it be? As I type here at 12:55 pm CST on January 3, 2025, the company’s stock is trading for around $30.56/share. At the end of 1992, it was an adjusted $34/share.
In essence, U.S. Steel was a bigger company over 30-years ago than it is today. Over that same time frame, the S&P 500 has had a total rate of return, dividends reinvested, in excess of 2,390%. Let’s just put it this way, U.S. Steel has NOT been where the money is for quite a long time. You would have done better putting your money into an old-fashioned savings account at the Bailey Brothers Building & Loan in Bedford Falls.
U.S. Steel? From being one the largest companies in the entire world at one point to being below the median average in the Russell Midcap Index well within my lifetime? Wow. There is a case study in there somewhere.
What’s more, in 2023, the company wasn’t even the largest steel manufacturer in the United States. According to The World Steel Association, in that year, U.S. Steel was the third largest domestically headquartered steel company, manufacturing 15.75 million tonnes. Nucor Corporation (at 21.20 million tonnes) and Cleveland-Cliffs (at 17.27 million) were larger.
Of course, that doesn’t take into account “foreign” companies which have major operations in the USA.
Please note, in the previous sentence, I put the word foreign into quotation marks. After all, the global economy has confused what is truly a domestic company and what is not. Chrysler? Nope. That is actually a Dutch company. Budweiser? That’s technically Belgian beer. Shell? Also Dutch. BP? That stands for British Petroleum. Tiffany’s? Parles-tu francais? Burger King is British, Popeye’s is Canadian and 7-Eleven is, well, Japanese. More? Okay.
- If you ever eat anything from Smithfield, Gwaltney, Armour, Farmland or Nathan’s Famous, you could argue you are eating Chinese food.
- Although the British aren’t well-known for their cuisine, you might think otherwise every time you bite into a Klondike Bar, Popsicle, Fudgsicle or anything made with Hellmann’s mayo.
- Then, perhaps almost heretically, your GE appliances? Since 2017, a Chinese company has been making those.
The list goes on and on. Then, there is the foreign-ownership of U.S. assets.
According to the U.S. Treasury, in 2023:“Foreign investors own 20 percent of all U.S. securities outstanding (Figure 2). Across major asset types, the fraction is about 33 percent for U.S. Treasuries, 27 percent for corporate debt, and 17 percent for equities.”
In absolute terms, that worked out to be $6.639 trillion, $4.059 trillion and $13.719 trillion respectively. Including U.S. agency debt, foreigners owned a whopping $25.686 trillion worth of U.S. paper assets in 2024. Guess what? These numbers grew pretty substantially in 2024, as total long-term TIC flows (Treasury International Capital flow) into the U.S. were in excess of $900 billion (before any appreciation) for the YTD through October.
Obviously, that is a lot of money. And, hey, I haven’t even touched on so-called American products made elsewhere and imported back into the U.S. Or how about stuff we assemble here out of inputs made elsewhere? The roughly 120 billion tablets of aspirin the Chinese ship into the North American market every year?
To put it bluntly, what is and what isn’t a U.S. product isn’t as easy to define as it once was. The same goes for foreign products. For example, assume Nippon Steel followed through on its promise to reinvest $1 billion in U.S. Steel’s Mon Valley Works and an additional $300 million in the Gary Works. Would steel made in those plants by American workers using ores mined in the United States somehow be Japanese? Or would it be American?
That’s an interesting question. Before you answer it in your head, consider U.S. Steel’s current “operating profit margin” is around 4.4%. Even if we assume the Japanese management takes 100% of the profit “back to Japan,” which it wouldn’t, how much would, could or should that leave in the United States?
That’s right, almost all of it.
So, here is the deal. U.S. Steel has been bleeding market share and employees for years. It hasn’t generated a return for its shareholders/owners in literally decades. It doesn’t have the cash needed to overhaul Mon Valley and Gary Works. Moody’s currently has a Ba3 (read: solid junk) rating on the company’s long-term debt, and Standard & Poor’s ranks it similarly at BB-.
In truth, if the company wasn’t called United States Steel, the Administration probably wouldn’t care as much about it as it does. The same could be said of the next Administration, which has said it would block the deal as well. If it were, I don’t know, Three Rivers Steel, do you think politicians would really care as much?
In the end, investors in the company are effectively out around $7 billion, which is roughly the difference between the stated deal price with Nippon Steel and the current market capitalization. That might not make up for the last 30+ years of sideways returns, but it is clearly better than nothing.
As it is now, the company will have to figure out a way to raise money more rapidly than earning it OR find a domestic suitor. That would pretty much mean either Nucor or Cleveland-Cliffs. The former doesn’t need U.S. Steel and the later has already offered substantially less for the company, using money it doesn’t really have.
What’s more, it would have a hard time raising the necessary capital (to complete the deal and make necessary improvements to current facilities) without assistance from Washington. That means, in all probability, U.S. Steel will continue to limp along like it mostly has for the last three decades.
Have a great weekend and Happy New Year.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.