ManagementManagement GoalsGoals andand MediumMedium--TermTerm Strategies/BusinessStrategies/Business PlanPlan
June 2003 Nippon Steel Corporation
Copyright （c） NIPPON STEEL Corporation 2003 All rights reserved. 0 Contents
I. Steel Business ① Business Environment ② Nippon Steel’s Competitive Advantages ③ Key Issues and Strategies II. Medium-Term Financial Goals (FY2003 - FY2005)
* Names of companies appearing in this presentation have been abbreviated
1 I. Steel Business
2 Nippon Steel: Progressing Into A New Phase of Earnings Growth
BusinessBusiness EnvironmentEnvironment GlobalGlobal demand demand supported supported by by brisk brisk growth growth in in Southeast Southeast Asia, Asia, espec especiallyially China China
CapacityCapacity limitations limitations leading leading to to favorable favorable demand demand for for high high value value-added-added products products
StableStable and and firm firm steel steel prices prices due due to to tight tight supply supply caused caused by by indus industrytry consolidation consolidation
GlobalGlobal steel steel commodity commodity price price convergence convergence favorable favorable for for Japanese Japanese steel steel makers makers StrategiesStrategies && GoalsGoals
ExpandExpand sales sales of of high high value value-added-added products products in in growing growing markets, markets, especially especially China China CapitalizeCapitalize on on strong strong relationships relationships with with key key Japanese Japanese customers customers
EstablishEstablish global global alliances alliances with with foreign foreign steel steel manufacturers manufacturers (e.g (e.g.,., Arcelor Arcelor))
IncreaseIncrease efficiencies efficiencies of of domestic domestic mills mills by by expanding expanding blast blast furna furnacece volume volume
InvestInvest in in downstream downstream production production facilities facilities in in Asia Asia (e.g., (e.g., JV JV wit withh Bao Bao Steel Steel in in China) China) Goal:Goal: achieve achieve record record high high recurring recurring profit profit of of ¥ ¥250bn250bn ($2.1bn) ($2.1bn) in in FY2005 FY2005
3 I. - ① Business Environment
4 Worldwide Demand for Crude Steel: Asian Market as a Significant Growth Driver
WorldwideWorldwide && AsiaAsia ChinaChina (millions of tons) 829 255 900 780 868 2001→ 2003E 240 Worldwide ＋11% 232 Worldwide 700 Asia ＋20% 210 211 Worldwide ex-Asia 449 ＋3% 180 500 422 174 372 150 Global Crude Steel 300 Asia Production (CY2001) 120 CY2001 CY2002E CY2003E CY2004E 100 CY2001 CY2002E CY2003E Worldwide 846m tons 2001→ 2003(E) Asia 351m tons China ＋33% JapanJapan China 75 73 72 72 Others 149 495 KoreaKorea 65 60 Korea 16% 55 increase 44 50 Japan 44 44 Asia - 45 103 38 Others 40 55 35 CY2001 CY2002E CY2003E (Source: International Iron and Steel Institute) 30
20 5 CY2001 CY2002E CY2003E Global Consolidation Has Helped Recover Pricing Powers
Footnote: Blue represents Nippon Steel alliance partners Crude steel based on group output volume CrudeCrude SteelSteel OutputOutput (growing(growing marketmarket shareshare ofof toptop tenten steelsteel makers)makers) ※ currently under negotiations
CY1995 CY2002 Production Volume Market share Production Volume Market share Top 5 9,591 13% 16,150 18% Top 10 15,058 20% 24,447 27% Total (Worldwide) 75,226 100% 90,279 100%
6 (Source: Metal Bulletin, IISI) Prices in Japan, The Lowest Worldwide, Have Recovered Significantly
Steel Sheet Products Price Index Steel Sheet Products Price Index PricePrice TrendsTrends ofof SteelSteel ProductsProducts inin JapanJapan (Nippon(Nippon SteelSteel estimatesestimates asas ofof FY2002FY2002--3Q)3Q)
(¥1000／ton） ASEAN Japan EU US (Thailand) China 60
Hot-rolled sheets 10 11 10 11 120 50 Cold-rolled sheets
Cold-rolled sheets 10 11 12 11 130 Plates 40 Coated steel sheets 10 10 13 - 130 Hot-rolled sheets
(Index based on Japan as 100) 30 Ｈ-beams
Small pipes (Tokyo) 130 140 130 20 100 105 120 115 130 100100 11 120 100 10 11 120 80 100 11 10 Scrap (Tokyo) 60 0
40 9 12 6 9 12 6 9 12 6 9 12 6 9 12 6 9 12
1997-6 1998-3 1999-3 2000-3 2001-3 2002-3 2003-3 20 Cold-rolled sheets (1.0xS) Hot-rolled sheets (2.3xS) Plates (19mm) Coated steel sheets 0 Ｈ-beams (200x100) Samll pipes (SD295-19mm Tokyo) Scrap (Tokyo) Cold-rolled sheets Japan Hot-rolled sheets EU US China ASEAN (Thailand) (Source: Japan Metal Daily, Nihon Keizai Shimbun)
7 I. - ② Nippon Steel’s Competitive Advantages
8 Our Competitive Advantages
SolidSolid customer customer base base in in the the domestic domestic market market
TopTop market market share share for for high high value value-added-added products products
StrongStrong capacity capacity for for delivering delivering total total steel steel product product solution solution to to globalizing globalizingcustomercustomer base base
CostCost competitiveness competitiveness through through production production facility facility enhancement enhancement
EstablishedEstablished supply supply network network for for stable stable and and speedy speedy delivery delivery
StrategicStrategic business business alliances alliances with with leading leading overseas overseas steel steel makers makersforfor capturing capturing growthgrowth opportunities opportunities as as well well as as delivering delivering technology technology innovation innovation
9 A Solid Domestic Base
Relationship with Leading Domestic Customers (Nippon Steel figures are based on non-consolidated accounts)
・・SteelSteel ProductProduct ShipmentsShipments DomesticDomestic shipmentsshipments 66%,66%, ExportExport ratioratio 34%34%
HighHigh weightingweighting toto longlong--termterm contractscontracts withwith manufacturingmanufacturing ・・CompositionComposition ofof DomesticDomestic industryindustry (especially(especially automobiles)automobiles)
DomesticDomestic ConsumptionConsumption andand NipponNippon SteelSteel ShipmentsShipments ofof SteelSteel ProductProductss Breakdown by User Demand （（FY01) Breakdown by User Demand FY01) （（IndexedIndexed basedbased onon FY1990FY1990 asas 100100））
100 Overall Industry 8 8 25% 90 86 Nippon Steel 30% 80 40% 73
55% 70 Manufacturing 30% (ex.automobiles) 20% 60 Automobile
Construction & 50 Retail FY96 FY02 Domestic Nippon Steel Source: Japan Iron and Steel Federation monthly statistics Source: Japan Iron and Steel Federation steel statistics, Nippon Steel estimates 10 Top Market Share for High Value-added Products
Specialized thin steel sheets Galvanized steel sheets ブリキ (High tensile特殊鋼薄板 strength steel) for automobiles Steel鋼材 materials
Nippon Steel approx. 25% Nippon Steel Nippon Steel approx. 40% approx. 50%
軌条Rails Electrical電磁鋼板 steel Tinブリキ &TFS
Nippon Steel Nippon Steel approx. 65% Nippon Steel approx. 40% approx. 50%
(Note: Market share based on non-consolidated account) 11 (Source: Order inflow statistics) Nippon Steel’s Market Share for Automotive Flat Steel in Asia
AsiaAsia (including(including Japan)Japan) 8 Major Customers in Asia
Toyota Nippon Steel Honda Others Total demand of 8 est. 48% 52% major customers (Japan & Asia) 8.2m tons Nissan／
Mitsubishi Motors／
Mazda／
Isuzu ／
Fuji Heavy／
Suzuki／
12 Meeting the Needs of an Ever Changing Competitive Environment/Customer Requirements
ShiftingShifting naturenature ofof competitioncompetition duedue toto globalizationglobalization inin marketsmarkets aandnd technological,technological, productproduct andand processingprocessing developmentdevelopment
(e.g. auto industry) SocialSocial ResponsibilityResponsibility GlobalizationGlobalization ofof AutomobileAutomobile manufacturersmanufacturers
GlobalGlobal environmentalenvironmental problemsproblems ExpansionExpansion ofof overseasoverseas productionproduction
LightLight--weightweight forfor fuelfuel efficiencyefficiency IncreaseIncrease inin worldwideworldwide launchlaunch ofof automobilesautomobiles (i.e.,(i.e., globalglobal models)models) ReductionReduction ofof pollutantpollutant releaserelease ReductionReduction inin automobileautomobile developmentdevelopment leadlead timetime PursuitPursuit ofof collisioncollision safetysafety (4(4 yearsyears →→ 11 year)year)
AutomobileAutomobile manufacturersmanufacturers areare requestingrequesting thatthat thethe steelsteel industryindustry developdevelop aa ““globalglobal supplysupply structurestructure””asas wellwell asas maintainingmaintaining ““highlyhighly technicaltechnical productsproducts equallyequally onon aa globalglobal basis.basis.””
DeliveringDelivering totaltotal solutionssolutions throughthrough collaborationcollaboration withwith automobileautomobile manufacturersmanufacturers
13 “Close-to-Customer” Capacities Promptly Responding to Needs such as “Just-in-Time” Production
Muroran Nationwide order inflow in millions tons, （）regional weighting actual figures for 1st Half 2002 （annualized base） Source: Steel and metal demand monthly statistics Hokkaido 1.58 (3%) Chugoku 4.96 (9%)
Tohoku Kamaishi 2.18 (4%) Mazda Hirohata Kyushu Hikari Nissan Honda 4.36 (7%) Yawata Kimitsu Toyota Kanto 18.6 (32%) Toyota Nissan Tokai & Honda Hokuriku Sakai 13.14 (23%) Oita Kansai Nagoya 12.0 (20%)
14 I. - ③ Key Issues and Strategies
15 Key Issues & Strategies for Nippon Steel
Issues
DomesticDomestic OverseasOverseas
・・ImprovementImprovement ofof marketmarket conditioncondition ・・SupportingSupporting overseasoverseas operationsoperations ofof majormajor domesticdomestic --OptimalOptimal utilizationutilization ofof eacheach alliancealliance partnerspartners’’facilitiesfacilities customerscustomers ・Reorganizing cost structure ・Reorganizing cost structure ・・CapitalizingCapitalizing onon thethe growinggrowing ChineseChinese marketmarket --EnhancingEnhancing operatingoperating cashflowcashflow// blastblast furnacefurnace capacitycapacity ・・ImprovingImproving internationalinternational costcost competitivenesscompetitiveness ・・MeetingMeeting thethe increasinglyincreasingly demandingdemanding customercustomer needsneeds
Strategies
AllianceAlliance NipponNippon SteelSteel
・・ImprovementImprovement inin ProfitabilityProfitability Domestic:Domestic: SumitomoSumitomo MetalsMetals Industries,Industries, KobeKobe Steel,Steel, --AlleviateAlleviate capacitycapacity constraintsconstraints atat blastblast furnacesfurnaces byby AichiAichi Steel,Steel, MitsubishiMitsubishi MuroranMuroran Steel,Steel, NakayamaNakayama introductionintroduction ofof thinthin wallswalls SteelSteel Works,Works, SumitomoSumitomo ElectricElectric IndustriesIndustries --ProductProduct mixmix iimprovementmprovement duedue toto higherhigher valuevalue--addedadded productsproducts andand costcost reductionreduction ofof commoditycommodity productsproducts Overseas:Overseas: Arcelor,Arcelor, POSCOPOSCO ・・RespondingResponding toto CustomerCustomer NeedsNeeds --PromptPrompt responseresponse byby havinghaving millsmills closeclose toto customercustomer locationslocations --JointJoint productproduct developmentdevelopment withwith customerscustomers ・・HarnessingHarnessing growthgrowth momentummomentum ofof thethe AsianAsian marketmarket --InvestingInvesting inin locallocal companiescompanies andand expandingexpanding exportsexports
16 Global Alliance Network: Overseas Alliance Partners
Units: (‘000 tons)
I/N Tek
CRC 1,600
Arcelor I/N Kote POSCO 40％ CGL 500 3％ EGL 400 50％ Bao Steel Nippon Steel
36％ 63％ 40％ Tata SUS SNP CRC 1,000 UNIGAL Electric resistance welded pipe 60 CGL 400
Strategic alliance JV under negotiations JV with Nippon Steel (% of capital investment) SUS:SUS: SiamSiam UnitedUnited SteelSteel Technological alliance SNP:SNP: SiamSiam NipponNippon SteelSteel PipePipe Note: Thin steel sheets for automobile use 17 Objectives of Strategic Alliances with Overseas Partners
Arcelor NipponNippon POSCO Arcelor SteelSteel POSCO
BaoBao SteelSteel
(joint venture under negotiations) ・・GlobalGlobal StandardizationStandardization ofof TechnologyTechnology
－－ SupportingSupporting overseasoverseas operationsoperations ofof domesticdomestic automobileautomobile makersmakers
－－ JointJoint ResearchResearch Arcelor:Arcelor: steelsteel sheetssheets forfor automobilesautomobiles POSCO:POSCO: technologytechnology forfor steelsteel processingprocessing
・・EstablishingEstablishing closeclose relationshipsrelationships withwith leadingleading overseasoverseas steelsteel makmakersers
・・HarnessingHarnessing growthgrowth momentummomentum ofof thethe AsianAsian (China)(China) marketmarket
18 Strategic Alliance with Domestic Partners
Alliance with Sumitomo Aichi Steel Metals Ind. & Kobe Steel ・Hybrid electrical furnace StrengtheningStrengthening ・ ・Optimal production through Mutual supply of slab and mutual competitiveness through utilization of strip mill competitiveness through collaboration with major customers businessbusiness alliancealliance ・Business integration through establishing joint ventures - Steel business with Sumitomo Metals ・Improving Market Condition Mitsubishi Muroran Steel joint ventures ・Optimal utilization of facilities ・Optimal production ・Cooperation between Affiliates between partners - Nippon Steel Sumikin Welding Nippon Steel Bolten & Shinko Bolt Nakayama Steel Works,
・Cooperation between Steel mills Sumitomo Electric Ind. - Hirohata & Kakogawa, Kimitsu & ・Support and cooperation for Kashima efficient production
Streamlining Distribution Channels
・Nationwide processing & distribution channel
19 Domestic Steelmaking Facilities: History of Rationalization
Blast furnace Blast furnace SakaiSakai MuroranMuroran BasicBasic oxygenoxygen furnacefurnace （（numbernumber ofof furnaces)furnaces) Ｘ (2) ElectricElectric furnacefurnace 1990 （Hokkai Steel Works）
HikariHikari HirohataHirohata KamaishiKamaishi YawataYawata （ （3.6m3.6m tonstons）） Ｘ (1) Ｘ Ｘ 1993 (4) 1989 1988 OitaOita（ （ 8.2m8.2m tonstons）） KimitsuKimitsu （ （9.32m9.32m tonstons）） NagoyaNagoya （ （5.72m5.72m tonstons）） (3) (5) TotalTotal blastblast furnaces:furnaces: 1313 unitsunits (1984)(1984) →→ 99 unitsunits (1993)(1993) －－shiftingshifting toto largelarge--volumevolume furnaces,furnaces, whilewhile shuttingshutting downdown (2) smallsmall--volumevolume furnacesfurnaces ((※）※）（（））crudecrude steel steel output output as as of of 1st 1st Half Half FY2002 FY2002 (annualized) (annualized) TotalTotal blastblast furnacefurnace volume:volume: 44,00044,000㎥㎥ →→ 37,00037,000㎥㎥ ××scrappedscrapped blastblast furnacefurnace andand yearyear AverageAverage innerinner volume:volume: 4,4004,400㎥㎥ perper unitunit
20 Expansion of Blast Furnace Inner Volume Contributing to High Efficiency
3 3 BlastBlast FurnaceFurnace ReliningRelining ScheduleSchedule Volume:Volume: 37,000m37,000m3→→40,000m40,000m3 AverageAverage furnacefurnace innerinner volumevolume followingfollowing ThinThin walls:walls: raisingraising efficiencyefficiency 3 completion:completion: 4,7004,700 mm3perper unitunit --EnergyEnergy && laborlabor savingssavings --StabilizationStabilization ofof productproduct qualityquality 3/1999 3/2000 3/2001 3/2002 3/2003 3/2004 3/2005 --IncreaseIncrease longevitylongevity
Nagoya Blast Furnace #3 4/2000 FurnaceFurnace innerinner volumevolume (capacity 3,42４→ 4,300m3) enhancementenhancement Kimitsu Blast Furnace #3 5/2001 37,000m37,000m33 →→ 40,000m40,000m33 (capacity 4,063→4,822m3) Muroran Blast Furnace #2 11/2001 (capacity 2,296→2,902m3) 11mm tonton increaseincrease inin steelsteel outputoutput (Going into effect after FY2003) Kimitsu Blast Furnace #4 5/2003 (Going into effect after FY2003) (capacity 5,151→5,555m3) 4/2004 Oita Blast Furnace #2 ReductionReduction ofof scrapscrap ironiron useuse (capacity 5,245→approx. 5,700m3) 《 → ％ 》 ImpactImpact ofof reliningrelining xx ¥¥20bn20bn 《14%14% → 77％ 》 (after(after FY2003)FY2003) (return(return balance)balance)
¥¥2020bnbnprofitprofit impactimpact ¥¥1010bnbnprofitprofit impactimpact
21 II. Medium-Term Financial Goals (FY2003 - FY2005)
22 Medium-Term Financial Goals: Key Highlights
・・IncreaseIncrease overalloverall recurringrecurring profitprofit mainlymainly fromfrom improvementsimprovements inin ststeeleel businessbusiness
－－ FromFrom ¥¥68bn68bn inin FY2002FY2002 toto ¥¥250bn250bn inin FY2005FY2005 (improvements(improvements inin steelsteel businessbusiness :: ¥¥180bn)180bn)
・・ReduceReduce overalloverall assetsassets andand leverageleverage whilewhile strengtheningstrengthening equityequity babasese
－－ ReducingReducing totaltotal interestinterest--bearingbearing debtdebt fromfrom ¥¥1,871bn1,871bn inin FY2002FY2002 toto ¥¥1,600bn1,600bn inin FY2005FY2005 －－ ResultingResulting inin decreasingdecreasing debt/equitydebt/equity ratioratio fromfrom 2.4x2.4x inin FY2002FY2002 ttoo 1.6x1.6x inin FY2005FY2005 －－ ReducingReducing totaltotal assetsassets fromfrom ¥¥3,757bn3,757bn inin FY2002FY2002 toto ¥¥3,700bn3,700bn inin FY2005FY2005
・・Thus,Thus, increasingincreasing ReturnReturn--OnOn--SalesSales (ROS)(ROS) andand ReturnReturn--OnOn--AssetsAssets (ROA)(ROA)
・・TightTight controlcontrol overover capitalcapital expenditureexpenditure visvis--àà--visvis depreciationdepreciation
23 Medium-Term Financial Goals: Assumptions & Financial Targets
＜＜ConsolidatedConsolidated＞＞ FY2002FY2002 FY2005(E)FY2005(E) ChangeChange FY2003(E)FY2003(E)
RecurringRecurring ProfitProfit ¥¥6868bnbn ¥¥250250bnbn ++ ¥¥181181bnbn ¥¥140140bnbn
ReturnReturn onon SalesSales (RP/Sales)(RP/Sales) 2.52.5％％ 99％％ +6.5%+6.5% pointspoints
ReturnReturn onon AssetsAssets ※※11 2.62.6％％ 99％％ +6.4%+6.4% pointspoints
TotalTotal AssetsAssets ¥¥3,7573,757bnbn ¥¥3,7003,700bnbn -- ¥¥5757bnbn
TotalTotal InterestInterest--bearingbearing DebtDebt ¥¥1,8711,871bnbn ¥¥1,6001,600bnbn -- ¥¥271271bnbn ¥¥1,8001,800bnbn
ShareholdersShareholders’’ EquityEquity ¥¥789789bnbn ¥¥1,0001,000bnbn ++ ¥¥211211bnbn
NumberNumber ofof EmployeesEmployees 47,20047,200 44,60044,600 --2,6002,600
＜＜AssumptionsAssumptions＞＞ CrudeCrude SteelSteel OutputOutput ((※※2)2) 29.929.9mm tonstons 2929 mm tonstons SalesSales ¥¥2,7492,749bnbn ¥¥2,9002,900bnbn ExportExport RatioRatio ((※※2)2) 32%32% 34%34% ForeignForeign ExchangeExchange RateRate ¥¥122122／／$$ ¥¥110110／／$$ Interest Rate （TIBOR） Interest Rate （TIBOR） 0.10.1 ％％ 22 ％％ (※1) ROA= RP excluding Interest Expense/Total Assets 24 (※2) based on non-consolidated account Medium-Term Financial Goals: Details of Profit Improvement
KeyKey profitprofit improvementimprovement driver:driver: steelsteel businessbusiness
FY2002 FY2005 ¥182bn increase ¥68bn ¥250bn
Improvement in Steel Business : ¥180bn （excludes alliance effects ）
ImpactImpact onon OrdinaryOrdinary ProfitProfit
PricingPricing && productproduct mixmix ++ ¥¥30bn30bn ･･ ImprovedImproved pricingpricing ・・BetterBetter productproduct mixmix --shiftingshifting toto moremore valuevalue--addedadded productsproducts ForeignForeign exchangeexchange raterate --¥¥10bn10bn １，７５０億円増 CostCost reductions*reductions* ++ ¥¥130bn130bn ･･ EffectsEffects ofof reliningrelining ofof blastblast furnaces:furnaces: ¥¥30bn30bn (reduction(reduction ofof scrapscrap usage:usage: ¥¥10bn)10bn) (elimination(elimination ofof temporarytemporary suspensionsuspension problemsproblemsi.e.i.e. HMRHMR && inventories:inventories: ¥¥20bn)20bn) ・・ProcurementProcurement costcost (e.g.,(e.g., rawraw materials)materials) :: ¥¥30bn30bn ・・LaborLabor productivityproductivity (10%(10% improvement)improvement) :: ¥¥20bn20bn ・・Depreciation:Depreciation: ¥¥15bn15bn ・・OthersOthers (improved(improved yieldyield ratesrates andand unitunit productivity)productivity) :: ¥¥35bn35bn GroupGroup companiescompanies ++ ¥¥30bn30bn ･･ IntegrationIntegration effectseffects (Nippon(Nippon SteelSteel SumikinSumikin StainlessStainless Steel,Steel, etc.etc.)) ・・OperationalOperational improvementsimprovements (overseas(overseas subsidiaries,subsidiaries, etc.)etc.)
*¥220bn in actual total cost reductions achieved in 3 years (¥60bn in FY2000, ¥80bn in FY 2001 & ¥80bn in FY2002) 25 Medium-Term Financial Goals: Cash Flow Target
GeneratingGenerating FCFFCF forfor enhancingenhancing balancebalance sheetsheet andand internationalinternational comcompetitivenesspetitiveness
CashCash FlowFlow TargetTarget 33--yearyear cumulativecumulative totaltotal
RecurringRecurring ProfitProfit ¥¥580580bnbn
CapitalCapital expenditureexpenditure (cash(cash out)out) --¥¥430430bnbn DepreciationDepreciation ¥¥560560bnbn
NetNet proceedsproceeds fromfrom capitalcapital outlayoutlay ¥¥130130bnbn
InvestingInvesting && financingfinancing activitiesactivities --¥¥8080bnbn EffectsEffects ofof assetasset reductionreduction ¥¥8080bnbn
CorporateCorporate taxes,taxes, dividendsdividends && othersothers --¥¥350350bnbn ConsolidatedConsolidated CashCash FlowFlow ¥¥360360bnbn
26