The JFE Strategy for Triumphing in a New Age of Steel:
Opening up a New Tomorrow through Technical Prowess

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Ongoing Growth in Demand and Output

Global output of crude steel remained at the 700 million-ton level for some two decades from the late 1970s, but broke above 800 million tons in 2000, and has subsequently continued to expand rapidly, reaching the 1 billion-ton level in 2004 (see page 4). The principal factor behind this has been the remarkable economic growth sustained by the newly industrializing countries known as the BRICs. In Asian countries, particularly China, there has been an explosive growth in steel demand.

The steel consumption of the BRICs remains small in per capita terms, even in the case of China, which has the largest consumption of the four countries at just over 200 kilograms per year, or about one-third of Japan's consumption. Steel consumption in China is at the level of Japan in the 1960s, or South Korea in the 1980s.

The histories of industrialized countries show that when economic growth raises people's living standards, demand for steel increases. First-phase demand growth is usually generated by the construction of roads and housing. As the countries subsequently industrialize, demand increases from manufacturing sectors like canning, machinery, and motor vehicles. It is expected that in the BRICs, with their huge populations, steel demand will rise in the foreseeable future as they undergo full-scale and continuous economic growth.

Birth of Giant Steelmakers Bolsters Negotiating Power of Entire Steel Industry

Apart from this expansion of steel demand, the world steel industry is entering an era of dynamic change. An ongoing process of consolidation and reorganization across national borders is giving birth to giant steelmakers of unprecedented scale. Against this backdrop, advancing globalization is being accompanied by the progressive oligopolization of suppliers of raw materials such as iron ore and coal, and also in the industries of principal steel users such as the automotive industry. Since consolidation in these industries preceded that of the steelmakers, the latter were unable to wield adequate price-negotiating power for a number of years. Now, however, the steel industry's consolidation has strengthened the steelmakers' bargaining power with respect to both their suppliers and their customers.

Securing a Competitive Advantage in the Asian Steel Market

Cost of Steel Transportation to East Asia

Amid the large-scale processes of consolidation and reorganization taking place around the world, the strengths of Japanese steelmakers include not only their advanced technical capabilities (described later), but also the fact that they operate large-scale steelmaking plants located at coastal sites advantageous for the import of good-quality raw materials, and the fact that they are located close to the Asian continent, which constitutes a huge and ever-expanding market. This keeps distribution costs down, and in addition Japan is currently negotiating economic partnership agreements (EPAs) with other Asian countries. As a result, the built-in advantages of Japanese steelmakers over their U.S. and European competitors are becoming increasingly significant.

Win-Win International Strategic Alliance

JFE regards Asia as its home market, and has taken the lead in cultivating the Asian steel market. It has done so by building a vertically integrated structure in which it provides stable supplies of high-quality slabs, hot-rolled coils and cold-rolled coils to downstream steelmakers, who then produce high-value-added steel products such as steel sheet for automobiles, plates for ships, and tin plate for food cans.

In the construction of an integrated steelworks, the processes up to the hot rolling mill account for some 70% of total capital investment. Under JFE's international strategic alliances, however, our downstream steelmaker partners are able to make savings in capital expenditure on upstream facilities such as blast furnaces, converters and continuous casting machines, while JFE can maximize capacity utilization ratios at its existing upstream facilities. These benefits create a win-win partnership for the two sides.

Also notable is that when these alliances are formed, they are accompanied by the provision of technical assistance and the taking of equity stakes in the partner companies. This approach assures the establishment of very solid long-term relationships of mutual trust.

Exports account for approximately 40% of JFE Steel's nonconsolidated sales. Among these, 40% go to the partner companies and overseas affiliates, and a further 40% go to customers on a contract basis, such as Japanese manufacturers' plants in other Asian countries. This structure helps to assure stable earnings for JFE Steel.

Polarization of Steel Products into High-Quality and Commodity Types

Product types
Plates	Cold-rolled sheets
High-quality products
Seawater resistant steel plates used for tankers	Steel sheets used for automobiles
Commodity products
Floor plate for construction site	Steel sheet for guardrails

The global steel market has been characterized not only by growth in demand, but also by a process of polarization. Commodity products can be produced relatively simply, by installing production plant and learning the basic operating methods. High-end products, on the other hand, are made to customer specifications, and can only be produced with integrated quality control at each stage -- heating, cooling and pressing. Products for general construction use (shapes, bars, wire rods and some types of cold-rolled and hotrolled coils) do not require particularly high levels of production technology or product quality. By contrast, the steel plate and sheet used in automobiles, consumer electronics equipment, and ships require high-level production technologies, know-how, and quality.

High-End Products are Clusters of Know-How

The plainest example of a high-quality product is exposed panel for car bodies. Exposed panels require qualities such as the following.

Press formability

+	Steel sheet does not break or wrinkle during carmakers' press forming
+	High precision of shape after press forming, including springback after pressing in dies

Bake hardenability

+	Good ductility and formability during press forming, but hardening through baking after painting to retain dent resistance

Surface quality

+	No surface defects on steel sheet

Phosphatability

+	Uniform and appropriate weight of phosphate layer formation in pretreatment for painting in carmakers' plants

Compatibility with adhesives

+	Good compatibility with adhesives of all kinds (e.g. adhesives used with rubber stoppers for vehicle glass windows)

For the manufacture of outer panels, it is essential to have the technologies to produce steel sheet that satisfies all of these criteria, not just on occasions when all the conditions are met in the course of things, but at any time, uniformly.

Plate mills At our plate mills, we aim to greatly reduce adjustment operations and thereby enhance productivity by skillfully controlling 1) temperature increases in heating furnaces, 2) rolling pressure, and 3) post-rolling cooling. In addition, we aim to ensure product quality by minimizing strength inconsistencies in steel plate, among other new approaches. The introduction of JFE's unique on-line accelerated cooling (Super-OLAC) equipment has made it possible to cool and refine the grain of rolled steel in its hot state at an unprecedented rate, and also to enhance the strength of the steel while reducing its carbon and alloy content.

The production of steel begins with yard-blending, involving the discharging of iron ore and coal, and then follows a long process until the coils are made. The desired product quality can only be achieved through the meticulous management and coordination of all operating parameters consistently, from upstream to downstream plant.

JFE takes pride in the fact that it currently has the world's most advanced technological capabilities. The question "How many years will it take other companies to catch up with JFE's technologies?" is similar to asking "How many years will it take a chef who has been given the latest kitchen equipment to be awarded three Michelin stars?" Be it a heating furnace for semifinished steel products such as slabs, or an oven for cooking, it is possible to heat the contents accurately to a set temperature at the push of a button. That's why the following questions are important. "Do you know what temperatures are the best and for how long?," "Are you capable of integrated control of all processes, including blending, rolling, heating, and cooling...?," "Can you respond rapidly to every different new request from customers?" The know-how for all of that is not acquired overnight. We are confident that JFE will be able to maintain its technological superiority into the far future by refining its know-how still further, always keeping one step ahead of its competitors.

Only One and Number One Strategy Enhances JFE's Technology Advantage

JFE's strategy is to have the highest possible ratios of Only One and Number One products based on technology that is unique (Only One) or simply the best (Number One) in the industry. Only One and Number One products in our steel business currently account for approximately 17% of total sales, but we have set ourselves the target of raising this above 20% by March 2006.

By using proprietary technologies that rivals cannot easily copy to build stable relationships with our customers, we will ensure a high level of profitability regardless of economic conditions -- this is JFE's strategy for thriving in an era of intense competition.

Towards Partnership and Shared Prosperity with China Concern has been expressed in some quarters that China, formerly an importer of steel products from the rest of the world, has become a net exporter. It is true that in September 2004, China's steel exports exceeded its imports, but an analysis of the product mix shows that imports of high-quality products remain high, and that with respect to Japan, that trend is actually more apparent. In addition, although imports from countries other than Japan, Korea, and Taiwan are trending downward as China's domestic capacity expands, imports from Japan, which specializes in high-quality products, remain stable. Demand for high-quality products in China is expected to increase in the future. JFE provides its products for steel users in China who require high-quality steel that helps them to reduce the environmental load of their operations. It also provides energy-saving and recycling solutions for steelmakers. By helping to preserve the integrity of the environment through both its steel and engineering businesses, and by seeking partnership and shared prosperity with Chinese steel manufacturers, JFE is clearly communicating its identity as a steel and engineering group boasting technologies that rank among the world's finest. China's Imports and Exports by Product Type (April 2005) Sources of China's Imports Assuring Long-Term, Stable Raw Materials Procurement Setouchi MAX bulk carrier The global expansion of demand for steel has led to tight supply-demand conditions and soaring prices for all raw materials used in steelmaking, including iron ore, coking coal and ferroalloys. This has made the securing of long-term stable supplies of raw materials an important management issue. During the year ended March 2005, a series of investments, long-term contracts and other measures taken by JFE to assure such long-term stable supplies were put into action. In the field of iron ore, a basic agreement was reached in August 2004 with BHP Billiton of Australia on the establishment of a joint venture for the development of a new mining area, and on an 11-year contract for the purchase of 15 million tons of iron ore annually. In addition, a 10-year contract was concluded in September 2004 with Companhia Vale do Rio Doce (CVRD) of Brazil for the purchase of 10 million tons annually. For coking coal, an agreement was reached in December 2004 with American Metals & Coal International, Inc. (AMCI) of the U.S. on the acquisition of interests in two mines in Australia, and on a long-term contract. The effect of these additional moves was to enable JFE to put in place a structure for the stable procurement on long-term purchasing contracts of nearly 100% of its requirements for iron ore, and some 70% of its requirements for coking coal. With regard to ferroalloys, agreement was reached in August 2004 with Inner Mongolia Erdos Group and Mitsui & Co., Ltd. on the establishment of a silico-manganese production and sales joint venture company in the Inner Mongolia Autonomous Region of China. This venture, together with supplies from other ferroalloy companies within the JFE Group, has enabled the company to meet its target for stable procurement. For the bulk carriers needed to transport raw materials, the company has built a structure under which 90% of the required vessels are secured on medium- to long-term contracts, and has reduced the proportion accounted for by vessels chartered at spot rates, which have risen markedly. Other steps to cut transportation costs included forming tie-ups with marine and shipbuilding companies, and actively introducing optimal vessel types, such as Setouchi MAX carriers. The Setouchi MAX offers far greater loading efficiency in shallow waters than conventional vessel types, and in future will be the principal vessel used to supply the West Japan Works, which is on the Inland Sea coast. A total of 17 vessels are scheduled to be introduced by March 2007. In ways such as these, JFE shares its vision for the future with the suppliers of its raw materials and its customers. JFE is further cementing the trust-based, long-term relationships it enjoys with both suppliers and customers. Trends in Prices of Raw Materials Long-term Contract Ratio