☀️☕️ Japanese US Steel

Happy Tuesday. The MFM will be taking a break for two weeks, after 210 issues in 2023. We wish you a joyful holiday season and will see you again on January 2nd next year!

📝 Focus

• Japanese US Steel

📊 In the Markets

• FOMC confusion

• Goldman Carded

📖 MoneyFitt Explains

• 🎓 Antitrust

💸 Personal Finance Corner

• How to Become a Better Investor: Start by Understanding the Psychology of Investing

📝 Focus

Japanese US Steel

Japan's Nippon Steel is taking over US Steel for $14.9bn including debt, or $55 a share, and paying it all in cold hard cash, beating rivals ArcelorMittal, Nucor and Cleveland-Cliffs, whose bid four months ago triggered the bidding war and the search for a new buyer. The $55 per share deal represents a 142% premium to US Steel's last trading price before the Cliffs bid, driven by optimism about President Biden's infrastructure bill and pro-domestic heavy manufacturing policies.

The agreed purchase price is also about 60% higher than the $35 per share August bid by Cleveland-Cliffs, valued at the time at $9bn and made up of $17.50 in cash and 1.023 shares of Cliffs stock. Though 43% higher than the trading price at the time, it was rejected by the board of US Steel as Cleveland-Cliffs was pushing it to accept the deal without allowing it to conduct proper due diligence on Cleveland-Cliffs itself to independently determine the value of the stock component. (Cliffs later raised the bid to $40 per share.)

The Nippon Steel deal is expected to close in Q2 or Q3 2024, subject to a shareholder vote in March and regulatory approval, including scrutiny by the Committee on Foreign Investment in the United States. The steel union is vocally opposing the foreign takeover of an iconic name in a strategic industry, but US Steel isn’t even the largest steelmaker in the country (Nucor is), and Japanese acquisitions have generally been waved through.

..... ▷ US Steel, with the single letter stock ticker of X (we wonder who will try to snap that up?), was once the most valuable company in the world. 

J. P. Morgan (the actual banker) formed US Steel in 1901 by financing the merger of Carnegie Steel with two other steel companies for $492 million ($17.3 billion in today’s money… more than Nippon Steel’s purchase price), a deal that made Andrew Carnegie the richest man in the world.

US Steel was dominant in producing the “long” and “flat” steel used in skyscrapers, bridges, dams, cars, appliances, weapons of war, and almost everything else that helped the United States become a global economic superpower. The country’s antitrust🎓 laws were created to rein in its colossal power, along with that of Rockefeller’s Standard Oil.

Now, at the sale price of $14.9bn, US Steel is valued at half of one percent of the value of the current most valuable company in the world, Apple. Today’s nothing-much-move of 0.85% in AAPL was a swing worth $26bn.

..... ▷ Its decline internationally started after the Second World War when competitors in Japan (including companies that merged to become Nippon Steel) and Germany used modern and lower-cost technologies like the electric arc furnace to rebuild their shattered economies. (More recently, companies from China, India and South Korea have grown to dominate the global steelmaking tables.)

In the 1980s, US Steel used tax breaks meant for modernising its steel business to expand into oil & gas by buying Marathon Oil. This then became its main business before it spun off all its non-steel businesses in 2001… leaving it saddled with uncompetitive old (unmodernised) steel operations.

It was eclipsed domestically by companies like Nucor (itself only #16 in the world), which adopted electric arc furnace technology and continuous casting processes, enabling them to produce steel at a lower cost, revolutionising the steel industry. It pioneered the mini-mill concept in the 1960s with efficient and decentralised (and non-union) operations. 

US Steel only opened its first electric arc furnace in 2020.

..... ▷ Traditional steel-making uses Blast Furnaces (BF), which mix coke with raw iron ore and heat at high temperatures to create molten pig iron, which is then refined into steel by blasting oxygen through it to lower the carbon content.

Coke is both a fuel and a reactant and is made from baking coking coal (or “metallurgical coal”) to get rid of impurities and leave just the carbon without burning up the coal itself (obviously). It has a higher carbon content and much much higher carbon dioxide emissions than the coal used for heating (“thermal coal.”) Neither is green, but met coal is worse.

BFs are large, operate continuously and are less energy-efficient.

Electric Arc Furnaces (EAF), on the other hand, use electricity to melt recycled scrap metal from old cars, etc., rather than using iron ore, a more sustainable source of raw materials. 

They are smaller, can start and stop quickly, and are more energy-efficient and cost-effective, producing less carbon dioxide in the process, making them the even more sustainable choice for steel production.

🇸🇬 Singapore: Let’s Get MoneyFitt!

📊 In the Markets

European and Asian markets closed weaker on Monday, with Germany’s Ifo business sentiment index falling more than expected, but US stocks kept motoring as investors ride the Santa Claus Rally in anticipation of Federal Reserve interest rate cuts in the coming year. Though they did lose some steam into the close, the S&P 500 is now just 1.2% away from its all-time high.

Interest rate futures markets have priced in a 63.4% chance that the Fed will cut rates by 25 basis points (0.25%) at its March monetary policy meeting, according to the CME FedWatch tool. This time last month it was at just 28%.

Chicago Fed President Austan Goolsbee (an FOMC 2023 voter) warned that markets seemed confused by Powell’s message and did not understand that the Fed doesn’t plan cuts ahead of time and yet seemed to be pricing them in. Cleveland Fed President Loretta Mester (an FOMC 2024 voter) said financial markets had gotten "a little bit ahead" of what the Fed was actually thinking.

Meanwhile, United States Steel surged 26.1% after Japan's Nippon Steel announced a $14.9 billion acquisition (see above) and Adobe terminated the proposed $20bn merger with product design software company Figma after antitrust🎓 investigations by EU and UK regulators.

International oil benchmark Brent crude increased 1.8% to $77.95 a barrel after supermajor BP said it would pause Red Sea shipments following a series of attacks on passing vessels by Iran-backed Yemeni Houthi rebels. Later, the Pentagon announced Operation Prosperity Guardian, which would include the UK, France, the Netherlands and other countries in a naval task force in the Red Sea to combat the attacks. The southern Red Sea and the Gulf of Aden are a crucial global trade route.

Goldman Carded

Once described by Rolling Stone magazine as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”, investment bank Goldman Sachs is pulling the plug on its Apple Card and Apple Card Savings Account partnership. It is expected to dissolve within the next 12 to 15 months.

Apple was always perceived to be the senior partner in the co-branded credit card venture, but after four years and substantial losses for Goldman, they have “mutually agreed” to end the relationship. 

This marks the latest retreat from the consumer banking ambitions of CEO David Solomon. Goldman is also scrapping plans for a public checking account and mothballing its personal loan business, reflecting the bank’s broader strategic shift away from highly competitive and unprofitable (for Goldman) mass-market banking, in which it had essentially zero experience, to focus on its core strengths in investment banking and wealth management.

 ..... ▷ To get access to the Federal Reserve’s emergency funding operations during the financial crisis in 2008, investment banks like Goldman and Morgan Stanley had to legally convert themselves into bank holding companies.

But Goldman Sachs has now also spent eight years attempting to use that licence to expand its business beyond corporations, institutions and the very wealthy.

Its online savings account with above-average interest rates was a success, gathering over $100 billion in retail deposits, a cheap form of capital.

But Goldman recently disclosed that it had accumulated $3 billion in losses in its consumer banking franchise since 2020 alone, mostly from provisions to cover potential loan losses in consumer lending.

(Also see: “Goldman Sad”)