Top Message

Supporting society globally through steelmaking

I am Kosei Shindo, the President of Nippon Steel & Sumitomo Metal Corporation (NSSMC).

Since its founding, NSSMC has played the important role of broadly supporting society through steelmaking.

And we are now also aiming at firmly establishing our presence as the best steelmaker with world-leading capabilities and in keeping with that expanding our role to a more global scale.

We believe this will be achieved by capturing demand from a more global perspective, generating profit, and achieving growth.

We are firmly committed to achieve our objectives, by using our world-leading technologies and manufacturing capabilities.

Let me take this opportunity to discuss the strategies we have adopted for achieving objectives, issues to be addressed, and other things we have in mind.

Basic business strategies

Focus on three strategic areas of automotive, energy and resources, and infrastructure
NSSMC aims at building a global and optimal production system, based on high technological capabilities, and at globally expanding business by taking advantage of our competitiveness in products and costs. By focusing on technology, cost, and being global, our three strategic areas are automotive, energy/resources, and infrastructure-related.
We intend to expand shares mainly in the high end of those markets with medium to long-term growth potential.

Enhance the competitiveness of domestic manufacturing bases and expand the profit of overseas bases

The current Mid-Term Management Plan, which ends in fiscal 2017, emphasizes growth of both domestic businesses and overseas businesses functioning as the two halves of the whole, as the basic strategy. This means that we seek to enhance competitiveness of domestic manufacturing steel mills as “mother mills,” which are the source of our competitiveness such as through technological superiority, and to expand the profit of overseas bases by taking advantages of the strength nourished in Japan.

In Japan, to enhance cost competitiveness and technology development capability in upstream operations

Our mother mills (domestic bases) strive to improve technological capabilities for achieving greater cost competitiveness in upstream operations. Most major blast furnace steelmakers in the world depend mainly on Brazil and Australia for raw materials and are exposed to the same competitive landscape. This means that competitiveness in capital-intensive upstream processes, including blast furnaces, converters, and continuous casting, is determined by competitiveness derived from the improvement in production efficiency, rather than geographical conditions.
Such cost competitiveness is enabled by technological capabilities. We believe NSSMC’s domestic upstream operations are highly competitive.
At present, NSSMC produces approximately 50 million tons of crude steel per year. Since the integration in 2012 of Nippon Steel and Sumitomo Metals to form NSSMC, we have consolidated facilities but have maintained production capacity by raising productivity by deploying our technological capability and at the same time have enhanced cost competitiveness. The present status of our improvement of production facilities is to complete changes that include, in particular, consolidation of 14 blast furnaces to 12, 32 converters to 28, and continuous casting facilities from 30 units to 27 from the integration in 2012 to the end of 2020.

Outside of Japan to expand downstream production capacity
Different from upstream processes, downstream process, such as steel plate rolling mills, are labor-intensive and require relatively low fixed cost. This is one of the reasons behind our accelerating a shift of production into emerging countries with potential for high market growth. From the time of our integration up to the present, we have completed consolidation into facilities that have high production efficiency by ceasing operation of 14 production lines.
Despite consolidation, our overall downstream production capacity has more than doubled from 9 million tons at the end of fiscal 2012 to 19 million tons at present, or 21 million tons if our new subsidiary Nisshin Steel’s overseas production capacity is included. Going forward, we will continue to expand downstream production capacity in the overseas market with growth potential.

The business environment and what we have done

China made steady progress in its excess capacity issue, but must be monitored going forward
The present environment surrounding the global steel industry cannot be described without touching on China’s excess production capacity issue. China’s excess capacity is said to be as much as 400 million tons, or equivalent to about four times Japan’s annual production capacity. In 2016, this excess capacity issue was brought up at the G7 and G20 meetings and a global forum was established as an international framework for solving the issue. This was followed by the Chinese government’s announcement to reduce its capacity by 140 million tons in five years from 2016 to 2020. China has already disclosed reduction of 65 million tons in 2016 and 50 million tons in 2017. While it would take years for the problem to be solved completely, progress has steadily been made and should continue to be closely monitored. Historically, the same path for reduction of steel production capacity in line with maturity of the economy was taken by developed countries, including Japan. For the sake of the future steel industry, Japan’s steel industry is more than willing to talk about our experiences if it helps our Chinese counterparts solve the problem.

Responding to changes in raw material prices and tackling the challenge to achieve appropriate prices that enable us to reproduce
Another big challenge for NSSMC has been to respond to fluctuation in raw material prices and to achieve appropriate margins that allow us to reproduce.
In the second half of fiscal 2016, raw material prices rose sharply and their impact on cost far exceeded the level we could absorb with our steady internal efforts. Only after and while making great efforts did we ask for customers’ understanding in reflecting raw material costs in our product prices.
In addition, we are asking customers to allow us to have appropriate prices and margins for maintaining the reproduction capability. In order to steadily deliver our high-quality, high-performance steel materials, it is critical to enhance facilities and human resources, such as by responding to the issue of aging facilities, establishing production base, and developing human resources, and establish, maintain, and enhance economic reproduction capability. Further, it is important to have R&D capability to correspond to increasingly sophisticated customer needs, and the establishment of overseas bases to supply on a global basis high-quality steel products similar to those from Japan. In seeking the understanding of our customers, we are committed to satisfying their requirements quality control, stable production, finely-tuned delivery control, product development, and other needs. At the same time, we are determined to continue making serious own efforts such as unending cost improvement and forward-looking technology development.

Toward strengthening our corporate foundations

Welcomed Nisshin Steel to our Group in Japan
The harsh business environment is not deterring us from continuing to lay the foundation for future development.
In March 2017, we completed acquisition of a 51% equity stake in Nisshin Steel and welcomed Nisshin as a new member of the NSSMC Group. We are expecting to generate synergy effects of JPY20 billion or more from various factors: stopping operation of the No. 2 blast furnace in its Kure Works; alternative supply of steel slabs from NSSMC to improve operating rate; sharing best practices in operations technology, facilities, and maintenance; and reduction in procurement costs of raw materials, resources, and equipment. We will bring together our management resources, generate synergies, and ultimately enhance our competitiveness.

Continue to support our important overseas base Usiminas in Brazil to enhance competitiveness
Among our overseas businesses, in Brazil, Usinas Siderúrgicas de Minas Gerais S.A. – Usiminas (“Usiminas”), an equity method affiliate of NSSMC, made a capital increase of 1 billion reals (approximately JPY30 billion), in which NSSMC underwrote a higher portion than our equity stake. The Brazilian economy suffered from negative growth for two years in a row and the manufacturing sector, in particular the highend market sector including automobiles and shipbuilding, which is our area of strength, were in a deep slump. Usiminas suffered from a significant decline in business but has taken firm measures to improve its financial strength and profitability.
After the completion of the capital increase, Usiminas promptly suspended the upstream operation of the Cubatao Steelworks and went through debt restructuring with major banks. In 2016, the economy in Brazil finally bottomed out and domestic demand in steel materials is recovering. Through price improvement mainly in Brazil, Usiminas is making tangible improvement in earnings. According to the International Monetary Fund (IMF), Brazil is expected to return to a stable growth track of around 2% per year by around 2020.
Having the best technological capability and a big presence in South America, Usiminas remains a critically important base for NSSMC’s global strategy. Concerning governance of Usiminas, there is a difference in opinions among major shareholders and an important challenge is to establish a stable management team. NSSMC however is committed to solve this governance issue at an early stage and to continue to support Usiminas in terms of technology and human resources and aid the enhancing of their competitiveness.

Update on the 2017 Mid-Term Management Plan

Challenge in achieving numerical targets of the Mid-Term Management Plan
Let me now explain the progress of the 2017 Mid-Term Management Plan in key performance indices (KPI). The business environment deteriorated more than expected, including effects of China’s excess production capacity, which emerged earlier than expected. As a result, KPIs in fiscal 2016 were quite short of the targets set for the final year fiscal 2017.
Specifically, return on sales (ROS) was 3.8% in fiscal 2016 (compared to the fiscal 2017 target of 10% or more), return on equity (ROE) was 4.6% (vs. the target of 10% or more), and the debt-to-equity (D/E) ratio was 0.71 (vs. the target of approximately 0.5). Nevertheless, closer examination reveals that in the second half of fiscal 2016 alone, both ROS and ROE improved significantly to 5.9% and 8.6% respectively. On a positive side, we have already significantly exceeded the target for asset compression a year ahead of the final plan year. We are also making steady progress and striving hard in cost reduction (targeting JPY150 billion or more per year in three years to fiscal 2017).
While we are far from satisfied in terms of numerical targets, we are promoting the enhancement of domestic manufacturing bases and the accelerated expansion in overseas business earnings—the base for the current Mid-Term Management Plan, without any hesitation or deviation.

Maximize the potential of steel and maintain its advantages over other materials

Among issues that NSSMC must work on for achieving sustainable growth, I would like to present our initiatives on the advantages of steel to be maintained and expanded relative to other materials. Steel products used for automobiles are positioned as one of the most important products for NSSMC in both quality and volume. They are required to both have strength for safety and be light in weight for economy and reduction in the environmental burden created by vehicle use. While NSSMC provides automakers with high-tensile automotive steel sheets, which have high-tensile capability, light weight, and excellent formability, alternative materials to steel have also attracted attention in the recent years in response to enhanced fuel efficiency regulations in various countries and regions. They include aluminum and carbon fiber, which have lower specific weight and strength relative to steel, and multi-materials that combine steel with those materials. However, fuel efficiency in driving is not the only environmental impact of automobiles.
The overall life cycle of automobiles includes factors such as the natural resources from exploration to transportation, manufacturing of materials and components, assembly, recycling of materials of used cars, and their disposal. This entire cycle needs to be evaluated. As many persons know, such evaluation method is called Life Cycle Assessment (LCA) and that type of thinking is Life Cycle Thinking. Steel is far superior than other materials in its creation of environment burden during manufacturing and in its recycling. Steel also has a big advantage in terms of cost. High-tensile automotive steel sheets have so far realized only about 10% additional strength relative to theoretical strength and steel still has more potential to be explored. I believe that steel is such an irreplaceable material that we must maximize its potential. It is also important that we spread these advantages of steel to benefit many people.

Making concerted efforts and tackling on the environmental problems

Being engaged in steelmaking which emits CO2 as part of its process, we must respond to environmental issues, such as global warming countermeasures, by reducing CO2 emissions, and do so in a responsible manner.
Japan’s steel industry is proud to have achieved the highest energy efficiency in the world’s steel industry and NSSMC, a perennial leader of the industry in Japan, is continuing to promote various measures for CO2 emission reduction. In addition to curbing CO2 emissions through improvement of the steelmaking process, we are contributing to reduction of CO2 emission through our products. They include development of high-tensile-strength steel materials that contribute to reduction of vehicle body weight, as mentioned above, and development of electro-magnetic steel sheets and boiler tubes that withstand high temperature and high pressure, to contribute to high efficiency in power generation.
Through making available to the world our own developed and commercialized environmental and energy conservation technology, we are also trying our best to contribute to global environmental preservation. We are promoting these initiatives as three eco-friendly initiatives: “The way we manufacture is eco-friendly (Eco process),” “What we produce is eco-friendly (Eco products),” and “Sharing our eco-solutions (Eco solution).”
With adoption of the Paris Agreement in November 2016, Japan is working on a plan to cut greenhouse gas emissions 26% from 2013 levels by 2030, and 80% by 2050 as a longterm goal. In order to achieve such a hefty long-term goal, we have to form a global-wide strategy. From a technological perspective, it would also be impossible unless various totallydifferent innovations and breakthroughs were achieved.
As one such breakthrough, NSSMC has been leading a project to develop eco-friendly innovative steelmaking processes that curb CO2 emissions. Commissioned by the New Energy and Industrial Technology Development Organization (NEDO), this project aims at controlling CO2 emissions by partially replacing the use of coal with the use of hydrogen when iron ore is reduced to make steel. This R&D project will continue, aiming at practical application and dissemination by 2050, on the premise that the technology is established by around 2030.
Bringing together the wisdom of our people and accumulating such instances of technological innovation one by one, we are taking on challenges to overcome difficult tasks.

Thoroughly executing safety and disaster-preventive measures

In January, the plate mill on the premises of the Oita Works had a fire. We sincerely regret the great trouble, anxiety, and inconvenience caused to the people of the local community, our customers, and many other stakeholders. We estimate loss of approximately JPY30 billion in aggregate in impacts to production and restoration expenses in fiscal 2016 and fiscal 2017. We are now devoting every effort to minimize the impacts and to take thorough measures to prevent similar accidents in the future.
Ensuring the safety of people at NSSMC is our first priority and essential value. It also forms the base of our daily business activities. We have identified 2017 to be “a year dedicated for safety enforcement,” aiming for zero serious accidents. Learning lessons from the past, we are taking five approaches and thoroughly executing them. These approaches are: to support priority workplaces which face serious safety issues; to accelerate making equipment inherently safe; to eliminate repetition of similar accidents; to establish or enhance special safety-related operations and the systems that support them; and to implement measures to improve safety levels of subcontracting companies.

Manufacturing begins from developing human resources

Various initiatives I have discussed so far can only be realized by people. I strongly believe that manufacturing begins with developing human resources. Society and the economy are always changing at a fast speed and the stage for performance of business activities is expanding globally.
For sustainable growth of a company, it is crucial in every age to focus on developing human assets and creating the environment where people can work with pride from a long-term perspective. I believe this is one of my important assignments.

Contributing to the society with technologies and manufacturing capabilities

Since our company was founded, we have faced numerous big changes in the environment. Each time we tenaciously and passionately carried out the process of analyzing the problem, coming up with measures, executing them together, and resolving the problem. That is how we have achieved sustainable growth. Going forward, we will continue to work to achieve our full potential and bring out technology and products that help enrich people’s lives, based on safety, environmental preservation, disaster prevention, and compliance. We also strive to contribute to society on a more global stage. I sincerely hope for your continued support and understanding for many years to come.

June 2017
Nippon Steel & Sumitomo Metal Corporation
Kosei Shindo, Representative Director and President