SPECIAL FEATURE 2: TRENDS IN STEEL DEMAND IN CHINA, AND JFE STEEL'S RESPONSE

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 EXPANDING STEEL DEMAND IN CHINA
China is one of the countries where demand for steel is increasing the most strongly. Since 1991, China's real GDP has maintained a steady growth rate of over 7% annually. Despite a temporary setback due to the outbreak of SARS in 2003, the country achieved a real GDP growth rate of 9.1% that year, its fastest rate since 1997. Per capita GDP in China now surpasses US$1,000. Demand for steel has also been expanding with the growth of the economy. These days, the apparent consumption of crude steel per capita is comparable to Japan in the 1960s or South Korea in the 1980s. Just as steel demand in Japan and South Korea rose strongly ahead of the Olympics when they were held in those countries, the consumption of steel in China is expected to keep growing ahead of the 2008 Beijing Olympics and the World Exposition Shanghai 2010.

	Million tons
										Forecast	Forecast
(CY)	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004	2005
Europe	158.7	147.5	164.5	173.6	170.5	181.4	176.5	176.5	182.1	187	191
NAFTA	116.9	124.4	134.5	144.1	139.9	146.6	129.8	132.8	130.6	139	141
Asia/Oceania	296.8	303.4	313.9	282.6	308.5	328.2	353.6	399.4	453.4	488	518
Of which, China	87.4	97.3	103.2	110.6	122.6	124.6	153.4	185.6	232.4	263	290
Other	78.9	77.8	85.1	81.1	79.7	91.4	94.7	96.1	97.6	103	108
World total	651.3	653.1	698.0	681.4	698.6	747.6	754.6	804.8	863.7	917	958
Source: International Iron and Steel Institute

 Apparent Per-Capita Crude Steel Consumption

 TIGHT MONEY POLICY IN CHINA
At the same time, however, the construction boom has led to some concerns about a possible overheating of the Chinese economy. The Chinese government, in pursuit of sustainable growth, showed no hesitation in tightening its money policy in early 2004. From that time until now, the authorities have (1) raised the official discount rate (March 25, from 3.24% to 3.87%), (2) increased the cash reserves ratio (April 25, from 7.0% to 7.5%) and (3) issued a State Council directive to limit investment (April 27). The State Council directive raised the minimum required of equity ratios for implementing investment projects: for steel the minimum was raised to 40% from 25%, and for aluminum and others to 35% from 20%. The aim of this move was to avert market disorder among steel and non-ferrous metals companies with weak capital bases that emerged from the construction boom, and to ensure the continued healthy development of the supply system.

 IMPACT ON JFE'S STEEL EXPORTS
Construction investment-related businesses expanded rapidly in 2003, but due to the series of tight money policy measures, the markets for construction materials such as steel bars and wire rods have already fallen into a temporary slump.
  The bulk (about 80%) of JFE Steel's exports to China are, however, not commodity-type items that are vulnerable to fluctuations in market supply and demand; rather, they are high-quality steel sheets for use in automobiles, home appliances and cans and plates for ships. The number of suppliers is limited in these areas, and we believe the supply/demand situation will remain tight in the future.
  In the area of construction materials, the downturn in the market has had little impact on JFE Steel's exports to China, which account for 8% of its total exports. JFE Steel's exports of construction materials represented only 8% of its total exports to China in the year ended March 2004. In addition, the construction materials we export are for the most part special, ultra thin, high-quality materials that cannot be supplied by domestic manufacturers in China (ultra thin cold rolled coil for galvanized steel sheets). Such materials are available from only a limited number of suppliers, and have not undergone the same kind of slump as ordinary construction materials.

 JFE Steel's Position in Steel Consumption in China

	Supply and Demand for Steel in China (2003)
			Million tons/year
	Apparent steel consumption (of which more than 50% of total are for construction)		266
	–Domestic production		236
	–Export		7
	–Import		37
	From Japan		8
	From JFE		2
	*Apparent consumption = domestically produced + imported – exported Source: China Iron & Steel Association

 DETAILS OF STEEL DEMAND IN CHINA
Overall steel consumption in China has been growing rapidly, as shown in the statistics of total apparent steel consumption in China, which has been growing 20-30% annually for the three consecutive years since 2001. Construction materials are estimated to account for over 50% of total steel demand, and it is, therefore, fair to believe that the major portion of this rapid growth is attributable to construction applications. This situation becomes even clearer if one looks at the activity level in various industry sectors. Compared with the rate of growth in construction investment, industrial production has shown relatively steady growth.
Consequently, aside from a slump in both supply and demand for construction materials resulting from the tight money policy, we believe, on the whole, the demand will remain healthy.
In truth, this situation is revealed in the changes in the market, as broken down by type of steel. Prices for steel bars and wire rods have been falling, but prices for sheets, by contrast, have remained at relatively robust levels. JFE Steel's main customers in the automotive, home appliance and shipbuilding industries have enjoyed continued stable growth for the past several years, their inventories have consistently remained at low levels, and raw materials are in a chronic state of short supply. The recent money tightening has not yet caused any change in these circumstances.

GUANGZHOU JFE STEEL SHEET CO.
In response to expanding demand for automotive steel sheets in China, JFE Steel recently formed a joint venture Guangzhou JFE Steel Sheet Company Ltd. with Guangzhou Iron & Steel Enterprises Holdings Ltd. JFE Steel holds a 51% interest in Guangzhou JFE Steel Sheet, where construction has already begun with the aim of starting operations in April 2006. Guangzhou JFE Steel Sheet will have an annual capacity of 400,000 tons of hot-dip galvanized steel sheets (GA, GI). The cold rolled coils used as materials for these sheets must be of a high quality, and JFE Steel will be the main source of supply.