Top Messege

Forging manufacturing capability, addressing megatrends, and creating the value of steel

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

Nowadays, great waves of long-term structural changes are washing over society and industries. We feel that amidst this the steel industry is on the verge of a new phase in its evolution. Globally, rising protectionism and emerging markets’ shift towards selfsufficient steel markets are expected to affect the supply-demand structure of steel. Trends such as rapid innovation in IT (notably, AI), automakers’ growing need for lighter and stronger vehicles, a shift to electric and other new energy vehicles, the development of self-driving vehicles, wider acceptance of a sharing economy are all anticipated to bring about significant change to society and industries. Further, the United Nations has adopted the Sustainable Development Goals (SDGs) and the Paris Agreement has entered into force, which have reinforced corporate responsibility to contribute to the achievement of a sustainable society.
What can be things which do not change, even in such global environment? For me, they start from the fact that steel as a material element has outstanding features that cannot be substituted by other materials and because of that, steel will continue to play a significant role for building social infrastructure for forthcoming economic development and for facilitating everyone to enjoy benefits of wealth.
The steel industry will continue to be a growth industry. In this context, NSSMC intends to forge its manufacturing capabilities, address the megatrends and determine what to change and what not to change, and through these initiatives create the value of steel, while contributing to society by providing steel, generating solid profits, and growing strongly as a company. These are our aims. Let me explain what we have in mind toward achieving these aims.

Basic strategy and five initiatives

NSSMC aims at expanding business globally by developing an optimal production framework with its globally-expanding production bases and based on our manufacturing capabilities, and by leveraging its competitiveness in products and costs. We also aim at profit growth, primarily in the high-grade steel segment in three strategic areas of automotive, energy and resources, and infrastructure, with emphasis on competitive superiority in technology, cost, and being global. Consonant with such basic strategy, we announced in March 2018 the 2020 Mid-Term Management Plan for the three years from fiscal 2018 to fiscal 2020. The plan has five main initiatives:
• Delivering materials and solutions responsive to changes in society and industry;
• Continuing to strengthen “manufacturing capabilities” of domestic mother mills;
• Utilizing advanced IT in steelmaking processes;
• Strengthening and expanding global business;
• Contributing to the achievement of a sustainable society (SDGs).

Delivering materials and solutions; Continuing to strengthen “manufacturing capabilities”; and Utilizing advanced IT

As change takes place in society and industries, customers demand advanced materials to match. We must keep providing higher valueadded products to customers to satisfy this demand. For example, the automotive sector needs more light-weight steel materials with strength and good workability. The energy and resource sector desires steel materials with superior resistance to corrosion, high temperature, and high pressure. The infrastructure sector requires steel materials which enable shorter construction periods, but also sufficient strength and reliability, to satisfy the needs of urbanization and growth in scale in infrastructure especially in emerging countries. In order to respond to these requirements, we will enhance our technology development and maximize the potential of steel as material. At the same time, in order to further differentiate ourselves from competitors, we are making efforts at advancing solution technologies for the use of materials, such as technologies to make good use of materials that are difficult to process and technologies that contribute to customers’ work efficiency enhancement.
For enhancement of “manufacturing capabilities” of domestic mother mills that create those high-end products, we will further strengthen facilities and human resources by introducing leading-edge facilities, revamping existing facilities, and promoting the transfer of technology and skills to younger generations.
Further, utilization of continuously evolving IT is becoming an essential element that determines the competitiveness of a company. While NSSMC has a group company that is engaged in a system solution business, we have also established a new team within NSSMC for promoting use of advanced IT. Applying our comprehensive, collective strength through cooperation within the group and utilizing IoT and big data, and AI, we aim at achieving safety and competitiveness in
the front lines of manufacturing, stability in production, improvement in product quality, and sophistication in business operations. We will further align operational process and systems among our manufacturing bases in Japan and overseas and apply advanced IT to realize a united, efficient execution of operations. Ultimately, we foresee in our future one virtual mill such as hitherto could hardly be envisioned even in our dreams.
We will implement capital expenditures of around ¥ 1,700 billion and R&D spending of around ¥220 billion over the three-year term. We will have rock-solid manufacturing capabilities, or production bases, so that we can steadily deliver unrivaled high-end products and solutions to customers and aim at enhancing cost competitiveness. In the short term, we will have significant cash outflows and increased depreciation burden. However, I believe this is a necessary, important step for us to make long-lasting achievements.

Strengthening and expanding the global business

We are ahead of other steelmakers in global development of downstream production processes. Our overseas production capacity steadily increased from 9 million tons per year in 2012 when Nippon Steel and Sumitomo Metal Industries merged to 21 million tons at present, and overseas bases are contributing more on the profit line as well. Anticipating steady increase in overseas steel demand over the long term, we have set about ¥600 billion for business investment over the three years up to fiscal 2020.
We intend to invest aggressively in projects which promise to contribute to our future growth, mainly in the three strategic areas of automotive, energy and resources, and infrastructure in Asia, North America, and South & Central America. In preparation for rising protectionism and a shift towards self-sufficient markets, we are considering establishing integrated steel production bases from ironmaking to product making in certain overseas areas.
This will be a shift from our previous business model of dividing work between domestic mother mills and overseas downstream production processes. In March 2018, NSSMC and ArcelorMittal entered into an agreement on basic terms and conditions to jointly acquire and manage Essar Steel India Limited, an Indian steelmaker having a fully integrated steel production system, and have begun procedures.

Contributing to the achievement of a sustainable society (SDGs)

Being a company with integrity and reliability is one of our underlying objectives, in addition to generating profit and making sustainable growth through our daily operations. First and foremost, safety and disaster prevention are the top priority. We will continuously work at appropriate risk management and implement preventive measures, based on lessons learned from past events and accidents. We also strive for continually improving internal control systems in order to comply with laws and regulations and to ensure credibility of our financial reporting, as well as the validity and efficiency of its operations. In addition, we respect human rights and are working to realize the Workstyle Innovation as endorsed by the Japanese government, by standardization of our operations and improvement in efficiency of operations as well as further utilization of IT. We aim at becoming a company where our workforce of diverse participants, regardless of their nationality and gender, can exercise their maximum abilities.

Following accession to 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 accordance with these goals, NSSMC is promoting three eco-friendly initiatives: reduction in environmental burden in manufacturing process (Eco process), development of eco-friendly products (Eco products), and reduction in global environmental burden by providing its advanced environmental technologies (Eco solutions).
As part of our actions to significantly reduce CO2 emissions in manufacturing, we are conducting extremely challenging technology research on the hydrogen reduction process, as well as separation and recovery of CO2 from blast furnace gas*. As a result of trial operations at a 12m3 pilot blast furnace within the Kimitsu Works, these technologies were put to use on a test scale in fiscal 2017. This was a major advance toward practical use. We plan to establish the technologies as proven by around 2030 and target practical use by 2050, as long as they can be economically viable.

*Development projects (CO2 Ultimate Reduction System for Cool Earth 50, or COURSE 50, Project) are being supported by the New Energy and Industrial Technology Development Organization (NEDO) and are being jointly conducted by NSSMC and other Japanese steel companies.

Review of the 2017 Management Plan and targets of the 2020 Management Plan

In fiscal 2017, the final year of the 2017 Mid-Term Management Plan, NSSMC was on a recovery trend, showing an increase in sales and profit from the previous year. Net sales amounted to ¥5,668.6 billion, ordinary profit to ¥297.5 billion, and profit attributable to owners of the parent to ¥195.0 billion. Concerning Key Performance Indicators (KPIs), cost reduction of ¥150.0 billion was achieved as targeted, while asset compression was ¥300 billion, significantly exceeding the ¥200 billion target for the past three years. The debt-to-equity ratio improved to 0.66 but was below the target of 0.5, mainly due to a decline in operating cash flow and expenses related to making Nisshin Steel a subsidiary. Regrettably, ROS and ROE were 5.2% and 6.4% respectively, falling short of their 10% targets.

As a background for the shortfall to the plan, there were external factors such as the deteriorated steel product market that suffered due to China’s excess production and excess exports; a decline in demand for high value-added steel products for the energy industry that was stemmed from sluggish oil prices, a surge in coal prices, and a cost increase in commodity raw materials, logistics, were additional influences. At the same time, a decline in output caused by our production troubles was a significant internal factor behind the shortfall. However, these factors are currently becoming more accommodative to our improved performance. Among the external factors, the international steel market is improving as the Chinese Government has made a significant change in policy, reducing excess production capacity. Addressing the surge in coal prices, we have made steady progress in gaining acceptance of passing increases on to steel product prices. With regard to steel products for the energy industry, we are improving our business in order to remain profitable even in a difficult environment. Oil prices have bottomed out of the worst phase, showing signs of recovery. After experiencing production troubles, we have reorganized the production systems and improved the production process, to eliminate the causes of the troubles. Moreover, we are making concerted efforts at realizing stable production and exerting our full capabilities, in order to flexibly cope with changes in operational conditions, that are accompanied by advanced quality requirements. Concerning overseas businesses, that have been expanded since our business integration in October 2012, the overseas profit contribution has been increasing, demonstrating steady progress in implementing our global strategy.

We have renewed our determination to successfully deal with the challenge of achieving ROS of 10% and ROE of 10% in the 2020 Plan. One of the ways to ensure achieving the targets is to enhance our selling and marketing capabilities. In addition to managing cost fluctuation in material costs and logistics costs, we find it critical to achieve appropriate prices for maintaining our reproduction capability, so that we can continue to serve our clients with the world’s highest-standard steel products. We are committed to contribute to enhancing added value of products of our long-term customers and to continue growing together with them. We highly value cooperative relationships of trust with our customers. We will focus on developing advanced high-grade products, while striving to achieve our targets.

Return to shareholders

Our annual dividend payment for fiscal 2017 was ¥70 per share, for a payout ratio at 31.7%. From fiscal 2018 onwards, we will raise the targeted payout ratio from the previous “around 20%-30%” on a consolidated basis to “around 30%” as a benchmark for the “payment of dividends from distributable funds in consideration of the consolidated operating results.”

Creating the value of steel and contributing to society

The earth is an “iron planet” with one-third of its weight being iron. Steel is a superb material with abundant reserves, high-strength, a high cost-performance ratio, outstanding recyclability, and low environmental impacts in production and from the perspective the life cycle assessment (LCA)*. This is proven by a fact that around 90% of metals used in society is steel.
In addition, we can say that steel has a distinctive characteristic of being able to add diverse features through heat treatment using a small amount of an added element or elements and to satisfy even unusual or extremely precisely defined needs of customers. Steel therefore cannot be substituted by other materials. At the same time, this also means that manufacturers’ capabilities are critical for bringing out the potential of materials.
We will continue our quest for creating the value of steel, an indispensable basic material for all industries and infrastructure building, provide the power of steel to society, and contribute to realizing society in which everyone can benefit from that value and power. In my view, this is the mission for all of us who are engaged in steelmaking.
In April 2019, we will change our name to Nippon Steel Corporation, opening a new chapter in our history. Since the business integration of Nippon Steel and Sumitomo Metals in 2012, Nisshin Steel joined our group and we are now considering to making Sanyo Special Steel our subsidiary. The name change this time demonstrates our strong commitment to prevail in the era of global competition as a steel company that originated in Japan, and that incorporated DNAs of various companies. Keeping that pride in mind, we will make our best efforts on the global stage every day, to realize Our Values to “pursue world-leading technologies and manufacturing capabilities, and to contribute to society by providing excellent products and services.

June 2018
Nippon Steel & Sumitomo Metal Corporation
Kosei Shindo, Representative Director and President

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