Markets ask how soon Nippon Steel will benefit from $15 billion bid for U.S. Steel

By Katya Golubkova and Anton Bridge

TOKYO (Reuters) -Nippon Steel investors and analysts are asking if its $15-billion deal to buy U.S. Steel, backed but not yet approved by President Donald Trump, is positive for the near term, even if its hopes for strong U.S. demand materialise.

Such a merger would create the world's third-largest steel producer by volume, after China's Baowu Steel Group and Luxembourg-based ArcelorMittal, data from the World Steel Association (WorldSteel) shows.

The "planned partnership" would create at least 70,000 jobs and add $14 billion to the U.S. economy via Nippon Steel's additional investments, Trump said last week.

While full details of the deal remain unclear, U.S. Steel shares surged 21% on the news and Nippon Steel gained 7%.

Nippon Steel did not exclude issuing new shares to fund the takeover, Vice Chairman Takahiro Mori said in December, after having already raised some funds through hybrid financing and asset sales.

"If the new equity is issued, investors will rightly be asking: is this the best possible use of capital at this moment?" said Fiona Deutsch, lead analyst with Australasian Centre for Corporate Responsibility (ACCR).

The company had pledged an investment of up to $4 billion in a new coal-dependent blast furnace, said Deutsch, whose climate activist group holds less than 1% of Nippon Steel's shares.

That plan, part of a wider investment commitment of $14 billion, comes "at a time when the global steel sector is shifting towards low-carbon alternatives", she added.

Nippon Steel shares were up 1% by 0405 GMT, outperforming the overall Nikkei index which was up 1.6%.

Unveiling the deal in late 2023, Nippon Steel offered $55 for each share of U.S. Steel, for a premium of 40% at the time. U.S. Steel shares closed at $53.3 on Wednesday.

"There's a lot of immediate negative effects, even though the long-term effect may be positive," said an adviser to institutional investors on strategies for Nippon Steel.

He cited the dilution as a further deterrent, besides the high offer price and additional investment commitments.

Nippon Steel did not reply to a Reuters request for a comment.

"In the short term, there are concerns about financing," said Shinichiro Ozaki, a senior analyst at Daiwa Securities.

"Given that U.S. Steel reported a net loss for the January-March period, the stock market may worry about the limited likelihood of a short-term return on the investment."

STRATEGIC GOALS

Projections that domestic demand will stay weak have pushed Nippon Steel, which is Japan's largest steelmaker, and others to look to overseas expansion, while they consider shutting some blast furnaces at home.

U.S. Steel is key to Nippon Steel's goal to raise its global output capacity to more than 100 million metric tons a year from 63 million tons now, as it aims to benefit from demand in India and the United States.

Both markets are relatively protected from vast steel exports from China, the world's top producer, thanks to protectionist measures they have adopted, such as tariffs.

In March, Nippon Steel President Tadashi Imai, who also chairs the Japan Iron and Steel Federation, warned that U.S. auto and steel tariffs could cut several million tons from Japan's annual steel output to below 80 million tons.

Ownership of U.S. Steel could provide a shield for Nippon Steel from the impact of tariffs on non-U.S. operations, said Alistair Ramsay, vice president of Rystad Energy.

"Should underlying demand in the United States begin and continue to recover, then we would expect the investment to pay off in good time, regardless of the duration of tariffs," he said. 

"But that's a big if, given how far the U.S. market has shrunk over the past few years, never mind this century."

U.S. steel consumption is expected to rise by 2% this year after a drop of 1.5% in 2024, according to WorldSteel.

This month, Nippon Steel said it would cut its dividend for the current fiscal year to 120 yen a share, off last year's 160 yen, and its lowest since 2021, amid a projected fall in profits, but the overall payout ratio would stay at 30%.

"For the investor who cares about the share price today, you wouldn't be looking at factoring in synergies based on what you think might happen in two to three years," said the adviser, who sought anonymity as the matter is a sensitive one.

(Reporting by Katya Golubkova; Additional reporting by Anton Bridge and Yuka Obayashi in Tokyo; Editing by Clarence Fernandez)