United States Steel: The First Billion Dollar Company?
Bryan Taylor, Chief Economist, Global Financial Data
It was announced this week that United States Steel has accepted an offer to be bought out by Nippon Steel for $55 a share turning the company into a $14 billion acquisition. This brings an end to the existence of one of the largest and most important firms in American history. Some could argue that US Steel, symbol X, was the first billion-dollar corporation. The curious thing is that technically, the original US Steel lives on as Marathon Oil. How did this happen? Read on.
The Establishment of US Steel
Steel is an alloy of iron and carbon with improved strength and fracture resistance compared to other forms of iron. The combination of high tensile strength and low cost makes it an essential part of the modern economy. Henry Bessemer found a cheap way to produce steel in 1856, and with the invention of the Bessemer process, the era of steel began. Pittsburgh became the center of steel production in the United States. Andrew Carnegie began the construction of his first steel mill in 1872 and the Carnegie Steel Corp. was formed in 1892 as a consolidation of different steel companies.
The 1890s were referred to as the Great Depression until the Depression of the 1930s proved to be even worse than the Depression of the 1890s. To fight the economic problems of the 1890s, trusts began to dominate the American economy. The Sherman Anti-Trust Act was passed in 1890, but industries continued to consolidate. Standard Oil became the first trust in 1882. Trusts were also formed in copper, tobacco, sugar, meat and other industries. Upton Sinclair wrote The Jungle and Frank Norris The Octopus to show the impact of these trusts on workers.
Workers in the steel industry tried to unionize, but Henry Frick, who ran Carnegie Steel for Andrew Carnegie, was against unionization and wanted to break the union. When workers were told they had to take a wage cut in June 1892, despite steel being protected from foreign competition by tariffs, the workers went on strike in Homestead, Pennsylvania on July 2, 1892, the day after the Carnegie Steel Corp. was founded. Frick hired over 1000 Pinkertons to break up the strike. The ensuing Battle of Homestead at “Fort Frick” (the name the strikers gave to the steel plant they occupied), led to over a dozen deaths and the defeat of the Pinkertons by the strikers. The state militia was called in and took over “Fort Frick” and removed the strikers from the steel mill. On July 23, an anarchist attempted to assassinate Henry Frick, but he failed and spent the next 22 years of his life in prison. From 1875 to 1920 American steel production grew from 380,000 tons to 60 million tons annually.
At a dinner held on December 12, 1900, honoring the President of Carnegie Steel, Charles M. Schwab (no relation to the broker Charles R. Schwab) made the case that all of the technological and cost-cutting benefits of the steel industry had already occurred, and the only solution for the steel industry was to form the biggest steel producer on earth. J. Pierpont Morgan agreed, and he combined ownership of the iron ore mines in the Mesabi Range in Minnesota that John D. Rockefeller owned with a number of companies that existed around Pittsburg such as the American Bridge Co., American Sheet Steel Co., American Steel Hoop Co., American Steel & Wire Co., American Tin Plate Co., The Carnegie Co., Federal Steel Co., Lake Superior Consolidated Iron Mines, National Steel Co., National Tube Co.. Oliver Mining Co., Pittsburgh S. S. Co., and Shelby Steel Tube Co. Before this, Morgan had hated Carnegie and refused to buy Carnegie out, but now he relented. Carnegie was 65 years old, and was looking forward to retirement. Morgan paid Carnegie a reported $492 million for Carnegie Steel, of which $226 million went to Carnegie himself. Carnegie spent the rest of his life giving his money away.
US Steel was established on February 5, 1901, when it issued 5 million shares of common stock and 5 million shares of 7% Preferred. This led to a joke in which a student said, “God made the world in 4004 B.C., and it was reorganized in 1901 by J.P. Morgan.” The company had 168,000 employees and made over $100 million in profits during its first year. U.S. Steel produced 66% of America’s steel output and 40% of the world’s steel output. Half a century later, U.S. Steel had over 300,000 employees.
U.S. Steel stock was so prominent and well traded that BOTH the common and the preferred stock were put in the Dow Jones Industrial Average (DJIA). The Preferred stock was in the DJIA until 1916 and the Common stock until 1991 when U.S. Steel was broken up into two companies. Two of the companies that were incorporated into U.S. Steel, Federal Steel Co. and American Steel & Wire Co., were removed from the DJIA. When Tennessee Coal Iron & Railway Co., U.S. Steel’s largest competitor, was acquired by U.S. Steel in 1907 with Teddy Roosevelt’s approval, it was removed from the DJIA as well. The U.S. attempted to use the antitrust laws against U.S. Steel in 1911, but this failed.
The historic price of steel is illustrated in Figure 1. The price reached new highs during World War I, with the price of steel scrap rising to the equivalent of $36 a ton, but declined once World War I was over, to an all-time low of $5 a ton in 1932. The price was fixed during World War II at $18.75 a ton, but rose once the war was over, trading at around $40 a ton until the 1970s when the price rose to $155 a ton in 1974. The price of steel scrap fluctuated between $50 and $150 for the rest of the century. Demand for steel ramped up as China rebuilt its economy and the price of hot-rolled coil hit $930 a ton in 2007 and $1900 a ton in 2021. Today a ton of steel costs about $1000. After adjusting for inflation, there has been virtually no change in the price of steel during the past 130 years.
Figure 1. Price of Steel Scrap, 1894 to 2008, Hot-Rolled Coil, 2009-2023
What Was the First Billion Dollar Corporation?
By all rights, the winner of the First Billion Dollar Company award should have gone to U.S. Steel. When it was formed in February 1901, it issued $508 million in common stock, $510 million in Preferred Stock and $391 million in bonds, making the total value of the company $1.4 billion. When it went public in February of 1901, the common traded at around $50 and the preferred around $100 so the total capitalization of the common and the preferred was around $765 million. Shares of U. S. Steel fell below $10 by 1904 and didn’t break $100 until 1916. The surge back to par finally pushed the company’s stock capitalization over $1 billion.
Standard Oil had 1 million shares outstanding in 1882 giving it a capitalization of $100 million; however, shares of Standard Oil were traded over-the-counter until 1913 when shares started trading on the Curb Exchange (later renamed the American Stock Exchange). Shares peaked at 842 in May 1901 right after U.S. Steel went public, giving Standard Oil a capitalization of $842 million. Shares fell to 395 during the Panic of 1907 but rose to 650 by March 1909 when an antitrust lawsuit was filed against Standard Oil. Shares were still at that level when the Supreme Court ordered Standard Oil to be dissolved. By the time shares in old Standard Oil stock stopped trading in August 1912, shares were at 1100 giving Standard Oil a stock capitalization of $1.1 billion, making it the first company in the world whose stock market capitalization was over $1 billion in history. When Standard Oil was broken up, the value of Standard Oil of New Jersey fell from $1.1 billion to $400 million overnight. The aggregate value of Standard Oil and its subsidiaries remained over $1 billion, but the company was no more.
Standard Oil issued $100 million in preferred stock when it finally listed on the NYSE on March 1, 1920. It took Standard Oil of New Jersey until 1925 to regain a $1 billion market cap U.S. Steel reached $1 billion market cap in 1916, but half of its valuation was preferred stock. U.S. Steel’s common stock reached $1.4 billion in capitalization in 1929 and $5 billion in 1959. In 1991 when U.S. Steel was split up, U.S. Steel’s market cap was still under $5 billion.
The Early Years
Charles R. Schwab was the first President of U.S. Steel, but he was removed a couple years after the firm was founded. He moved over to Bethlehem Steel which he reorganized and turned it from a loss-making company into the second-largest steel company in the United States. Bethlehem Steel existed for the next 100 years. U.S. Steel and Bethlehem Steel were the two giants of the industry. The Steel Strike of 1919 also failed, and it wasn’t until the 1930s that steel companies were unionized in the United States. The price of both U.S. Steel and Bethlehem Steel peaked at the end of the 1950s, then gradually declined. Bethlehem Steel went bankrupt in 2004.
The United States faced a steel crisis in the 1970s and 1980s when a recession occurred in the global steel market. The price of steel collapsed, and U.S. firms faced competition from abroad. Steel employment in the United States fell from 512,000 jobs in 1974 to 236,000 in 1984. Many steel mills in the northeastern United States were forced to close down, and steel production declined. U.S. Steel faced new competition in the 1970s when Nucor (formerly the Nuclear Corp. of America) invested in electric-arc furnaces which were cheaper and more productive than the traditional blast furnace. Nucor is now the largest steel producer in the United States. It took 10.1 man hours to produce a ton of finished steel in 1980, but only 1.5 man hours in 2017 with some mini-mills requiring just 0.5 man hours to produce a ton of steel. The new steel mills, combined with competition from steel produced in Asia, has reduced the profitability of U.S. Steel.
Figure 2. US Steel/Marathon Oil, 1901 to 2000
U.S. Steel and Marathon Oil
The Ohio Oil Co. was spun off from Standard Oil when the company was broken up in 1912. Ohio Oil Co. changed its name to Marathon Oil on August 1, 1962 and was bought by U.S. Steel on March 11, 1982. U.S. Steel changed its name to USX Corp. on July 8, 1986. As the price of oil grew and US Steel faced the steel crisis, the steel portion of U.S. Steel shrank. By the 1990s, Marathon Oil represented over 80% of the revenues of the company. U.S. Steel decided to break up the company into two divisions in April 1991. The two shares were renamed USX – U.S. Steel Group and USX – Marathon Oil Group before being changed to simply U.S. Steel Corp. (New) and Marathon Oil Corp. on December 31, 2001. Since the majority of the revenues and profits of the company came from the Marathon Oil division of the company rather than U.S. Steel, the stock history of U.S. Steel is included in Marathon Oil (MRO), while U.S. Steel was listed as a new company, even though it took possession of the famous “X” symbol which is the ticker for U.S. Steel. Although U.S. Steel will soon be taken over by Nippon Steel, Marathon Oil continues to exist and prosper.
U.S. Steel stock made little progress during the first dozen years of its new existence after 1991, but it enjoyed a monster rally between 2003 and 2008 when an expanding China demanded more steel and the price of steel rose. The price of U.S. Steel stock rose from around $20 a share to $192 in June 2008, pushing U.S. Steel’s market cap past $27 billion, but then the price collapsed by 69% when the demand for steel from China, North America and Europe weakened. The stock returned to the $20 range where it remained for the rest of its existence. By March 2020, U.S. Steel’s capitalization was about $1 billion, less than it had been a century before.
Figure 3. US Steel (New), 1991 to 2023
The passage of President Biden’s infrastructure bill, the Inflation Reduction Act, provided spending and tax incentives for U.S. Steel. Cleveland-Cliffs unveiled a $35 a share cash-and-stock bid on August 11, 2023. U.S. Steel initiated a sale process to find the highest bidder for U.S. Steel. Nucor, ArcelorMittal and Nippon Steel all expressed an interest in acquiring U.S. Steel, but Nippon Steel offered the highest price at $55 in cash per share, making the acquisition worth about $14 billion. The fact that shares of both Cleveland-Cliffs and Arcelor Mittal rose when they “lost” the right to acquire U.S. Steel may not shine brightly on the firm. Nevertheless, there is no guarantee the acquisition will be approved. President Biden said the deal deserves “serious scrutiny in terms of its potential impact on national security and supply chain reliability.” It will be reviewed by the Committee on Foreign Investment in the United States. Whether U.S. Steel is acquired by Nippon Steel or another company, its acquisition will bring an end to the existence of one of the greatest firms in American industrial history.
