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by New York - It’s a pleasure for me to be here today and I thank MSCI and Mr. Berlin for inviting me back to address you. I also thank them for giving me a very big promotion from last year. As I looked at the first version program I realized that I’m President of the entire JFE Steel Corp. Last year I was only head of the Americas office. I’m delighted to address you what is today’s one of the most dynamic growth industries in the world – the steel industry. What’s a difference from the first time I had a U.S. assignment back almost 20 years ago. Then steel in the United States, in Japan and I believe in Europe was called mature. There was also the connotation – rustbelt – which also wasn’t too positive. But that’s all gone now. Now, we have companies outbidding each other to buy steel mills and billions of dollars are involved. In the United States, steel stocks were the best performing stocks last year. In Japan it was similar. Many know the various factors that influenced this dramatic change. In my speech today I want to touch upon this and also other aspects of the steel industry, especially in Asia, which has made steel once again a significant industry in the world. Let’s look at consolidation. This chart looks at the top steelmakers in 1995 and in 2005. The top 10 steelmakers now control 29 percent of the 1.1 billion tons of steel production in the world, up from 20 percent a decade ago. Consolidation has eliminated inefficient capacity but much more has to be done. To give you an example, my company, JFE, eliminated several facilities, including 2 blast furnaces and a number of finishing facilities over the last few years to increase our efficiency. I also believe that Mittal took similar steps in the United States. Consolidation provides more cost effective production. Companies don’t simply produce for cash flow but adjust production for profits. In addition, we had strong steel demand. The fears about overcapacity that were expressed a year or so ago are not so serious. Here are the numbers on steel production worldwide over the past 35 years. Leading the growth has been China. This chart shows the impact that China has had, especially in the last three years. Based on data provided by a variety of analysts it doesn’t appear that there is substantial oversupply in the world. Prices remain firm. This slide shows increase steel consumption of Asian countries, including China, in this dynamic growth. (Long Pause) We do expect that there will be capacity increases in China, India and Korea to satisfy increased steel consumption. Let’s look at some published price information on China, The EU and the United States. You can see that while there are fluctuations, the current situation looks very good. Prices in China did decline late last year but have come back this year as steelmakers adjusted their production downward. I think that some steelmakers have ceased production earlier this year because of the poor situation. While we’re looking at China let me talk about recent developments there. The Chinese government wants to improve quality and increase the percentage of value-added production. It wants a stronger industry based on quality output rather than absolute tonnage. The government also wants to cut energy consumption while improving the environment. It believes the consolidation can be an important factor. This would create efficiencies in energy use and environmental improvement. Some estimates indicate that as much as a hundred million tons of capacity in China is inefficient. The government wants to close down much of this. But there is also the expectation that highly efficient new capacity will be installed to replace much of the eliminated capacity. Until the first-half of 2005 China did not have enough steel capacity to satisfy its own needs. It always had to import value-added products and there was some export of commodity grades, mostly semi-finished steel. This chart looks at that import-export relationship on a product basis. In recent months China has increased its capacity and it’s now at a balance or perhaps somewhat in excess. Therefore China increased exports, but still mostly in the commodity grades. Demand continues to increase in China and the government wants steelmakers to concentrate primarily on meeting domestic needs. One reason is that exporting might not be profitable because of the high cost of iron ore and energy. As you may know, the strong demand from China for iron ore is one of the principal reasons that prices of that raw material has risen. Per capita consumption in China is still very low – just over 200 kilograms. This compares with over 1,000 kilograms for Korea and over 600 kilograms for Japan. Therefore, we expect demand to continue to increase. What’s happening with consolidation in China? The government wants many mills to merge. Some of this has happened like Wuhan Steel, Tangshan Steel and so on. Jinan and Laiwu, each with more than 10 million tons of capacity have announced that they will merge. The new company will be Shandong Steel Group which will have the sixth largest capacity in the world. Another proposed merger would link Anzan and Benxi – a new 18 million-ton company. There are over 800 mills in China. The government owns about 100, which have more than one-half of crude steelmaking capacity. About 700 mills are owned by private companies that have almost 40 percent share. The rest are owned by foreign investors. The smaller mills’ production average under a hundred thousand tons of production annually. As you know, the smaller mills are owned by entrepreneurs supported by provincial governments. Most of these steelmakers have not been profitable in the production of commodity grade long products and they have pushed for more exports for cash flow. China is also upgrading its finishing equipment to be more value-added. This year there’ll be a 52 percent increase in hot-strip mill production, adding almost 22 million tons. Most of this production will then go to cold-rolling where China will increase that output by about 11.5 million tons – a 58 percent increase from the year earlier. This will make them more self-sufficient in value-added products and we believe that virtually all of this new finishing capacity will be used to satisfy domestic requirements. Asian demand is also increasing and most exports from China will be aimed at those markets. This chart shows the 3 major countries for its exports as well as the 3 leading importers. Japanese as the No. 1 exporter to China, with a 30 percent share of its imports, has been providing a good deal of value-added products to China over many years. As you know, we do have several joint ventures where we can export these products in the automotive area and to other OEM manufacturers. Korea has extensive trade with China – accepting 22 percent of its exports while providing 20 percent of its imports. Last year I did predict that China, a net importer at the time, would become a net exporter and this has occurred. But I do think the government is concerned about rising exports, especially to the United States where it could cause trade problems. Let me return to my original theme about steel being a dynamic growth industry. The sharp fluctuations in prices of the past are now gone because steelmakers can adjust to the current environment. Market intelligence is so swift today. There are no longer big surprises concerning inventory build-ups and market demand. Price cycles now change within 6 months rather than 2 or 3 years. This is obvious in the last few years in the United States and also in the world steel market. The fluctuations are expected to be very shallow. Several years ago we had very deep declines and sharp increases. Furthermore, the absolute price of steel is now higher than the average price over the last several decades. Some factors involved with this phenomenon are the high raw material costs and relatively strong and sustained demand as well as production adjustments when demand does decline. I also want to note another factor. And that is government intervention, especially in the United States. Over the last 3 or more decades we have seen Voluntary Restraint Arrangements, a Trigger Price Mechanism, quotas and dumping cases. These have all distorted the marketplace and caused fluctuations which were not market-based. I hope that these will not take place again and that everything will be market influenced. __________________________ The steel industry is strong. We expect demand to continue to increase. We have major players who have great profit motivations. The quality has improved tremendously. We look for a great future. Before I conclude I just want to give a little commercial about JFE Steel. Here’s our product mix. We’re almost 80 percent flat-rolled. About 85 percent of our total shipments is value-added. In addition, more than 20 percent of our shipments are unique to our company which we call only 1, No. 1 products and these sales have very high profitability. As you know JFE was created by a merger of NKK and Kawasaki Steel. Here’s our operating income over the past 4 years. We have had a steady increase. Our stock price has also increased. As with other Japanese companies and many international steelmakers we have a great number of alliances and joint ventures throughout the world and this benefits us in a variety of ways through cross-technical exchanges to serve our customers overseas. I think I should also mention a little about the Japanese market today. At JFE we are operating at full capacity and we’re only supplying our existing customers, both domestic and overseas. Other steelmakers are also operating at full capacity. Steel production in Japan this year will be about the same as last year – 112 million metric tons.
I also should note that about 85 percent of JFE exports go to Asian countries. JFE exports very little to the United States. Mostly they have been semi-finished steel slabs to our joint venture California Steel Industries because that market was tight for the past several months. A robust U.S. market economy, high steel prices, strong steel demand and low inventory levels encouraged more imports into the United States over the past several months. As a result, Japanese steel imports also increased somewhat. But still Japanese imports represent less than 5 percent of total U.S. steel imports. We’re very positive about the outlook for steel. I thank you very much for your attention and look forward to your questions.
Prepared by Charles E. Butler & Associates, 60 East 42nd St., New York, N.Y. 10165, doing business as JAPAN STEEL INFORMATION CENTER. The CENTER is registered with the U.S. Department of Justice, Washington, D.C., under the Foreign Agents Registration Act as an agent of The Japan Iron & Steel Federation, 3-2-10 Nihonbashi-Kayabacho, Chuo-ku, Tokyo, PC-103, Japan, a privately financed trade organization. This material is filed with the Department of Justice where the required registration statement is available for public inspection. Registration does not indicate approval of the contents by the United States Government.
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