How BlueScope plans to ride on the coat tails of Nippon Steel’s audacious US Steel play
BlueScope Steel boss Mark Vassella will be watching comfortably from the sidelines as he eyes his own expansion opportunities in the US market after Japan Inc made an audacious play for the heart of America’s steel industry.
Global giant Nippon Steel hopes to move quickly in wrapping up its $US14.1bn ($21bn) offer to manufacturing icon US Steel. Speed was partly behind the hefty 40 per cent premium being tabled for the company already in play.
The prospect of a foreign major buying a one time giant of corporate America will be politically charged as the US is about to enter a highly-contested presidential election race.
It will be a reminder of Japan’s corporate buying spree during the 1980s which coincided with an escalating trade war. This time it is different. China is now the common economic enemy.
The proposed Nippon steel deal, with its bullish outlook for steel prices, will change the dynamics for steelmakers throughout the world and force many to take another look at Vassella’s BlueScope that generates two thirds of earnings from the US.
The planned acquisition will be closely watched inside Japan and indeed among others, waiting patiently for the US dollar to come off. The proposed deal will test increasingly close strategic ties between the two countries in the face of the rising political and economic clout of China on the global stage.
Given that Chinese companies have been essentially shut out of deal-making in the US, Tokyo will find out whether the US continues to be an open market for cashed-up Japanese companies wanting to expand there.
And with official interest rates still at negative levels in Japan there’s good reason for their corporates to be looking to move capital offshore – including Australia.
The proposed buyout will come under intense foreign investment scrutiny from US officials, given the deal comes with a whole set of economic and industrial security concerns.
It’s no surprise Nippon Steel wants to have a shareholder vote wrapped up by March. The Republican primary voting rounds will be just getting under way in a few months and Donald Trump – the self proclaimed friend of US steelworkers – is still that party’s frontrunner to be nominated to stand for president. Although regulatory approvals will certainly drag closer to next year’s November vote.
‘Japanese playbook’
The implications of the friendly takeover can’t be understated. US Steel can be considered the industrial Apple or Microsoft of its era, and even today it hits all the heartland notes.
It played a pivotal role in providing an industrial base during World War II and at one stage was ranked as the biggest company in the world. Its formation can be traced back to Wall Street powerbrokers John Pierpont Morgan.
However, it has long since been overtaken by global steel giants – particularly in China – and the US steelmaker is now ranked 27th in the world in terms of output. Nippon Steel is fourth placed and a deal would move it up to third place.
US Steel these days is mainly a producer of high quality flat-rolled sheet for the domestic car industry, although it also has a key foothold in pipes and tubes manufacturing used in building and infrastructure.
The friendly deal outlined on Monday night has already sparked anger from US unions, which claim they were blindsided. It has stirred threats of the deal being blocked, from Democrat Senator John Fetterman of Pennsylvania where US Steel and the bulk of its 22,000 employees are based. Pennsylvania is the home state of US President Joe Biden. Let the games begin.
The buyout follows another US steelmaker, Cleveland Cliffs, in August offering $US7.3bn for US Steel, prompting its bankers to launch a global search for a rival bidder. Cliffs overnight bowed out of the race and vowed to launch a share buyback instead.
The proposed buyout follows the deal-making playbook of Japan Inc. This involves offering a hefty upfront price to wrap up a deal from the beginning, which keeps the bid friendly and avoids a messy bidding war.
Australia has seen a string of deals under this approach. It includes this year’s $1.9bn move by Japanese beer giant Kirin on Blackmores, the $3.8bn takeover of paints player Dulux by Japan’s Nippon Paints and even Japan Post’s blockbuster $6.5bn deal on Toll Holdings.
Just this week, Mitsubishi UFJ Financial paid $1.2bn for the troubled Link Administration to boost is funds warehousing business. In Australia, history has shown Japanese acquirers generally leave the local business intact, including keeping local management and operations in place.
For Nippon Steel, the buyout gives it options outside the slow-lane Japanese economy. It views the US market as offering real growth in steel demand over the long term, particularly as energy and manufacturing return on the benefits of energy boom from the Inflation Reduction Act. This too will be a boon for steelmaking, Nippon told investors. Over the longer term, Nippon Steel views the US as a willing market for its nascent green steel technology, based around hydrogen.
It is worth noting Australian commodities provide much of the base for Nippon’s low-cost expansion. The Japanese company is a long-term equity partner in Rio Tinto’s Robe iron ore venture. It has a stake in Queensland’s Moranbah North coking coal mine.
Regardless of how the politics plays out, the US Steel deal only has positive implications for $10bn BlueScope. The Australian operator has a large US exposure through North Star – a hot rolled coil specialist – and has spent more than $2.5bn there in the past three years building its footprint.
Indeed, BlueScope’s steel mill based in Ohio, last year generated around two thirds of the Australian company $1.6bn in full-year earnings, even after being hit with softer prices. Like US Steel, most of North Star’s output goes into carmaking and construction.
Vassella has previously spoken of a clear aim to grow earnings in North America. This includes through the expansion of North Star capacity and the more recent expansion across scrap and recycling.
Even with demand in Australia slowing, the Port Kembla-based BlueScope has been the beneficiary of the recent rally in US steel prices. Shares in the ASX-listed steelmaker are up 2.4 per cent on Tuesday and nearly 30 per cent since October. It’s a contrast to October where a softer US steel market was weighing on BlueScope’s near-term outlook.
BlueScope will benefit from political and potential union distraction of the mega-merger.
The Australian player will be in the box seat among international bidders if Nippon’s move leads to more US consolidation. Remember, it was one of a handful of steel makers to secure an exemption from Donald Trump’s previous efforts to impose tariffs to protect US steel.
Even if Nippon is proven to be overly bullish over its outlook for US steel demand, for now, it has lifted the market for everyone.
johnstone@theaustralian.com.au
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