It's the End of an Era for Heavy Metal

A few months ago, Japanese steelmaker Nippon Steel (5401.T) made a bid to take over U.S. Steel (X)...

Both Joe Biden and Kamala Harris have since vowed to block the deal. Even Donald Trump has spoken out against it.

Steel is critical to America's economy and security. U.S. Steel has been a symbol of American industrial strength for more than a century. So it's no surprise that a potential foreign takeover raises concerns about its future.

But this isn't just about legacy. The steel industry is in transition.

For decades, it relied on coal-powered blast furnaces. It's now shifting toward cleaner, more flexible technologies. This evolution is reshaping the market. And U.S. Steel is being forced to adapt.

Today, we'll break down why this takeover attempt has stirred such political tension... and what it could mean for the future of American steel production.

This situation is more political than it is about national interest...

The steelworkers' union has thrown its support behind Kamala Harris. And with steel still a key industry in battleground states like Pennsylvania, neither side wants to risk losing that vote.

But let's face it – U.S. Steel is no longer the industrial giant it once was.

The company still relies on outdated, inefficient blast-furnace technology. Meanwhile, America is leading the world in the adoption of electric arc furnace ("EAF") technology.

These new furnaces use electricity to melt scrap steel instead of the coal-intensive blast furnaces that burn raw iron ore. EAF is faster, cleaner, and more cost-effective.

According to industry research, it also provides greater flexibility in production and cuts emissions by up to 75%.

In an increasingly competitive and regulated market, that's a game-changer.

U.S. Steel hasn't made the necessary moves to stay competitive. The company had a few good years during 2021 and 2022, when steel prices soared thanks to supply-chain shortages.

Aside from that, Uniform return on assets ("ROA") has ranged between negative 5% and 2%. Considering breakeven is about 5% to 6%, this business is losing money for investors.

That earns U.S. Steel an "F" for Earning Power in the Altimeter Pro...

There's no way to put a positive spin on those grades. And Nippon Steel isn't in much better shape...

Despite being a major player in Japan, it's facing similar issues – outdated production methods and weak financials. It hasn't returned above 2% in the past decade.

Both companies are clinging to an old way of doing business, while the rest of the steel industry is moving forward...

The reality is, U.S. Steel and Nippon Steel represent a dying part of the industry. The global shift toward greener, more efficient methods is leaving them behind.

U.S. Steel's blast furnaces are relics of the past. And they were designed to run continuously for years at a time. That makes them inefficient and slow to adapt to market changes.

In contrast, EAFs can be powered up and down as needed, providing a much more flexible and cost-effective way to produce steel.

From a political standpoint, blocking the takeover makes sense. Steel is still a major employer in critical swing states. Both parties are looking to protect that base.

But from an investment perspective, the future of industry isn't with U.S. Steel or Nippon Steel. Blast-furnace technology is outdated... and the sooner we can wind it down, the better.

Investors should look to companies that have modernized and embraced cleaner, more efficient technologies. As the industry continues to evolve, businesses stuck in the past will struggle to stay afloat.

And while politics may delay the inevitable, it won't change the fact that blast furnace-based steel companies are running out of time.

Regards,

Joel Litman
September 25, 2024