US warns against Nippon merger with US Steel, citing China steel glut

China Steel

05/09/2024 23:14

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      CFIUS fears less domestic steel production
    

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      Letter cites glut of Chinese steel
    

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      Harris, Trump both oppose Nippon-US Steel deal 
    

  
 (New throughout, adds response letter and quotes)
    By Alexandra Alper
       WASHINGTON, Sept 5 (Reuters) - 
    Nippon Steel's proposed $14.9 billion takeover of U.S. Steel
would create national security risks because it could hurt the
supply of steel needed for critical transportation, construction
and agriculture projects, the U.S. said in a letter sent to the
companies and seen by Reuters.
  
        The letter cited a global glut of cheap Chinese steel,
and said that under Nippon, a Japanese company, U.S. Steel would
be less likely seek tariffs on foreign steel importers.
  
    The Committee on Foreign Investment in the U.S. (CFIUS) said
in its 17-page letter sent Saturday to Nippon Steel  5401.T  and
U.S. Steel  X.N , and first reported by Reuters, that decisions
by Nippon could "lead to a reduction in domestic steel
production capacity." 
        CFIUS added "U.S. Steel's decisions in (trade) cases
will be influenced by Nippon Steel and may take into account
Nippon Steel's commercial interests and competitive position in
the global steel market."
  
    The letter provided a first glimpse of the national security
grounds that the Biden administration could use as a basis for
its expected move to block the merger, even as the companies and
many industry experts questioned the strength of the arguments.
        CFIUS appeared to be "significantly expanding" its
definition of national security risk, said Sarah Bauerle
Danzman, a professor at Indiana University and a fellow at the
Atlantic Council. 
  
        "While the resilience of U.S. domestic steel capacity is
clearly in the national interest, it is unclear how ownership by
a firm domiciled in a major treaty ally would fundamentally
threaten this," she said.
  
        Many Republican and Democratic lawmakers have voiced
opposition to the deal. Vice President and Democratic
presidential candidate Kamala Harris said on Monday at a rally
in Pennsylvania, the swing state where U.S. Steel is
headquartered, that she wants U.S. Steel to remain "American
owned and operated." Her Republican rival Donald Trump has
pledged to block the deal if elected.
  
        According to CFIUS, China's "persistent use of market-
distorting government interventions" has allowed the country to
unfairly gain dominance in the global steel market, as it
exports extensive surplus steel that artificially lowers
international prices.
  
        It cited 2022 data that showed China produced about 54%
of total global crude steel and was the largest exporter.
  
        While U.S. Steel has aggressively petitioned for trade
relief against foreign imports, Nippon Steel has at times
opposed U.S. efforts for relief, CFIUS said. 
  
        In a 100-page response letter seen by Reuters and sent
Tuesday, Nippon Steel said it will invest billions of dollars to
maintain and boost U.S. Steel facilities that otherwise would
have been idled, "indisputably" allowing it to "maintain and
potentially increase domestic steelmaking capacity in the United
States."
  
        Echoing previously made statements, Nippon also said it
would not transfer any U.S. Steel production capacity or jobs
outside the U.S. and would not interfere in any of U.S. Steel's
decisions on trade matters, including decisions to pursue trade
measures under U.S. law against unfair trade practices.
  
        Nippon even proposed a national security agreement,
aimed at assuaging CFIUS concerns. It also pledged that a
majority of U.S. Steel's board of directors will be non-dual
U.S. citizens, including three independent directors approved by
CFIUS to oversee compliance with the agreement.
  
        "Nippon is throwing a financial lifeline to U.S. Steel
while allowing it to remain led and managed by U.S. persons with
government oversight," said Nicholas Klein, a CFIUS lawyer with
DLA Piper. "I would think that CFIUS could mitigate the risk of
reduction in steel production capacity through supply assurance
and other common mitigation measures."    
  
    The committee, which reviews foreign investments for
national security threats, also sees risk arising from Nippon's
growing presence in India, where production costs are much lower
than in the U.S. 
     "Nippon Steel has no economic incentive to, and will not,
import Indian-origin or other non U.S.-origin steel into the
United States to compete with or undermine U.S. Steel, which
would directly contradict the basis for Nippon Steel’s
multi-billion dollar investment," the companies countered in
their Tuesday letter. 

 (Additional Reporting by David Shepardson; editing by Chris
Sanders and David Gregorio)
 ((Alexandra.Alper@thomsonreuters.com; +1(202)354-5865; Reuters
Messaging: alexandra.alper.thomsonreuters.com@reuters.net - https://twitter.com/alexalper?lang=en))