Business and other risks
Business and other risks
Of the risks to the JFE Group’s business, its financial and accounting position, and other areas, the following might have a material impact on investors’ decisions. This is not a comprehensive list of all risks facing the Group; other risks exist. Any such risks could also affect investors’ decisions. Forward-looking statements in this document reflect the Group’s judgment as of March 31, 2023.
(1) Economic conditions and sales environment (Steel Business, Engineering Business, Trading Business)
Steel Business, Trading Business
In our Steel Business and Trading Business, we face competition in the product markets and regional markets in which we operate. Sales of steel products in Japan span many areas of demand—these include building construction, civil engineering, automobiles, industrial machinery, and electrical machinery—and sales are made through a variety of channels. Beyond Japan-market sales, JFE Steel Corporation also derives around 44% (unconsolidated value basis), and JFE Shoji Corporation around 49% (unconsolidated value basis, includes JFE Steel products), of sales from exports. Major export destinations include Thailand and other ASEAN markets, as well as South Korea and China.
Therefore, the Group’s steel product sales volumes and prices may be affected by changes in supply and demand for steel products both in Japan and abroad, reflecting economic conditions in Japan, Asia, and around the world, as well as the shrinking of the domestic market in Japan amid a falling birthrate coupled with population aging. With respect to overseas markets in particular, the JFE Group may face increasingly intense competition due to structural changes that include increases in exports out of China owing to falling domestic demand in that country and increases in steel production capacity in emerging markets. Further, the imposition of import restrictions such as tariff increases and anti-dumping measures in the businesses’ major markets may affect the JFE Group’s export transactions and thus affect its financial performance.
Meanwhile, the imposition of various import restrictions in markets where the volume of the JFE Group’s exports is small, such as the U.S. and the EU, could result in goods excluded from those markets being returned to the JFE Group’s major export markets, which could affect those markets, and as a result, the JFE Group’s financial performance could be affected. Further, international conflicts, such as the war that broke out in Ukraine in 2022, could affect the Group’s steel product sales volumes and prices by altering supply and demand for steel products both in Japan and abroad.
To address this, the JFE Group seeks to optimize its production volumes in response to changes in steel supply and demand levels in Japan and abroad and build optimal production operations by consolidating and closing facilities in anticipation of trends in steel product supply and demand over the long term. As part of these efforts, the JFE Group plans to terminate upstream processes (ironmaking, steelmaking) and cease the use of hot-rolling equipment in JFE Steel Corporation’s East Japan Works’ Keihin District, to transition from eight blast furnaces to seven in its domestic production operations, and to reduce its annual crude steel production capacity by around four million tons (a reduction of approximately 13%) by September 2023.
Meanwhile, the JFE Group will configure its operations to be capable of generating profits even in the face of changes in the market environment by investing strategically in JFE Steel Corporation’s West Japan Works, its core steelmaking facilities, and improving its cost competitiveness. The JFE Group also seeks to create a stable earnings base by expanding its exposure to sales of products that offer technological advantages over those of mills in emerging markets. The JFE Group is also establishing global supply capabilities capable of responding flexibly to changes in global market conditions through the vertical division of labor in overseas markets and by investing in steelmakers overseas in order to localize its steel product manufacturing operations.
In the Trading Business, with its focus on steel products, we purchase, process and sell steel raw materials, nonferrous metal products, foodstuffs, and other items. We are also building a distribution and sales network capable of responding efficiently to changes in the environment in product markets in which we do business both in Japan and overseas. Specifically, in Japan we are strengthening our sales capabilities through measures that include restructuring distribution, and we are updating and renewing the facilities we need to strengthen our foundations in a timely manner. Overseas, we actively seek to strengthen the distribution and processing capabilities of our global operations spanning four main regions, and are working to bolster sales of JFE Steel products in areas of high value-add. We also strive to maintain and build our presence among customers while deploying JFE Steel products (including those of alliance partners) and other suppliers’ products.
In our Engineering Business, we are engaged in engineering, procurement, and construction activities with a focus on environmental facilities, such as energy plants and waste incinerators, and bridges. We perform operation and maintenance of equipment in DBO (design-build-operate) projects as a contractor, and we also run our own operation and maintenance businesses in areas including recycling, power generation, and electricity retailing. As the majority of the above business portfolio is related to public infrastructure (waste incinerators, bridges, etc.), reductions in domestic public works projects due to domestic economic conditions, the influence of national and local government policies, and other factors can lead directly to a decrease in the number of bidding projects, which could result in a decline in the volume of orders we receive.
Similarly, the volume of orders we receive in overseas markets may decline owing to changes in economic conditions and policies in countries in which we do business. Also, during the execution of project work, increases in the prices of materials and equipment, etc., can push up construction costs. We are engaged in technology development and the like to build competitive strength that is resilient to increases in construction costs. We also seek to stabilize our earnings by bolstering our operation and maintenance businesses as a stable, long-term source of earnings.
(2) Raw materials and energy market environments (Steel Business, Trading Business)
We procure iron ore, coking coal, ferroalloys, nonferrous metals, scrap, etc., as raw materials for the production of steel. In recent years, the purchase prices of these raw materials have been rising owing to factors including changes in global supply and demand, natural disasters or accidents in the major producing countries of Australia and Brazil, and international conflicts such as the war in Ukraine. If we are unable to reflect such purchase price increases in our steel product prices, this could affect the JFE Group’s financial performance. We also purchase electricity, natural gas, and other energy supplies for use in the steelmaking process. If the purchase prices of these rise as a result of changes in global supply and demand, the tightening of environmental regulations, international conflicts, or other such events, and we are unable to reflect this in our steel product prices, this could affect the JFE Group’s financial performance.
Further, if natural disasters or accidents in the main producing countries, international conflicts, supply chain disruptions, or other such events make it difficult to procure raw materials and energy, this could affect the Group’s financial performance through reductions in production and sales volumes.
To address this, we seek to reduce the costs and cost fluctuations involved in the procurement of raw materials by developing technologies allowing the use of low-cost raw materials and by increasing our usage of such materials. We also seek to reduce the risk of procurement instability by diversifying our procurement sources. Furthermore, we plan to reduce the cost and cost variability of the energy we procure by systematically refurbishing the power plants and other such facilities within our steelworks.
In addition to selling raw materials to the JFE Group, our Trading Business also sells raw materials outside of the Group. Therefore, changes in the JFE Group’s activity levels as well as changes in purchasing or sales conditions resulting from natural disasters or accidents in raw material producing countries, international conflicts, supply chain disruptions, and other events may affect our Trading Business sales volumes. To address this, we seek to reduce raw material supply chain risks through the purchase of lower-cost materials, the development of new procurement sources, and similar activities. We also seek to stabilize and maintain sales volumes by developing sales channels outside of the Group.
(3) Stable operating status of manufacturing equipment and systems (Steel Business)
In our Steel Business, we manufacture steel products using many large-scale manufacturing facilities such as blast furnaces, coke ovens, converters, continuous casting machines, rolling mills, annealing furnaces, and power plants. Some of these facilities have been in operation for decades and are approaching their renewal dates. To establish a domestic manufacturing base capable of sustaining stable production levels, we have been planning intensive capital investments and gradually renewing aging facilities since the formulation of our 5th Medium-Term Business Plan. Equipment and systems problems affecting these facilities could result in decreases in production volumes and increases in repair and maintenance costs, among other outcomes, which may affect the JFE Group’s financial performance.
To address this, we are systematically investing in the renewal of key facilities and equipment to strengthen the manufacturing capabilities of our steelworks. Since FY2019, we have been investing in our core facilities and equipment, including outlays to deal with the deterioration of blast furnace ancillary equipment to ensure the stable operation of blast furnaces, and efforts to utilize digital transformation (DX), artificial intelligence (AI), and Internet of Things (IoT) technologies. Under our 7th Medium-Term Business Plan, we are rolling out these efforts across all processes.
(4) Effects of capital investments and business investments (Steel Business, Engineering Business, Trading Business)
The JFE Group makes major capital investments and business investments with the aim of maintaining and enhancing its earnings base and expanding its businesses.
In our Steel Business, we continue to invest strategically in our production sites in Japan in order to build a stable production base and to improve our productivity and cost competitiveness. We will be modernizing and increasing the capacity of facilities in the business’s East and West Japan Works, which will include renewing coke ovens and expanding the electrical steel sheet production line. If the operation of these facilities is delayed or the demand for steel products changes, the expected cost reductions and sales growth effects may not be realized, and this could affect the JFE Group’s financial performance.
We therefore periodically check the progress of major works to ensure that they are being executed as planned. We also continuously monitor global economic conditions and demand trends and, when changes occur, make appropriate revisions to the timing and scale of investments and other such areas in our initial capital investment plans.
In addition to investing in Japan, the JFE Group pursues business investments for the purpose of capturing overseas growth opportunities. Unforeseen circumstances, such as changes in political and economic conditions overseas and changes in joint-venture partners’ circumstances, could make it difficult to achieve expected earnings levels, recoup investments, and so forth, and this may affect the JFE Group’s financial performance.
To address these risks, we continuously monitor global economic conditions and demand trends and, when changes occur, make appropriate revisions to the timing and scale of investments and other such factors in our initial business investment plans. Also, as part of the business investment decision-making process, we assess risks relevant to individual companies and regions, and follow up accordingly in order to manage those risks.
(5) Development status of new products and new technologies (Steel Business, Engineering Business)
In order to be globally competitive, the JFE Group has honed its technological capabilities by responding to the sophisticated demands of its customers. To maintain and enhance the Group’s earnings base, we must continue to develop the world’s most advanced new products and technologies and seek out new businesses that will contribute to society at large. If we are unable to do this as planned or if the effects do not emerge as planned because of changes in external environmental factors, our sales volumes could decline because we miss opportunities to provide new products, our profitability could decline because of an inability to add sufficient value, or we may lose opportunities to receive orders; these and similar outcomes could affect the JFE Group’s financial performance.
To address this, in the Steel Business, we will accelerate our development efforts with a focus on automobiles, infrastructure building materials, and energy. We will also pursue development that captures customer demand more accurately than ever before. For example, we will work to create value through steel in the automotive space by deepening our interactions with customers and stepping up our EVI (Early Vendor Involvement) so that we can continue to offer leading-edge technologies, including advanced high-tensile steel products and the technology to make use of them. In our Engineering Business, we will develop technologies that leverage the latest AI and IoT capabilities and allow production plants to be automatically run and remotely monitored, and we will continue to offer new products and services, including energy services.
The JFE Group will also continue to leverage new technology developments and revise its development plans as appropriate in response to changes in the market environment.
(6) Quality assurance (Steel Business, Engineering Business, Trading Business)
The JFE Group provides a wide variety of products and services, including steel products, to customers. The quality of the Group’s products is confirmed by a quality assurance department that is independent of the quality design and manufacturing departments, with quality assurance operations being checked by a quality audit department. However, if problems arise with, for example, the Group’s products, services, or quality management systems, this could lead to the payment of compensation, loss of reputation, or similar outcomes, which could affect the JFE Group’s financial performance.
To address this, we have set up an organization at head office to oversee quality control, including that of Group companies, and we are implementing processes designed to eliminate quality defects. With respect to the quality data that we provide to customers, we are working to eliminate human error and data tampering by expanding and enhancing the automatic measurement and transmission of such data. We are also working to prevent aberrant materials from reaching customers by strengthening the identification and management of steel intermediate materials and by strengthening our quality assurance operations through in-house diagnosis.
In our Engineering Business, the engineering, procurement, and construction of equipment and facilities involve the use of procured construction materials and equipment, and we remain liable for contract non-conformance for a set period after delivering the equipment and facilities. If faults or defects categorized as contract non-compliance emerge during the construction of those equipment and facilities, as contractor we have a duty to perform rectification work, which may result in additional costs being incurred. To mitigate such risks, we have established quality assurance systems and we perform inspections of procured products and construction work.
(7) Risk of post-order cost fluctuations (Engineering Business)
In the Engineering Business, the engineering, procurement, and construction of equipment and facilities involves the purchasing of materials and equipment and the hiring of external contractors, and some projects involve construction periods spanning several years. Also, operation and maintenance businesses involve purchasing the electricity, fuel and other materials required to operate facilities and equipment, with some of these business projects remaining in operation for 20 years or more. As market and economic conditions change, the price of construction materials and contractor labor can fluctuate, affecting construction costs; the cost of electricity, fuel, and other items can also fluctuate, similarly affecting operating costs. These factors could affect the JFE Group’s financial performance.
To address this, we seek to mitigate the risk of post-order cost fluctuations by identifying any risks at the bidding stage of orders and, for example, by incorporating allowances for such risks into the contractual conditions. After receiving orders, we seek to discover and mitigate risks early through third-party follow-up assessments performed by people with relevant project experience.
(8) Serious occupational accidents (Steel Business, Engineering Business, Trading Business)
The JFE Group is engaged in a variety of businesses, some of which feature workplaces with relatively high rates of accidents and incidents, including those involving work at considerable heights or in high-temperature environments, the transportation of heavy objects, and work on gas-related equipment. The Group strives to create work environments in which diverse human resources, including women and the elderly, can work with peace of mind and free from accidents. However, in the event of a serious accident at a production facility or similar or a serious occupational accident, the Group’s business activities could face restrictions, and this could affect the JFE Group’s financial performance.
As such, the Group’s operating companies all strive to eradicate serious accidents and disasters. In the Steel Business, we have conducted a diagnosis and evaluation of safety as recommended by DuPont, a leader in the development of safety culture, on the basis of which we have instituted an internal auditing system. We are also introducing various safety systems, including an AI-based image recognition system that sounds an alarm and stops the production line if a worker enters an exclusion zone, as well as systems designed to prevent incidents by monitoring gas concentrations and the proximity of workers to heavy machinery in real time.
(9) Climate change (Steel Business, Engineering Business, Trading Business)
The JFE Group utilizes steel manufacturing processes that emit large amounts of CO2, and we regard the Group’s efforts to address climate change as an extremely important management priority with bearing on the sustainability of the Company’s business. If the Group does not make adequate efforts toward achieving carbon neutrality or is unable to achieve its targets for innovative technology development, this could result in a loss of cost competitiveness, reduced dealings with customers, and difficulty in raising funds, etc., thereby possibly lowering international competitiveness or significantly impacting the Group’s financial performance.
The Group has set goals for reducing CO2 emissions by around 18% by FY2024 and more than 30% by FY2030, both versus FY2013 levels, as well as the goal of achieving carbon neutrality by 2050. Toward this end, internal structures and teams are being developed and work is being carried out swiftly and efficiently.
Through our involvement in a Green Innovation Fund project named Hydrogen Utilization in Iron and Steelmaking Processes, commissioned by Japan’s New Energy and Industrial Technology Development Organization (NEDO), we are actively developing ultra-innovative technologies, including hydrogen reduction technology for use in blast furnaces, technology for achieving low levels of carbon in blast furnace exhaust gas (carbon-recycling blast furnaces and carbon capture and utilization), direct hydrogen reduction technology, and impurity removal technology for electric-arc furnaces. These various initiatives are part of our multitrack approach to reducing our CO2 emissions. Rather than carrying out refurbishments scheduled in around 2027–2030, we are studying the prospects of shutting down these blast furnaces and instead switching to large, high-efficiency electric-arc furnaces. We are also conducting a feasibility study on the production of low-carbon reduced iron—an effective way of producing high-quality steel in electric-arc furnaces—and developing technologies to facilitate carbon capture and storage.
The JFE Group will also begin supplying JGreeX™ green steel from the first half of FY2023. For JGreeX™, we use the mass-balance approach to manufacture products that are substantially better than conventional products in reducing CO2 emissions generated by steelmaking processes.
Meanwhile, the introduction of these carbon-neutral processes will necessitate large outlays for technology development and capital investment, so we believe that significant increases in manufacturing costs are inevitable. The Japanese government’s national strategy is committed to long-term support for technology development and capital investment aimed at decarbonization, as is spelled out in the Basic Policy for the Realization of GX and the Act on Promoting a Smooth Transition to an Economic Structure Capable of Generating Growth while Decarbonizing. However, if the government cannot provide the same level of subsidies and other support as other steel-producing countries, or if there are further rises in industrial electricity prices in Japan, which are already high by international standards, or if the cost competitiveness of Japanese steelmakers declines relative to other countries, such developments could affect the JFE Group’s financial performance. To achieve carbon neutrality, it will also be crucial to procure large amounts of green hydrogen at low prices and non-fossil energy at internationally competitive prices, but if such factors are not available in Japan, or if steel prices do not appropriately reflect the high environmental value of green steel, these separate developments could affect our Group’s financial performance. Accordingly, a conversation must take place within Japan regarding how such costs should be borne across society and what kinds of additional support can the government and other bodies offer so that environmental value is appropriately recognized in order to encourage green procurements.
Additionally, there is concern that policies and systems such as taxonomies and carbon border adjustments may lead to global protectionism, which could impede a smooth transition to decarbonization. Further, the standards, threshold values, definitions, and standards for CO2 quantification concerning green steel vary throughout the world, including among international and private-sector bodies, which could disrupt international steel trade. This is why we need an international framework for common methods to measure CO2 emissions and collect data within the steel industry. Based on a proposal from the Japanese government, participants in the April 2023 Group of 7 (G7) Ministers’ Meeting on Climate, Energy and Environment agreed to take steps in this regard. JFE will continue to work with the Japanese government and relevant organizations to advance the discussion of developing globally common methods, and will also work with relevant organizations to help create a system for ensuring that emissions-reduction efforts are properly valued and fairly compensated. In addition, we will continue working toward an appropriate global framework for environmental regulations.
(10) Large-scale natural disasters, rapid outbreaks of infectious diseases such as new influenza strains, wars, internal disturbances, riots, terrorist activities, etc. (Steel Business, Engineering Business, Trading Business)
Natural disasters such as major earthquakes or typhoons, rapid outbreaks of infectious diseases such as new influenza strains, wars, internal disturbances, riots, and terrorist activities are among the events that could hinder the Group’s business activities and affect its financial performance. For example, an outbreak of an infectious disease such as a novel coronavirus could result in measures such as movement restrictions and urban lockdowns being imposed around the world, hindering the Group’s business activities, and could result in a decrease in sales volumes due to large reductions in production levels in industries the Group serves, and such outcomes could have a large impact on the Group’s financial performance. International conflicts arising in regions in which the Group does business could result in reduced sales volumes owing to large reductions in production levels in industries that use the Group’s products, and this could affect the Group’s financial performance. In addition, damage to equipment or buildings or the flooding of steelworks caused by large typhoons could result in reduced production volumes, thereby affecting the Group’s financial performance. Also, if the production or shipment of raw materials used by the Group are suspended because of the suspension of port facilities in locations from which the Group procures these, this could result in reduced production volumes and other outcomes, similarly affecting the Group’s financial performance.
In response to the increasing intensity of typhoons and heavy rainfall in Japan in recent years, we are strengthening and upgrading the drainage facilities at our steelworks. Also, given that we mainly procure raw materials from overseas, we will address the risk of large-scale weather disasters overseas by finding alternative sources, diversifying across sources, and increasing equipment capacity. We have also formulated a business continuity plan (BCP) for emergency situations. In the event of a large earthquake, for example, this plan sets out measures for setting up tsunami evacuation shelters, for maintaining company-wide command functions in the event of communication constraints and power outages, or similar, and for backing up data.
With respect to the risk of new infectious diseases, we are putting in place workplace systems and environments that prioritize the health and safety of all employees to ensure that they can continue to work with peace of mind. These include strict sanitation and hygiene controls, flexible business operations such as staggered working hours and telework, and the building up of infrastructure, and we have arrangements in place allowing the setup of a task force that can take prompt action.
(11) Competing materials (Steel Business, Trading Business)
The Group sells eco-products and environmentally friendly technologies that are highly effective in controlling CO2 emissions. High-tensile steel used in automobile body applications has cost advantages over other materials such as aluminum and carbon fiber, and it also helps to reduce vehicle weight, so we believe there is limited scope for it to be replaced with other materials, but significant reductions in the costs of these could result in a decline in steel demand, which could affect the Group’s financial performance. Accordingly, we are working to reduce costs and improve product performance in an effort to limit the potential for other materials to replace steel, including by proposing multi-material structures that incorporate resins and other lightweight materials and by developing components made with combinations of steel and other materials.
(12) Information security (Steel Business, Engineering Business, Trading Business)
During the course of its business activities, the Group comes into possession of confidential information and personal information on its customers and business partners, and it also holds confidential information and personal information pertaining to the Group. Rigorous controls are in place across the Group to ensure that this information is not leaked, tampered with, or otherwise compromised. If any of this information is leaked or tampered with as a result of negligence, theft, external attacks, etc., this could lead to a loss of technological advantage, the payment of compensation, and loss of reputation, among other impacts, which may affect the Group’s financial performance.
To address this, the Group has established rules governing information management as a means of preventing information leaks and system failures caused by cyberattacks or unauthorized system use. In addition, the JFE Group Information Security Committee deliberates on important IT issues, particularly information security, and based on the policies and principles determined by this committee, we continue to enhance information security management across the entire Group through JFE-SIRT, an internal team established to plan and drive the implementation of information security measures.
(13) Country risk (Steel Business, Engineering Business, Trading Business)
The Group actively seeks to develop its business in overseas markets to capture growing demand. In the Steel and Trading Businesses, the Group invests in local steel production and processing lines and engages in capital alliances with local steel companies; in the Engineering Business, the Group takes orders for infrastructure projects in emerging markets. Unforeseen circumstances in the regions in which we do business, including changes in political and economic conditions, terrorism and other sources of turmoil, law revisions, and large natural disasters, could result in production volumes decreasing, synergies with capital alliance partners being reduced, costs being incurred due to the revision of laws and regulations, logistics costs increasing, the impairment of goodwill recorded in the consolidated financial statements, changes in manufacturing costs in projects undertaken, and other such outcomes, any of which could affect the Group’s financial performance.
To address this, we strive to make careful investment decisions by incorporating business risk assessments appropriate to the risks of the relevant countries into our business investment and lending assessment process. To mitigate the impact of unforeseen circumstances, we are strengthening our monitoring capabilities, seeking to diversify local procurement sources, among other measures.
In the Trading Business, we are engaged in international trade dealings, and we face the risk of being unable to import or export due to circumstances in specific countries, and we may also be exposed to settlement risk if a foreign government suspends international fund transfers due to, for instance, the situation in the foreign exchange markets. We use trade insurance and other means to address these risks.
(14) Exchange rate fluctuations (Steel Business, Engineering Business, Trading Business)
The Group’s financial performance can be affected by exchange rate fluctuations. Exchange rate fluctuations can cause a mismatch between amounts received in foreign currency (the export value of products, etc.) and amounts paid in foreign currency (the import value of raw materials, etc.), potentially impacting on the Group’s financial performance. Our measures to address this include using forward exchange contracts to hedge our transactions.
When the Japanese yen depreciates, the Group’s financial performance can be affected by increases in the cost of raw materials when converted into Japanese yen. In turn, we reflect such increases in our product selling prices.
In addition, when the Japanese yen appreciates, domestic demand for steel products can decrease owing to the reduced export competitiveness of industries that use steel products, such as the automotive industry, and the Group’s products can become less price competitive in foreign markets, with such factors potentially affecting the Group’s financial performance. To address this, as described in Sections (1) and (5), the Group is working to secure its share of the Japanese market for steel products and also establishing global supply capabilities capable of responding flexibly to changes in global market conditions through the vertical division of labor in overseas markets and by investing in steelmakers overseas to localize its steel product manufacturing operations.
(15) Decline in the value of fixed assets (Steel Business, Engineering Business, Trading Business)
The Group owns many fixed assets, including large-scale steel product manufacturing facilities. When the Group does not expect to be able to recoup the amount invested in a fixed asset because of, for example, a decline in profitability, then it recognizes an impairment loss on the asset, and such occurrences may affect the Group’s financial performance. To address this, we work to maintain and improve the value of our assets, mainly through the measures described in (1) – (5), (9) and (11) above.
(16) Hiring and training human resources and providing proper working environments (Steel Business, Engineering Business, Trading Business)
As Japan’s working-age population declines, the Group is stepping up its efforts to ensure it has an adequate labor force and sufficient skilled personnel, to improve individual abilities through human resource development, and to improve labor productivity by means of labor-saving measures. But if the Group or companies in the Group’s supply chain are unable to secure sufficient human resources, particularly skilled personnel, the resulting loss of competitiveness and stability in production operations could affect the Group’s financial performance. In response, the Group views diversity and inclusion as key business initiatives, is expanding its hiring sources to secure a wide range of personnel, and is also fostering a corporate culture of respect for diverse people and opinions in order to increase retention rates and productivity. The Group will also continue to improve its workplace environments and systems while, at the same time, using IT to achieve greater labor savings and efficiencies in the face of labor shortages.
Improper labor management could result in outflows of personnel and significant harm to the Group’s credibility, which could affect the Group’s financial performance. Our efforts to prevent this include properly managing working hours, conducting human rights awareness training, and maintaining a harassment consultation office.
(17) Protection of intellectual property (Steel Business, Engineering Business)
The Group holds many intellectual property rights in Japan and abroad for the purpose of protecting the right to use the individual technologies and trademarks necessary for its business activities. When doing business, we investigate what intellectual property rights are held by third parties (i.e., parties not part of the Group) and take measures to avoid infringing on such rights; however, if a third party were to claim that the Group has infringed on its intellectual property rights, this could result in the payment of damages or royalties, the suspension of business activities, and other consequences, and this could affect the Group’s financial performance.
If the intellectual property rights of the Group were to be rendered invalid by a third party, this could result in reduced competitiveness in the relevant business area, which could affect the Group’s financial performance. Further, if intellectual property rights of the Group were to be infringed by a third party, or if intellectual property information were to be leaked by information holders inside or outside of the company, the Group’s financial performance could be affected by a decline in the value of its technologies or brands, the failure to collect damages, or similar outcomes.
To address this, the Group continues to strengthen its systems for investigating and monitoring the intellectual property rights of third parties, including those outside of Japan, to prevent infringements on such rights. Additionally, the Group is working to acquire rights to important technologies in overseas regions while also strengthening its systems for monitoring third-party counterfeit technologies and counterfeit products in order to prevent and deter people from infringing on the Group’s intellectual property rights. We are also enhancing our internal information management training programs and strengthening efforts to manage the confidentiality obligations of retired employees and other individuals.
(18) Financial market fluctuations and changes in the financing environment (Steel Business, Engineering Business, Trading Business)
The Steel Business, the Group’s core business, has large-scale facilities and requires large amounts of capital to maintain and renew those facilities, so maintaining a sound financial footing is crucial. In recent years, our capital investments have exceeded depreciation costs, so we have high levels of interest-bearing debt. Therefore, financial market instabilities, increases in interest rates, the lowering of our credit ratings by rating agencies, and other such events could result in the Group facing financing restrictions and increases in financing costs.
As such, we use financial management indicators—the debt/EBITDA ratio and the debt/equity ratio—to manage the finances of the entire Group and its operating companies. We also use interest rate swaps to hedge some of our borrowings and other transactions. To maintain financial soundness, we are currently working to reduce our interest-bearing debt through measures that include the reduction of inventory and the like to improve the cash conversion cycle, downsizing our asset holdings by, for example, reducing our equity holdings, and conducting order-of-priority reviews of capital investments and of other investments and lending.
(19) Fluctuations in the value of equity holdings and the like (Steel Business, Engineering Business, Trading Business)
Changes in the value of equities and the like held by the Group may affect the Group’s financial performance and financial position. As a general rule, the Group does not hold listed equities unless a reasonable justification for holding those equities exists, and we are thus selling off the Group’s holdings of listed equities.
(20) Credit risk (Steel Business, Engineering Business, Trading Business)
If the Group incurs bad debts due to the insolvency or bankruptcy of a trading partner in respect to which the Group has trade receivables, this may affect the Group’s financial performance. As such, we engage in rigorous credit management, and we use credit insurance to cover some high-risk transactions.
(21) Laws and regulations (Steel Business, Engineering Business, Trading Business)
In Japan and other countries in which it does business, the Group is subject to various laws and regulations; these include those pertaining to the environment; labor, safety, and health; commerce, trade, and foreign exchange; intellectual property; and taxation. It is also subject to anti-trust laws—business-related laws and regulations such as the Construction Business Act—and other relevant laws, ordinances, and regulations. If such laws and regulations become stricter, in addition to the effects described in Sections (1), (9), and elsewhere in this document, the Group may face restrictions on its business activities, incur costs related to compliance, and so forth, and this could affect the Group’s financial performance. The Group strives to comply with such laws, ordinances, and regulations by ensuring it has rigorous internal controls in place, but if it were determined that the Group is not in compliance, it could face administrative sanctions or similar, which could affect the Group’s financial performance.
To address this, we will continue to advocate for the appropriate enactment, revision or abolition of relevant laws and regulations by, for instance, submitting an opinion statement when authorities are considering any such establishment, revision or abolition. In addition, whenever a law or regulation is enacted, revised, or abolished, the business unit primarily responsible for matters relating to that law or regulation evaluates the impact on our business and notifies other relevant departments within the company of its findings. We also regularly conduct compliance training covering a variety of regulatory themes and ensure that the relevant knowledge is shared with and properly understood by employees.
(22) Respect for human rights in the supply chain (Steel Business, Engineering Business, Trading Business)
The Group procures raw materials and other materials and equipment from all over the world, but if human rights problems occur in the relevant supply chains, in addition to impacting on procurement and production, this could lead to damage to the Group’s reputation, which could in turn affect the Group’s financial performance.
The JFE Group Human Rights Basic Policy, which sets out the Group’s overall approach to respect for human rights, was adopted in 2018 and then revised in April 2023 in response to recent changes in attitudes and issues surrounding human rights. We have also established policies for our operating companies, including our Procurement Guidelines, Basic Policy on Procurement, and Basic Policy on Sustainability in the Supply Chain, in addition to following purchasing practices that ensure respect for human rights, legal compliance, and environmental protection. We have also commenced human rights due diligence in accordance with the United Nations Guiding Principles on Business and Human Rights, and we will continue to identify human rights risks within the Group as well as study and implement measures to rectify such risks.
(23) Retirement benefit obligations (Steel Business, Engineering Business, Trading Business)
The Group’s employee retirement benefit costs and obligations are calculated based on assumptions, such as discount rates, used in actuarial calculations. Fluctuations in interest rates, changes in the fair value of institutional assets, changes in the retirement allowance system, and similar events could affect the Group’s financial performance and financial position.
(24) Deterioration in financial performance at equity-method affiliates
The Company and its consolidated subsidiaries have many equity-method affiliates. Losses incurred by equity-method affiliates are recorded in the consolidated financial statements according to the ownership ratios of the Company and its consolidated subsidiaries. If the recoverable value of an equity-method affiliate is lower than the acquisition cost or carrying amount, the Company or its consolidated subsidiary may have to record an impairment loss on the shares it holds in the equity-method affiliate.
The Company and its consolidated subsidiaries provide debt guarantees for the monetary obligations of some equity-method affiliates. If, in the future, the Company or its consolidated subsidiaries are required to honor these debt guarantees, this could affect the Group’s financial performance and financial position. To address this, we monitor the efforts of equity-method affiliates to improve their profitability, and we implement a range of measures necessary to reduce risk.
Note that, in addition to the events described above, the Group’s business activities, financial performance, and similar areas could also be affected by other events that cannot be predicted at this time.