If you’ll forgive the cliché of starting an article by referencing Star Wars: remember that scene in Empire Strikes Back when Lando complains “This deal is getting worse all the time” because Darth Vader keeps “altering” it to make it worse?
So we have a similar situation for Cleveland-Cliffs, only it’s not an evil space tyrant making the deal worse, it’s just reality.
For a while now, Ohio-based Cleveland-Cliffs has been trying to buy Pennsylvania-based US Steel. In mid-2023 CC made an offer of $7.3 billion, which was quickly dwarfed by Japan-based Nippon Steel with a bid of $15 billion. What should have been a simple, obvious negotiation – you go with the one that offers you double the money! – entered the political realm, with both Joe Biden and Donald Trump last year weighing in on the deal.
This week some news broke that made CC an even less attractive dance partner for US Steel, when their quarterly earnings report came out: CC lost $434 million in the Q4 2024. Nevertheless, CEO Lourenco Goncalves is confident (outwardly at least) that investors should believe he can still buy the company he’s been unable to buy for almost two years. On the earnings call, he said of Nippon Steel, “It's time to pack up and go before their epic M&A disaster becomes a serious diplomatic issue.”
Furthermore, he noted that any tariffs from President Trump will “penalize the foreign competitors who have been playing by a different set of rules, while strengthening the domestic producers.
The tariff angle probably won’t pan out. Investors and other stakeholders will probably still be smart to bet on the company that has twice as much money to spend on this merger. While President Trump loves to threaten tariffs, he seems to use them as a negotiating tactic to get what he wants, then he withdraws them. US Steel supports these tariffs because it levels the playing field for domestic producers like themselves. But the gains made by leveling the playing field won't make up for losing the billions of dollars in investment into their Pennsylvania and Midwest facilities that Nippon will provide. Moreover, Trump’s use of tariffs is a foreign policy club to get at China – they always have been. The best way to undermine the Chinese economy is to strengthen ties with Japan, which this deal will absolutely do.
It seems like this is the strategy that both Nippon Steel President Tadashi Imai and Japanese Trade Minister Yoji Muto will employ to persuade Trump to negotiate a satisfactory deal and move ahead with the transaction. Now that Howard Lutnick has been confirmed as US Commerce Secretary, the pieces are all in place to move forward.
We talked about late last year, when the outgoing Biden Administration – in a last-ditch effort to sabotage the United States on its way out the door – threatened to use the Committee on Foreign Investment in the US (CIFIUS) to block the acquisition of US Steel by Nippon Steel. Ostensibly this was on the grounds of national security, an excuse which was always ridiculous.
Finally, U.S. Steel executives have been clear, U.S. Steel needs an injection of capital and technology to bring it into the modern era. Without this deal, it could be forced to take drastic action, which could include pivoting away from blast furnace facilities – jeopardizing thousands of good-paying union jobs – and moving its headquarters out of Pennsylvania. This would ultimately destabilize the domestic steel industry when we need an “all hands on deck” approach to counter China.
By the numbers…
Nippon Steel was the No. 4 largest producer of steel in in 2024, according to the World Steel Association, with an output of 43.66 million tons (or tonnes for our commonwealth friends). China’s Ansteel Group is the No. 3 largest at 55.89 million, while US Steel is at the No. 24 spot with just 15.75 million. But a US/Nippon Steel hybrid combined would have an output of almost 60 million, rocketing past China’s Ansteel to the No. 3 spot. Cleveland-Cliffs is No. 22 with 17.27 million tons, and a merger between the two would only barely crack the world’s Top 10.
Moreover, since CC made its offer in August 2023, the company has not shown the strength that investors need to see to indicate sustainable growth. Since then, US Steel’s stock has risen ~57% while CC’s has dropped ~35%.
This deal is getting worse all the time. The best thing for investors, US Steel workers, and America is for Nippon Steel to finally get the go-ahead it should have had in 2023.