The Decline And Fall Of US Steel
Earlier this week, Nippon Steel of Japan announced that it would acquire US Steel for 14.9 Billion (USD). America had lost its last great, fully self-sufficient steel maker.
Here’s the story of how it happened:
Nearly 50 years ago, in the early 1970s, US Steel Corporation was considered a fading “Blue Chip,” the kind of stock that one would recommend to a widow or orphan (to use the old expression). That is a company with a viable track record and paid a handsome dividend. US Steel met both those criteria easily. The company was formed when JP Morgan merged three steel companies, Carnegie Steel, Federal Steel, and National Steel, to create the new US Steel.
US Steel had a good track record and a solid dividend, just the sort of investment for someone who did not want to trade the market but was happy to clip their dividends. No one looked at US Steel as a growth opportunity. Instead, it was like a utility stock, a solid income producer with little potential upside.
It was all part of the corporate culture at US Steel, solid but staid. For much of the twentieth century, US Steel was a vital “cog” in the industrial output of the United States. After all, it was the Steel from their mills that built the skyscrapers in New York, that was part of every automobile produced in Detroit, and most critically, that made the war machine that won World War II. US Steel was a top supplier throughout that War, producing 35 million tons of Steel at its peak and employing 34,000 workers. Without the American Steel Industry, of which US Steel was number one, it is unlikely that America would have prevailed.
This week, as the news broke on Wall Street that US Steel was no more, and was greeted with a ‘ho, hum.” As just another chapter in America’s fading past was closed. What most of the analysts missed was that this was the last great integrated Steel company in the United States.
An integrated steel company mines, transports, and produces all the facets of the steelmaking process. Entirely independent, the Integrated Steel Company can be relied upon to make during good times and bad. They are not reliant upon external suppliers. It’s why integrated production is so important during times of War and stress. Today, most of our Steel is made by “recycling” companies that take scrap metal to refine it into Steel.
What is most intriguing about US Steel is how closely its business plan matches many of the most significant American companies today. These three fundamentals are how US Steel was capitalized, how it promoted innovation in the production process, and how US Steel dealt with environmental issues.
Capitalization
JP Morgan was the most influential banker of the early twentieth century. A true Wall Street legend, the man was named atop the country’s largest bank. But a “Steel Entrepreneur,” hardly. Indeed, Morgan was a money guy, one of the best financiers ever. What he saw in assembling the US Steel Corporation was less a company that produced an essential product than a “financial deal.” He knew that he could organize a transaction so that all the principals (the founders of the steel companies) could receive a fair price and make a good profit for himself.
Morgan never took the position of President of US Steel. Instead, he immediately turned that role over to an experienced Steel Executive, Charles M. Schwab. Like today’s financiers, Morgan wanted to close the transaction and let someone else run the plant. And like most financiers, Morgan recognized that the best price he could achieve would be through leverage. By borrowing much of the purchase price, fewer shareholders meant less profit to share.
It was all good news for Morgan, but it saddled the remaining company with excessive debt. Debt that would need to be serviced (paid principal and interest) before management could plow earnings back into the business. We see this same type of corporate financing today, often called the Leveraged Buy-Out. But, almost without exception, this kind of financing leaves a staid, conservative corporation more concerned about meeting its ongoing financing charges than with innovation.
Production and Innovation
Staid and conservative perfectly describe US Steel during the most than half century I’ve followed. Today, the oldest Steel Mills in the world are owned by US Steel. US Steel was one of the last American corporations to upgrade their operating software when they began that process in 2010.
Additionally, US Steel has been late in embracing the Electric Arc Furnace, a cleaner, more efficient method to produce Steel. The new Electric Arc Furnace is estimated to operate at 80–90% lower than the traditional coke-fed furnace at US Steel. Nucor Steel will become America’s number-one producer using the newer Electric Arc Furnaces after US Steel leaves the scene.
Politics and the Environment
Many of the leaders of US Steel have had a political tin-ear. During one particularly rancorous labor dispute, one US Steel Exec alienated President Truman that Truman threatened to “nationalize” the company.
But perhaps the most vivid example happened in 1963. That year, President Kennedy was trying to desegregate the University of Alabama. Naturally, Kennedy appealed to the largest employer in town, US Steel, to ask for their help. Responding, the US Steel President told the press he would be “offended” by such a request. Months later, when US Steel implemented a much-needed price hike, they found President Kennedy taking to television demanding they “roll back” such an inflationary price hike, which US Steel subsequently did. Politicians, you see, have long memories.
However, it is in dealing with environmental issues that US Steel has had the most problems. Steel-making can be a dirty business, and that’s especially true when you have some of the oldest mills around.
The low point in Big Steel’s environmental record came in 1948. For three days, a smothering smog blanketed the small village of Donora, Pennsylvania. Twenty people died immediately, including the father of baseball Hall of Fame outfielder Stan Musial. Over the next several weeks, fifty more residents would succumb to the deadly fumes. Making a total of 70 Donora residents who would die from US Steel pollution, but like much of Steel’s public relations, it took years for all of the facts of this story to become public.
As recently as a decade ago, the Environmental Protection Agency counted US Steel as the number two polluter in the country. Currently, US Steel and the EPA are locked in a Supreme Court Battle over a proposed new Ozone Regulation scheduled to go into effect in 2026. Steel has spent over a million dollars in legal fees fighting these new regulations. Is there any doubt that Steel’s plants do not meet the new standards?
For 122 years, US Steel has been behind the curve, late to innovate, politically inept, holding on to plant and equipment long after it has become outmoded. It’s hard to build a business case for a company that, in half a century, has gone from producing 2/3rds of the nation’s Steel to just 8% today. US Steel has become a business dinosaur.
But there is another perspective from which to view US Steel: America’s Strategic Interests. Remember, US Steel is the country’s last integrated steel producer. Two headline events have recently shown us how vital integrated production is.
First was the supply chain dispute immediately following the COVID-19 pandemic. It was a time when American manufacturers and suppliers could not obtain the products and components needed. Many of our industries have shipped their production offshore. Electronics, computers, pharmaceuticals, and many more are no longer made within the United States. With this departure, US Steel becomes yet another.
The second major wake-up has been the Ukraine War. The United States had taken a leadership role in providing Ukraine with the weapons and munitions needed to fight. However, Ukraine’s demand for additional supplies has recently outstripped our ability to meet their requirements. By one estimate, Ukraine fires off in two days, the number of shells it takes us a month to produce. We ran out of the most common high-accuracy 155mm shells a couple of months ago, and we will no longer supply Ukraine with any. It points to a potentially catastrophic inability to provide our troops should we be in such a conflict.
Even in an industry as significant as Steel, the loss of an aging producer would not ordinarily be especially noteworthy. Few will mourn the closing of a few rusty factories. (I’m assuming the new buyer, Nippon Steel, will ship much of the production to their Japanese factories.)
But what is incomprehensible is the loss of our last integrated steel maker at a time when the world is as unstable as it is now.
