Written by Katya Golubkova and Yuka Obayashi

TOKYO (Reuters) – Nippon Steel is poised to expand operations in the United States and India as it seeks growth and protection from cheap Chinese exports after the White House blocked its bid for US Steel.

Japan’s largest steelmaker, struggling with falling domestic demand, made a $14.9 billion offer to buy the U.S. product in a bid to grow its presence in a stronger market. But its hopes of salvaging the deal after President Joe Biden rejected it on national security grounds depend on a lawsuit seen as far-fetched.

China, the world’s largest steel producer, has flooded the market with high export volumes for nearly a decade, as a faltering real estate sector weighs on domestic demand, upending the global steel industry and prompting Nippon Steel to invest more in the material. Raw and production abroad. Its local market.

“China’s excess capacity is likely to continue to pressure steel exporters… and increase Nippon Steel’s need to access areas with growing domestic demand,” said Kyle Lundin, principal consultant at Wood Mackenzie.

Nippon Steel, the world’s fourth-largest steel producer, has a long-term plan to increase crude steel production capacity to more than 100 million metric tons per year from about 65 million tons currently and raise profits to 1 trillion yen ($6.32 billion) annually. The year reached a target of 780 billion yen in the fiscal year ending in March.

“For us to be a truly global steel producer, more production capacity will likely be needed than at present,” Wood Mackenzie’s Lundin said.

Greater production capacity gives flexibility to reduce production in one place and increase it in another where demand is more solid in order to boost margins.

The United States is the most promising market among developed countries where there is great demand for advanced steel products such as those used in electric vehicles, Eiji Hashimoto, CEO of Nippon Steel, told reporters on Tuesday.

He added that the company is not yet studying alternatives to the US Steel plan, adding that it will not give up expansion in the United States.

“Given current industrial and energy policies, the demand for advanced steel will increase further in the future. In any case, American business is essential to our global strategy,” Hashimoto said.

Nippon Steel has been operating in the country since the 1980s and has a number of US assets, including its flagship facility, a joint venture with ArcelorMittal (NYSE:) in Calvert, Alabama, purchased a decade ago.

“While domestic demand in the United States is increasing, its production capacity is smaller than domestic demand, making it a net importer,” said Ryunosuke Shibata, an analyst at SBI Securities in Tokyo.

The Calvert plant produces sheet steel using semi-finished products sourced at home and abroad, and the joint venture is investing approximately $800 million in a 1.5 million tons per year electric arc furnace to reduce reliance on third-party supplies.

Nippon Steel could also consider other U.S. investments and acquisitions that may not pose the same political and national security hurdles, Wood Mackenzie’s Lundin said.

US Steel was founded in 1901 by business icons Andrew Carnegie, J.P. Morgan, and Charles Schwab (NYSE:), has a heavily unionized workforce and a brand that was once seen as a symbol of the country’s industrial strength.

India opportunities

Nippon Steel recently bolstered its raw materials operations by acquiring mining assets globally, including purchasing iron ore and coking coal assets in Canada and Australia over the past year.

It also asked the Japanese government to restrict steel imports from China to protect the domestic market as production is shrinking due to slow demand from the manufacturing and construction sectors.

“Japan’s domestic demand is decreasing, so it has to go global and India is currently in a good position,” said BBI’s Shibata.

India is the world’s second-largest steel producer, but like the United States, it is a net importer with growing demand.

Domestic steel demand in India is expected to grow by 8.5% this year, according to the World Steel Association, against a 1.2% rise in global consumption.

China was India’s largest steel supplier from April to November last year, according to the latest available data, with imports reaching an all-time high of nearly 2 million tonnes, an increase of 23% year-on-year, government data showed.

With India considering increasing import tariffs to protect against Chinese steel, the market could offer strong growth opportunities.

“The foundation of our global strategy is to operate in markets with growing demand where we can leverage our technological strengths,” Hashimoto said on Tuesday. “In line with this approach, we are actively expanding our business in India and ASEAN countries, especially Thailand.”

In India, Nippon Steel has had a joint venture with ArcelorMittal since 2019, but it is a smaller player compared to ArcelorMittal. Tata Steel (NS:) and JSW Steel (NS:), according to Lakshmanan R, senior research analyst at CreditSights Singapore.

To narrow the gap, the joint venture, India’s fourth-largest steelmaker, plans to increase steel production capacity to 15 million tons per annum by the end of 2026 from 9 million tons per annum now.

“The attractiveness of the Indian market is the growth in demand,” Takahiro Mori, vice chairman of Nippon Steel, said in November. “In this growing market, we are determined to expand steadily and increase our market share in line with our plans.”

($1 = 158.1300 yen)