The dead hand of the past weighs on the US steel takeover

Over the past three years, European governments and the administration of US President Joe Biden have announced a series of ambitious plans to wean emerging economies off their dependence on coal-fired power. These plans – in Indonesia, South Africa, Vietnam and Senegal – have shown little sign of success. To understand why, one has to look to Pittsburgh, Pennsylvania.

Washington is preparing to block a takeover of United States Steel Corp. by Nippon Steel Corp., people familiar with the matter told Bloomberg News. The deal has been opposed since it was first announced in December on the patently absurd grounds that ownership by a company from Japan – one of America's closest allies for eight decades and home to the largest contingent of American troops abroad – posed a national security risk.

Hardly anyone believes this argument. In fact, steelworks are a permanently protected species that has been closely intertwined with nationalism for centuries. US Steel, founded by Gilded Age industrialist Andrew Carnegie, was America's first billion-dollar company. It built America's railroads, skyscrapers, and the massive war machine of the 20th century. Nippon Steel's Kamaishi and Yawata plants were also the cradles of Japan's industrial revolution of the late 19th century.

Politics exacerbates this dynamic. Pennsylvania will give political strategists more sleepless nights over the next two months than any other state in the US. Donald Trump won the state – and the entire election – by a margin of just 44,292 votes in 2016. Pennsylvania will likely be the deciding state again on November 5, and early voting begins in a few weeks.

While the United Steelworkers union fully supports Biden and Democratic presidential candidate Kamala Harris, many workers appear to be leaning toward Trump, who is also against the takeover of Nippon Steel.

Anyone who studies the pernicious relationship between politics and fossil fuels in South Africa, Indonesia or other emerging economies recognizes this dynamic.

Traditional power grids were built around huge, cheap, always-on coal, gas or nuclear plants, known as baseload plants. It's difficult to turn these plants on or off at short notice, so grid operators typically added more expensive “peaking” gas or hydroelectric plants that could be ramped up for short periods. The growth of renewables and battery storage has destroyed that model. Wind and solar are so cheap that baseload plants are going out of business in droves, while their volatility is making peaking plants increasingly expensive.

All of this is a problem for state-owned power companies, which sit on huge fleets of uneconomic baseload generators, and they are doing everything they can to slow the transition. Miners in places like Indonesia's Kalimantan, South Africa's Mpumalanga and India's Odisha are on the same side. Politicians are wary of crossing either group.

Ironmaking is not much different. You can think of US Steel and Nippon Steel as producing a kind of baseload metal. Like a coal-fired or nuclear power plant, the blast furnaces they run are hard to shut down and typically run continuously for 20 years. They, too, are being replaced by cleaner, more flexible technologies: in this case, arc furnaces that can be ramped up and down according to supply and demand.

No country is further along the path to this transition than the United States. Nucor Corp., the largest EAF operator, is now worth more than five times as much as U.S. Steel. Their base costs are quite comparable, but the efficiency of Nucor's furnaces means the company can use its capital much better. Over the past decade, it has recovered about 1.7 times its cost of equity and debt. U.S. Steel had a ratio of 0.6 – an economic loss. Andrew Carnegie's iron giant has been rusting away for decades. A takeover by the Japanese is the kind of desperate last-ditch effort the company desperately needs.

U.S. Steel's faster shift to more flexible production appears to have been a key factor in the takeover bid. The company's main EAF plant in Big River, Arkansas, was instrumental in “piqued NSC's interest” in a takeover, the U.S. company's president, David Burritt, told investors last December, referring to Nippon Steel Corp. The switch to EAF at its plant in Fairfield, Alabama, saved the company about $100 million a year in 2022, he said.

Politicians should encourage this process, not block it. Both Nippon Steel and US Steel are being dragged into the future in their own reluctant ways. Few places in the US are a better example of this process than Pittsburgh, which has long since left its heavy industrial past behind to reinvent itself as a booming center for health care and services.

In an election year, it is only natural that political games will be played in Pennsylvania, Kalimantan, Mpumalanga, Odisha or Yawata. But let us hope that the game is over once the ballots are cast. The future of these places will be cleaner, healthier, more profitable – and with better jobs. Clinging to a vanished history will not save workers from their rendezvous with destiny.

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This column does not necessarily reflect the opinion of the editorial board or of Bloomberg LP and its owners.

David Fickling is a columnist for Bloomberg Opinion covering climate change and energy. He previously worked for Bloomberg News, the Wall Street Journal and the Financial Times.

This article was generated from an automated news agency feed without any modifications.