What's Behind Japan's U.S. Buying Spree and Why Are U.S. Firms Selling?

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Written by Paul Wiseman for Industrial Info Resources (Sugar Land, Texas)--In recent days, the world has seen Japan's Nippon Steel (Tokyo) announce its planned purchase of United States Steel Corporation (NYSE:X) (U.S. Steel) (Pittsburgh, Pennsylvania) for $14.9 billion, and Tokyo Gas (Minato City, Tokyo), through its subsidiary, TG Natural Resources (TGNR) (Houston, Texas), announce the acquisition of Rockcliff Energy (Houston) from Houston-based private equity firm Quantum Energy Partners for $2.7 billion.

Although these transactions are hardly stocking-stuffers during this holiday season, they are raising questions about foreign investments that may require regulatory scrutiny, such as in the case of the U.S. Steel acquisition.

Why Are Japanese Firms Buying?
The bigger and more concerning transaction is the U.S. Steel purchase, which signals the nadir for a company that once was America's powerhouse in steel manufacturing, in a slide that began decades ago. One telling milestone was the company's 1991 removal from the Dow Jones Industrial Average, where it had been a mainstay for 90 years, because it was no longer a significant part of the 30 companies making up that indicator. Its 2023 purchase price of $14.9 billion ($14.1 billion in equity value plus roughly $800 million in debt) is a fraction of the value of top tech companies, and worth about two weeks of sales at Walmart.

In August, U.S. Steel rebuffed an effort by competitor Cleveland-Cliffs Incorporated (NYSE:CLF) (Cleveland, Ohio), which offered $7.3 billion, about half the final offer--yet still about a 40% premium to its market value at the time.

Nippon Steel, currently the world's fourth largest steel company, is expecting the combined companies to expand steel output to about 100 million tons per year. Nippon has been concerned about falling demand in its home country for years and is looking to the U.S. as a potential growth market.

Stateside, lawmakers on both sides of the aisle are demanding that the Biden administration do a close review on this transaction, citing issues of national security and "Buy American" requirements. Treasury Secretary Janet Yellen heads the Committee on Foreign Investment in the US (CFIUS), which is tasked with such reviews. There has not yet been an indication of how CFIUS will proceed.

Energy Poor
The purchase of Rockcliff, a natural gas producer in the Haynesville play in north Louisiana and east Texas, is based on Japan's position as one of the leading importers of energy in the world, having next to no energy supply of any sort on its own shores.

In past years, Japan limited imports of coal, oil, and natural gas by relying on nuclear plants for its power grid--an option that has slowed, but not stopped, since 2011's Fukushima disaster. IIR Energy's Geoffrey S. Lakings points to a 2022 Reuters story noting that the Japanese government has set "a goal for nuclear power to make up 20-22% of the country's energy share by 2030.

It is, however, a balancing act. IIR's Gordon Murray said Japan also is very concerned about its energy security and is now seeing companies invest more into green hydrogen/ammonia, and other renewables. But as is the case almost everywhere, Japan still needs fossil fuels as a base for many tasks.

Until 2021, Japan received much of its coal and oil from Russia, a situation the island nation has worked to change since the latter's invasion of Ukraine. Tokyo Gas has said that one of the pushes behind its Rockcliff acquisition is to expand its holdings in the Haynesville because the field is near liquefied natural gas (LNG) facilities in Texas and Louisiana. While the company has said it wants to sell most of the gas into the U.S. domestic market, a significant portion of Gulf Coast LNG is shipped to Asian markets. The company has not ruled out those options for the future.

This purchase will quadruple TGNR's Haynesville production to 1.3 billion cubic feet per day (bcf/d), putting it toward the top of Louisiana/Texas shale gas producers, the company said.

Floating on Gas in the Energy Transition
Lakings sees another underlying case for both purchases--avoiding de-industrialization. As he has previously noted, the energy transition in Germany has sent the EU's largest economy into an industrial tailspin, with renewable energy costs rising to the point that industry is looking to move elsewhere or shut down. Said Lakings, "Japan is urgently turning to viable sources for their energy security, as I imagine they wish to avoid what is unfolding in Germany with their de-industrialization."

For more information, see December 13, 2023, article - Four Nails in the $100-Per-Barrel-Oil-by-December Coffin.

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) platform helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking more than 200,000 current and future projects worth $17.8 trillion (USD).