US President Joe Biden has officially blocked Nippon Steel's proposed $14.9-billion purchase of US Steel, dealing a probably fatal blow to the contentious merger plan after a year of review.
"A strong domestically owned and operated steel industry represents an essential national security priority and is critical for resilient supply chains," Mr Biden said in a statement.
"Without domestic steel production and domestic steel workers, our nation is less strong and less secure," he added.
The Committee on Foreign Investment in the United States spent months reviewing the deal for national security risks but referred the decision to Mr Biden in December, after failing to reach consensus.
Nippon paid a hefty premium to clinch the purchase of the second-largest US steel producer in a December 2023 auction, but the deal faced opposition from the powerful United Steelworkers union (USW), as well as politicians.
Mr Biden has previously said he wants US Steel to stay domestically owned and run, while President-elect Donald Trump has vowed to block a foreign takeover of the storied American firm after he takes office on 20 January.
In a November letter, Japanese Prime Minister Shigeru Ishiba urged Mr Biden to approve the merger so as to avoid marring recent efforts to strengthen ties between the two countries, Reuters has exclusively reported.
A spokesperson for Mr Ishiba could not be reached for comment before the announcement and Japan's trade ministry declined to comment, saying there had been no formal announcement of a decision.
Japan is a key US ally in the Indo-Pacific region, where China's economic and military rise and threats from North Korea have raised concerns in Washington.
It is also the top investor in the US and Keidanren, its biggest business lobby, has previously aired concerns that the review was facing political pressure.
Blocking the deal may dissuade international investors from bidding for politically sensitive US companies with a unionised workforce in the short term, said Alistair Ramsay, vice president of steel research at consultancy Rystad Energy.
"Big bids are a risky idea less than 12 months from a presidential election, but big steel producers with traditional operating furnaces, such as Nippon Steel, see the US as an excellent place to produce steel in the long term, despite the market depression there," he added.
Nippon Steel has decided to file a lawsuit against the US government to challenge the appropriateness of the procedures by which Mr Biden issued the order to block its acquisition, the Nikkei business daily reported.
But lawyers have said mounting any such legal challenge against the US government would be tough.
The two companies had sought to assuage concerns over the merger.
Nippon offered to move its US headquarters to Pittsburgh, where the US steelmaker is based, and promised to honour all agreements in place between US Steel and the USW.
A source familiar with the matter said this week that Nippon Steel had also proposed giving the US government veto power over any potential cuts to US Steel's production capacity, as part of its efforts to secure Mr Biden's approval.
"It is difficult to fully understand the risks involved in Nippon Steel's potential acquisition of US Steel," said a Japanese government official, who spoke on condition of anonymity, as did the other sources.
"Nippon Steel has done everything to eliminate risks related to economic securities, including committing not to reduce production," the official said.
Nippon Steel faces a $565m penalty payment to US Steel following the deal's collapse, which is set to prompt a major rethink of its overseas-focused growth strategy.
With the acquisition of US Steel, Nippon Steel aimed to raise its global output capacity to 85 million metric tons a year from the current 65 million, nearing its long-term goal of taking capacity to 100 million tons.
'Right move'
US Steel has previously said the deal's failure would put at risk thousands of jobs and it might be forced to close some steel mills, an assertion the USW described as a baseless threat and intimidation.
But Atilla Widnell, managing director at Singapore-based trade consultancy Navigate Commodities, said any decision to block the deal was "misguided".
"Nippon Steel is a bona fide operator of overseas assets with a strong and successful track record," Mr Widnell said.
"Even more so, US Steel has acknowledged its assets are in dire need of new large-scale investment and it will not be able to sustain its operational capacity and production in its current state," he added.
The United Steelworkers union said it welcomed Mr Biden's decision to block the sale, calling it "the right move for our members and our national security".
"We're grateful for President Biden's willingness to take bold action to maintain a strong domestic steel industry and for his lifelong commitment to American workers," USW International President David McCall said in a statement.
