US Steel (NYSE:X) up for sale

US Steel (NYSE: X) is putting itself up for sale. Obviously, X stock is up 30% premarket on the idea. Given that rise in the stock price we can divine, very simply, that the current company is worth less than the sum of its parts. Which is why US Steel has received a number of unsolicited bids recently. The Cleveland Cliffs offer is only one of them.

Well, OK, but why? After all, there’s that Inflation Reduction Act - some call it the Manufacturing Revival Act - which should really boost the steel business, right? Except, well, no. And it’s necessary to dive a little deeper into the steel industry to work out why.

Firstly, the US uses about half the iron and steel it did in the 1950s. In fact, we’re back down to about 1908 levels. No, that’s not per capita, or per unit of GDP, that’s total usage. The country’s at least twice as many people as in the 1950s, is what, four times richer? And yet uses half the steel. Yes, including imports and exports. The why is simply that capitalism becomes more economically with the use of inputs over time. After all, inputs cost money, spending money reduces profits, therefore capitalists reduce resource use.

So, the US steel business - as opposed to the US Steel business - is half the size it was 70 years ago. But it gets worse again. We also have Nucor (there are other companies but they’re the biggest). They don’t make steel the old way, in big blast furnaces with iron ore. They melt scrap steel in electric arc furnaces. This is well more than half the US market now. Effectively, we get more than half our steel from recycling, not from making new stuff.

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US Steel share price from Google Finance.

The net effect of this is that the steel business is a quarter the size it was and less. And the threequarters that has gone is the bit that US Steel was concentrated in - making virgin steel out of iron ore and coal. This is, in fact, nothing at all to do with Chinese exports, although obviously have not helped. It’s to do with firstly, capitalism becoming more efficient and secondly, the rise of recycling. As, in fact, was pointed out more than a decade back “However, no one wants the two blast furnaces there which make up the other part of the plant, as we can now make our ingots of steel out of scrap. It's a standard assumption in the metals world that no one will ever again build a new blast furnace in the rich, industrialised countries. Not only do we not need them, we don't need all the ones we've already got.”

Vale US Steel therefore.