Tokyo: After President Donald Trump approved a multi-billion-dollar merger, Japan Steel on Saturday touted a “historic partnership” with US steel.
However, the Japanese giants face many headwinds in the future.
Below are some of the challenges facing the company, from trade tariffs to a global shortage of demand.
– Our Conditions –
Nippon Steel and Us Steel said they have “concluded a national security agreement” with the US government. It said “provisions that around $11 billion in new investments will be made by 2028.”
Former President Joe Biden had blocked the contract for national security reasons just before leaving the White House.
Other terms include the so-called “golden share” of the US government, giving the company more control and undesignated “commitments” related to domestic production and trade.
“All regulatory approvals required for the partnership have now been received and the partnership is expected to be quickly finalized,” the company said in a statement.
– Economic burden –
Last month, rating agency S&P said that the “huge financial burden” of the transaction could downgrade Japan Steel worse than planned.
Bloomberg Intelligence’s Michelle Leon also warned that the $14.9 billion merger in May would “substantially increase the debt burden on Japanese companies from the current $16.7 billion.”
“This transaction could help Nippon Steel diversify beyond the domestic market slump, but it requires significant investments to help repair aging assets in US steel,” she said.
Some shareholders have expressed alarms, and activist investors 3D investment partners are calling for opposition to the reappointment of Japan’s steel executives at upcoming annual meetings.
He warned that “this level of capital expenditure” puts “irreversible obstacles to corporate value.”
– Tariff Threats –
“The indirect impact of weak domestic and international demand for steel products and US tariffs placed on steel” will likely collide with Nippon Steel’s revenues, S&P said.
The company warns that global steel demand is a “state of unprecedented crisis.” This is a trend that will be driven by slowing economic activity, oversupply in the market and a decline in public infrastructure projects.
They also need to tackle Trump’s tariff attacks. Steel collection and aluminum imports have recently doubled to 50%.
In Japan, the weight of an aging population is complying with steel requirements, but exports are becoming more difficult as other countries boost local production.
To address this, Nippon Steel strengthened its international presence by acquiring Indian and Thai steel manufacturers.
The US steel merger is part of this strategy. This will allow Nippon Steel to achieve global crude oil production capacity of 86 million tonnes per year, starting from the current 66 million tonnes.
– China’s overproduction –
According to the Organization for Economic Cooperation and Development (OECD), global steel demand is growing at a rate of less than 1% per year.
It will likely cause a price drop and threaten many steelmakers.
Much of this surplus is subsidized by China, the world’s largest steel producer, characterized by the OECD as “policy distortions.”
Steel exports from China have more than doubled since 2020, urging regions, including the European Union, to launch anti-dumping investigations.
Shibata Ryunosuke of SBI Securities told AFP.
“A huge amount of steel is flowing into Asia at almost profitable prices.
– Expensive decarbonization –
Japan has committed to reaching carbon neutrality by 2050 as the government works to curb emissions around the world.
As part of its own initiative to produce planet-warm carbon dioxide, Nippon Steel has announced a $6 billion plan to build, modify or restart three less-polluted “electric arc” furnaces at different sites.
About a third of the funds come from the government.
However, investments “can lead to increased financial costs,” said Leung, as production from the facility will not begin by fiscal year 2029.
