Review of Operations

JFE Steel Corporation

A challenging spirit, flexibility, sincerity These are the characteristics that underpin ambitious efforts to reach higher goals and be the best steelmaker in the world.

JFE Steel focuses on steel operations-one of the core activities of the JFE Group-and executes these activities efficiently at the East Japan Works, the West Japan Works and the Chita Works, which specializes in finished steel products. The East Japan and West Japan works are located along major coastlines and represent two of the world's largest steelworks.

The overriding aim of our First Medium-Term Business Plan is to dramatically improve profitability. We have thus prioritized expansion of profits over a wider market share and are building a corporate structure ideally suited to our business pursuits. A vital key to success is the introduction of a product-based management system.

This system is not so much market-oriented as it is product-oriented, bundling activities, such as sales, production and distribution, according to product category, and facilitating strategic planning and profit control across divisions within our organization. With this system, we can pinpoint profitability on each order and isolate profit-related issues in need of reassessment. In addition, we gain clues that can be used to identify the increasingly sophisticated requirements of clients more accurately and to further enhance our own marketing capabilities.

Demand for steel is likely to grow in Asia, especially in the People's Republic of China (PRC). Seeking to capitalize on this opportunity, JFE Steel will utilize advanced technologies and high productivity to become a global player on the steelmaking stage.




JFE Steel Group's First Medium-Term Business Plan

The JFE Steel Group aims to secure stable profits and reinforce its financial footing. To realize these goals, the JFE Steel Group formulated its own First Medium-Term Business Plan, a blueprint of objectives highlighting the establishment of an optimal production system, integration and rationalization of production facilities, development of "only one" and "number one" technologies and products, and increased exports through global alliances. The plan also outlines the restructuring and consolidation of companies under the JFE Steel Group umbrella.

Through steady achievement of stated objectives, JFE Steel expects to post consolidated ordinary income of ¥230 billion for the year ending March 31, 2006. In the same time frame, we aim to boost return on sales to 11.0% and return on assets to 9.0%.




Integrating and Rationalizing Production Facilities, Creating an Ideal Production Structure

 

The most important aspect of our plan to integrate and rationalize facilities was determining crude steel output. JFE Steel considered its product lineup and the additional costs accompanying increased production, then concluded that a groupwide production volume of 27 million tons would raise profitability most successfully. This figure was set as the target for crude steel output in the year ending March 31, 2006.

Our plan to integrate and rationalize production facilities hinges on the target we have set for crude steel output. In upstream operations, we will shut down two blast furnaces, with total annual output capacity of 3.9 million tons, while in downstream operations, we will halt work on 15 lines, representing annual capacity of 3.5 million tons. Of these 15 production lines, seven were shut down as of April 2003.

We are also bringing under one roof production of common items previously manufactured separately at Kawasaki Steel and NKK facilities. This consolidation of equipment and operations should raise downstream utilization more than 10% over the current level. We aim to elevate operating efficiency still higher through the establishment of unified standards for finished steel products, which will promote lot-intensive downstream operations, and through the development of processing technologies that dramatically enhance maximum production capacity at downstream facilities.




Cost-Cutting Measures

We are tackling ways to lower depreciation costs and the cost of repairs on equipment, paralleling the consolidation of facilities, while generating more favorable unit costs and yields, through the concentration of production activities and shared production know-how. We also seek to reduce procurement costs and personnel expenses.

Through business consolidation, the scale of raw materials acquired by the JFE Steel Group rises to 45 million tons of iron ore and 25 million tons of coking coal, valued at ¥400 billion. We plan to utilize the merits of expanded scale to cut costs related to the procurement of raw materials and supplies.

Specifically, we will trim raw material costs by acquiring the lowest-cost materials available, taking advantage of group companies engaged in relevant materials businesses and choosing the most ideal type of ship to transport raw materials. We intend to reduce the cost of procuring raw materials and supplies by ¥25.0 billion over three years by consolidating usable materials and maximizing the benefits of package purchasing.

We have initiated further cost-cutting efforts, including a procurement system that optimizes IT advances and greater sharing of raw materials and building materials among steelworks and encourages technology transfers.

On the labor front, we are raising the efficiency of essential personnel by concentrating production at certain facilities, eliminating redundant divisions, such as headquarters divisions, and executing rationalization strategies, especially programs to restructure and consolidate companies under the JFE Steel Group umbrella. Concrete objectives are to streamline the groupwide employee count by about 4,000 people over the next three years and control personnel costs. Achievement of these goals should result in annual crude steel production
of 2,100 tons per employee by the year ending March 31, 2006, a 20% improvement over the period under review.




"Only One" and "Number One" Strategies

The goal of "only one" and "number one" strategies is to continuously develop and market products with excellent profitability potential, based on technology that is unique (the only one) or simply the best (the number one) in the industry.

To achieve staying power as a steelmaker of global stature, JFE Steel must increase the ratio of high-quality, technologically superior products that will yield high profits and not be vulnerable to the effects of price competition. A top priority at JFE Steel is to reinforce "only one" and "number one" technologies and products and then augment these vital assets. We are already energetically tackling relevant themes.

Existing technologies and products that epitomize the "only one" category include NANO HITEN*1, hot-rolled TMCP high-formability steel sheets*2 and HISTORY steel tubes*3, while highly corrosion-resistant chromate-free steel sheets, high-quality plates made by the Super-OLAC (On-Line Accelerated Cooling) technique, and high-alloy oil country tubular goods (OCTGs) headline the "number one" category.

These "only one" and "number one" technologies and resulting products currently account for between 6% and 7% of the JFE Steel Group's net sales. Concerted efforts to develop additional technologies and products, however, will increase this ratio to between 15% and 20% by the year ending March 31, 2006.

Our exploration into potential "only one" and "number one" technologies and products and the eventual realization of these assets extends across the steelmaking spectrum, from sheets to iron powders. We are, however, directing particular attention toward such products as coated steels and HITEN steel sheet for automotive applications.

Our coated steel lineup includes several newly developed products with formability and finishes of unparalleled quality. These products will soon appear on the market.

Meanwhile, we are working on new HITEN steel sheets with enhanced durability, formability and resource-saving qualities, and seek to raise the ratio of HITEN steel sheets for automotive applications. In addition, we plan to reinforce development and sales of high-profit "only one" and "number one" products in such categories as electrical steel sheets, seamless pipes, UOE pipes and chrome-based stainless steel sheets.


*1 NANO HITEN: The world's first steel sheet featuring nanosized particles evenly dispersed throughout the steel for high strength and superior formability.
*2 Hot-rolled TMCP high-formability steel sheets: High-carbon steel sheets made by a new accelerated cooling process called the thermal-mechanical control process (TMCP), which promotes a fine-grained metal composition and microscopic dispersion of carbon particles for dramatically improved formability.
*3 HISTORY steel tube: A steel tube boasting high strength and excellent formability accorded through an in-line TMCP utilizing a manufacturing method called HISTORY (High-Speed Tube Welding and Optimum Reducing Technology).


Global Strategies

For about 20 years, until 1999, annual worldwide demand for steel hovered around 700 million tons. In 2000, demand reached 800 million tons, and in 2002, it hit 900 million tons. The figure could top 1 billion tons in a few years.

Seeking to capitalize on potential demand but cautious of intense price fluctuations in overseas markets, the JFE Steel Group is charting a course that targets an increase in exports through credible allies in Asia and North America, rather than expanded exports to spot markets.This policy will ensure stable profits.

The JFE Steel Group exported about 10 million tons of steel in the year ended March 31, 2003, of which about 4 million tons were directed toward allies. The First Medium-Term Business Plan aims for annual aggregate export volume to allies to increase by 1.3 million tons, with at least 800,000 tons heading primarily for South Korea, the PRC and ASEAN (Association of Southeast Asian Nations) markets and at least 500,000 tons destined for North America. Successful efforts will boost the contribution of exports to net sales from 43% in the period under review to 46% in the year ending March 31, 2006.

We will provide strategic products, such as environment-friendly steels and high-quality steel sheets for automobiles. Taking the risks of trade into account, we will also maintain a prudent stance on direct exports to the PRC, where we anticipate solid demand for steel, while building strategic alliances with downstream companies.


Group Company Restructuring and Consolidation

We will construct a framework that fully demonstrates JFE Steel Group synergy by clarifying the function of each JFE Steel Group company and then reorganizing and consolidating duplicate functions.

In April 2003, we merged six companies into three new entities: Kawasaki Steel Container and KOKAN DRUM became JFE Container; Kawasaki Steel Metal Products & Engineering and Nippon Kokan Light Steel became JFE Metal Products & Engineering; and ADCHEMCO and Kawasaki Steel's Chemical Division became JFE Chemical.

During the year ending March 31, 2004, we plan to integrate JFE Steel Group companies concentrating on intellectual property and technology information as well as supporting research and inspection and analysis. In April 2004, we will tackle integration of logistics, mining and slag operations and facilities maintenance.



Capital Investment Plans

The First Medium-Term Business Plan stresses capital investment within the limits of depreciation costs over the three years from April 2003 through March 2006. Specifically, JFE Steel will earmark ¥320.0 billion for groupwide use, of which non-consolidated operations will utilize ¥240.0 billion.

The primary application of funds will be to refit production facilities, including the No. 2 blast furnace at the Kurashiki zone of the West Japan Works and the No. 2 blast furnace at the Keihin zone of the East Japan Works.

Steel R&D
JFE Steel has positioned its Steel Research Laboratory-the world's largest steel-related research facility-as a hub for in-house R&D pursuits. The laboratory is responsible for creating innovative processing technologies used to manufacture steel products and also explores promising finished steels that capitalize on the potential afforded by new materials. The technologies and expertise amassed by the laboratory are further applied to R&D in peripheral fields, such as chemicals, as well as the environment.

The laboratory maintains close ties with production and marketing divisions and other Group companies and tackles additional R&D topics that accurately address clients' needs and groupwide productivity and profitability goals. These efforts will contribute significantly to the development of "only one" and "number one" technologies and products, which underpins the First Medium-Term Business Plan.

Recycle Business Center
Greater awareness of the natural environment permeates the national consciousness, and legal provisions have been established to underpin the shift toward a recycling-oriented society. A major issue for society, however, is the way in which resources are recycled.

JFE Steel boasts advanced recycling technologies that utilize the infrastructure of steel operations. Through the Recycle Business Center, we have access to proprietary technologies, most notably a process to turn waste plastics into blast furnace feed, that function as solid building blocks of a resource-recycling society. Our use of waste materials as blast furnace feed also serves another environment-friendly purpose: the reduction of carbon dioxide from steelmaking operations.