Presentaion by
Masatoshi Nakamura, Vice President
JFE Steel Corporation
JFE STEEL’S CHALLENGE TO SUSTAINABILITY IN
THE 21ST CENTURY
At the Steel Success Strategies XX on June 21, 2005, New York

First, I would like to express my words of appreciation to Mr. Peter Marcus, and the American Metal Market for this opportunity. Today, I would like to share with you the steel industry’s challenge to keep and maintain the sustainability which, I believe, is being endangered by the flood of new capacity and overproduction in commodity segment. I will introduce the case of the JFE Steel Corporation.

The steel industry has been the cyclical industry. Fewer players, tight metallics with growing demand. This could be yesterday. Today, overproduction and surplus metallics.

This is the cycle we repeated for many, many, many years.

That’s why the steel industry has been called as: Declining, Marginal, Dying, and Smokestack industry. This cyclicality is the core problem of the steel industry. Is this eternal? Is it impossible to overcome?

Let’s have a glance at the recent change in global industry.

The consolidation in the steel has been accelerated. In the past 10 years, the top 10 steel companies’ total production and its share increased dramatically. The production increased from 150 million tons to 297 million tons, and the share, from 20% to 28%.

However, the steel industry’s concentration is still very low compared with the Auto industry, or, raw material industries.

Another change in recent days in the world steel industry is the tremendous huge capacity increase, especially in China.

Last year, we were in the steel shortage. However, this year, production will exceed the consumption. Next year the excess could be 30 million tons, and far more thereafter.

Overproduction could be the same in the case of The Asia’s flat products. Next year, the excess production will be 25 million tons, and 40 million tons the following year.

In the case of galvanized in China and Korea, the excess production would be more than 2 million tons this year, and more than 4 million tons the following year.

In South East Asia, already the steel inventory level has increased about 150% in one year, and has reached the highest level in the last few years.

In China, the cold rolled and coated products segment’s consumption has plunged recently whereas the capacity has increased substantially.

This is a summary of the recent changes in the global steel industry which indicate the steel industry’s core problem is apparent and seems to be emerging again. How can we overcome this? Is it impossible or possible?

JFE Steel’s challenge. JFE Steel has been challenging this difficult task of overcoming the core problem. JFE Steel has differentiated strategies in operation, products, and marketing.

By merging former Kawasaki and NKK, the very efficient new JFE Steel started in 2003. First, we shutdown old and inefficient facilities. We shut down 2 BF, and we shut down 2 EGL lines, we shut down 1 CGL line and we shut down 2 ETL/TFL lines. Now, only two gigantic steel works are producing 27 million metric tons of crude steel.

We reduced our facilities. However, we have maximized the capacity utilization of our remaining facilities, and succeeded in achieving the utmost efficiency and competitive edges. .

In addition to the differentiated operation, our JFE’s differentiated marketing strategies are all long-term contract based, which have been tailored to the specific customers in the specific industries. There is no spot business. Domestic customers Structure is as follows. In export business, 41% goes to our vertical integration alliances. Another point of our marketing is, our differentiated product strategy, “Only 1, Number 1” products.

JFE Steel’s product strategy is high-quality, high-value added high-margin products oriented. 85% goes in that category. The highest grade steel is, "Only 1, Number 1”, which has the higher profitability where the ROS is above 20%, whose portion we have increased gradually.

Our global sales is unique in that we have many alliances worldwide – some 25 alliances. We do the vertical integration with those alliance companies stably supplying our steel products to them. For example, in Korea, Dongkuk Steel, Hyundai, HYSCO, INI. Donbu Steel, Seah Steel.

JFE Steel earnings improved ever since its start. Its corporate value is also increased. The point is how to sustain this.

JFE has been challenging to maintaining sustainability and will further challenge to overcome the core problem of steel industry.

The 3 key strategies, JFE Steel will further pursue and evolve.

Successful consolidation and integration

Product differentiation taking advantage of the high-end steel market

Marketing differentiation by long-term, sustainable and viable business. No spot business.

Actually, our targeted segment of high-end steel is growing in demand. This is the China’s case. China’s customers, such as Japanese car companies, Japanese electrical appliance companies, expanding their business and import is stable in this high-end segment, whereas China is now the net exporter of the commodity products.

JFE determines the high quality products from 4 factors.

Virgin metal from blast furnace and converter

Combination of advanced technology

Sustainable price and margin

Long-term business relationship

Spot prices are fluctuating in China. JFE’s long-term high-end business has enabled us to keep stable pricing in China.

Crucially important are three key strategic concepts or spirits of JFE Steel when we conduct business.

Long-term relationship

Win-Win relationship

Trust-based relationship with customers and partners

The sustainable co-prosperity with customers and partners is our ultimate goal.

Continuing the challenge to the sustainability, JFE is now building up the new business plan, which starts in 2006. In that business plan, JFE Steel will continue to challenge to keep the sustainability. By our differentiated strategies in operation, products and marketing, We will continue the customers-linked business. Our production and marketing is customers’ “Real-Demand-Driven”. This “Real-Demand-Driven” production and marketing, we believe, is essential and contributes to avoiding the current and future excess production and steel glut in the worldwide steel market. This, ultimately, we believe, will contribute to realizing the sustainability in the steel industry in the 21st century.

Thank you for your kind attention.

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