Debt to decarbonisation: challenges for Nippon Steel

By AFP/Julien GIRAULT

Nippon Steel closed its multi-billion-dollar acquisition of US Steel on Wednesday, a deal that was stalled for months as Washington scrutinised it on national security grounds.

The Japanese giant hailed the merger as a "historic partnership" -- but the company faces several challenges, from trade tariffs to lacklustre global demand:

US conditions

The transaction between Nippon Steel and US Steel grants the US government a non-economic "golden share" -- a veto-like power over strategic decisions.

Former president Joe Biden had blocked the deal on national security grounds shortly before leaving the White House.

Now the companies have made an agreement with Washington they say "provides that approximately $11 billion in new investments will be made by 2028".

They have agreed to keep US Steel's Pittsburgh headquarters, to maintain US production, and for a majority of US Steel's board -- including key leaders -- to be American citizens.

The government's golden share grants it consent rights for proposed capital budget cuts and on acquisitions in the United States among other powers.

Nippon Steel CEO Eiji Hashimoto said Thursday in Tokyo that these conditions "won't hinder" the company's activities.

Financial burden

Ratings agency S&P last month said the "huge financial burden" of the deal could cause it to downgrade Nippon Steel more severely than planned.

Bloomberg Intelligence's Michelle Leung warned in May that the $14.9 billion merger would "significantly increase the Japanese firm's debt burden from the current $16.7 billion".

Some shareholders have also expressed alarm, with activist investor 3D Investment Partners calling for opposition to the reappointment of Nippon Steel executives at an upcoming annual general meeting.

But Roman Schorr of Moody's Ratings said Thursday that the "clear credit negative" could be "counterbalanced by the strategic benefits of expanding into the US market, which enjoys tariff protection".

Tariff threat

"Weak domestic and overseas demand for steel products and the indirect effects of US tariffs imposed on steel" will likely hit Nippon Steel's earnings, S&P said.

Nippon Steel has previously warned that global steel demand is "in an unprecedented state of crisis" -- a trend fuelled by sluggish economic activity, oversupply in the market and fewer public infrastructure projects.

It will also need to grapple with Trump's tariff offensive, with levies on steel and aluminium imports recently doubled to 50 percent.

In Japan, the ageing population is weighing on demand for steel, but exporting is also becoming more challenging as other countries boost local production.

To address this, Nippon Steel has strengthened its international presence by acquiring Indian and Thai steelmakers.

The US Steel merger is part of this strategy: it will allow Nippon Steel to achieve global crude steel production capacity of 86 million tonnes a year, up from 66 million currently, it says.

Chinese overproduction

Global steel demand is growing at a pace of less than one percent per year, which is mismatched with the anticipated 6.7 percent jump in production capacities by 2027, according to the Organisation for Economic Co-operation and Development (OECD).

That will likely cause a price drop, threatening many steelmakers.

Much of this surplus is subsidised by China, the world's largest steel producer, in what the OECD characterises as a "policy distortion".

Steel exports from China have more than doubled since 2020, prompting regions including the European Union to launch anti-dumping investigations.

Chinese demand for steel is slowing and the country's "exporting spree... is aimed at driving up its GDP", Ryunosuke Shibata of SBI Securities told AFP.

"A vast amount of steel is flowing into Asia at prices that are barely profitable," sparking a "wave of price competition", Shibata said.

Costly decarbonisation

Japan has pledged to reach carbon neutrality by 2050, as governments worldwide work to curb their emissions.

As part of its own efforts to produce less planet-warming carbon dioxide, Nippon Steel has announced a $6 billion plan to build, modify or restart three less polluting "electric arc" furnaces at different sites.

Around a third of the funding will come from the government.

But the investment "could lead to mounting financial costs" as production from the facilities will not start before the 2029 financial year, Leung said.