The document provides an overview of Japan's blast furnace steel industry and related industries. It discusses that steel is a key industry for Japan, accounting for 7.6% of GDP. It also summarizes that Japan maintains the second largest production of crude steel globally, after China. The document then highlights several Japanese steel companies and their production volumes. It provides details on the value chain for blast furnace steel production and trends in the industry, including steel exports being a key export item for Japan and efforts to improve energy efficiency and reduce emissions.

1. 01
A Brief Glance at Japan's Blast Furnace Steel-Related Industries
By Kaoru Yoshida - SPEEDA Analysis Team
Translated by Kenneth Bresson
The following is the third instalment in a special edition SPEEDA series. Industries related to blast
furnace steel are the focus of this report, and the information is based on the value chain provided in
SPEEDA, as well as the fluctuations of fundamental figures disclosed in the securities reports of
companies across a ten-year period.
Steel Is a Key Industry for Japan
Steel has a broad range of applications from infrastructure to areas in daily life. Steel products find use
in residential buildings, roads, bridges, automobiles, shipbuilding, home appliances, and industrial
machinery. In addition to being a backbone industry, steel manufacturing plays a particularly important
role. In 2014, it accounted for 7.6% (JPY 6.9 trillion) of the GDP for all manufacturing industries in Japan
combined.
Japan has been maintaining the second spot in crude steel production globally, right after China, which
has been showing remarkable growth in recent years.
A Brief Glance at Japan's Blast Furnace Steel-Related Industries
20170704

2. 02
A Brief Glance at Japan's Blast Furnace Steel-Related Industries
2015 Production Volumes for Japanese Crude Steel Manufacturers
A look at the production volumes of crude steel in 2015 shows that ArcelorMittal holds an
overwhelming lead in the steel industry. Nippon Steel & Sumitomo Metal and JFE Steel (subsidiary of
JFE Holdings) also make the ranks, standing in third and eighth place, respectively.
In October 2016, fifth place Baosteel Group and eleventh place Wuhan Iron and Steel (Group) Corp.
integrated, with the resulting combined crude steel production volume moving up to second place.

3. 03
A Brief Glance at Japan's Blast Furnace Steel-Related Industries
Companies in the Value Chain
Below is the value chain for the blast furnace steel industry. Both high-quality and regular steel are
manufactured via blast furnaces, though regular steel is also manufactured via electric furnaces.
Furthermore, there are electric furnaces for the manufacturing of special steel and ferroalloy.

4. 04
A Brief Glance at Japan's Blast Furnace Steel-Related Industries
Industry Trends: Steel Is a Key Export Item for Japan
Exports have been on the rise in recent years for such products as steel plates for use at Japanese
automobile manufacturers’ assembly plants. The export value of steel was JPY 4.5 trillion in 2008, fell
temporarily to JPY 2.9 trillion in 2009, but recovered thereafter, rising to JPY 3.5 trillion and then JPY
4.0 trillion. However, it fell again in 2016, dropping to JPY 2.8 trillion.
Nevertheless, coupled with the stagnation in electronic component exports, the share of steel in the
value of exports overall rose to 4.1% (JPY 2.8 trillion) in 2016 from 3.1% (JPY 1.6 trillion) in 2000.
Furthermore, exports account for 40% of the total crude steel production volume.

5. 05
A Brief Glance at Japan's Blast Furnace Steel-Related Industries
Realising the Highest Energy Efficiency in the World
Converter steel, which is manufactured via blast furnaces, is the mainstream across the world. The
differences between the technological levels of countries are relatively large when it comes to the
development of converter steel, and this type of steel is the most important factor for international
energy efficiency comparisons. Furthermore, such a comparison was carried out in 2010, and was the
first of its kind in the world.
Below are estimated figures for the energy consumption of converter steel manufacturing by country
as of 2010. A low amount of energy consumption implies high energy efficiency, and Japan currently
ranks top globally in energy efficiency for converter steel. Japan’s top place is likely attributable to the
use of energy-efficient technologies and energy management for all steel plants.

6. 06
A Brief Glance at Japan's Blast Furnace Steel-Related Industries
With that being said, the manufacturing of steel via blast furnaces is burdened with environmental
issues, as it results in massive electrical power consumption and carbon dioxide emissions. In order to
tackle these issues, technological developments have been underway in recent years, such as the
improvement of manufacturing methods in order to reduce carbon dioxide emissions.
New Steel Manufacturing Method “ITmk3” Garnering Attention as
Countermeasure to Environmental Issues
A new steel manufacturing method known as “ITmk3”, which was developed by Kobe Steel, has been
receiving attention as a countermeasure to environmental issues. ITmk3 is a process wherein high-
purity granular iron for electric furnace steel is produced from low-grade iron ore and low-grade coal,
which cannot be used in the blast furnace process. With ITmk3, it is possible to produce high-grade pig
iron (96–97% iron content) equivalent to that produced via a blast furnace. Furthermore, this process
takes a mere ten minutes to manufacture what a blast furnace takes eight hours to smelt.

7. 07
A Brief Glance at Japan's Blast Furnace Steel-Related Industries
In addition, the process also has the merit of about a 20% reduction in carbon dioxide emissions
through a substantial cut in the amount of energy used. Commercial production with ITmk3 has already
begun in the USA, with projections that production will increase in future.
Desire for High-Quality Steel Manufacturing with Electric Furnaces
Blast furnace steel processes often garner attention since they can manufacture both high-quality and
regular steel. However, in the area of electric furnaces for regular steel, Ricoh announced in March
2012 that it will employ the use of electric furnace steel plates, developed jointly with Tokyo Steel
Manufacturing, in the structural components of its all-in-one copiers. In April 2013, Japan’s Ministry of
the Environment succeeded in the trial manufacturing of high tensile strength steel plates used in
construction through electric furnaces, and was able to produce steel plates that are equivalent in
quality to those produced via blast furnaces.
Currently, the manufacturing of steel plates for automobiles is said to have the most difficult
technological requirements amongst steel production technologies. However, there has been an
increasing desire to use electric furnaces for the manufacturing of high-quality steel in this area.
Companies Consolidating Production Bases to Strengthen Price Competitiveness
In order to strengthen their price competitiveness, blast furnace manufacturers have been
consolidating their production bases, and then strengthening the facilities at those bases.

8. 08
A Brief Glance at Japan's Blast Furnace Steel-Related Industries
Competition Amongst Materials Predicted to Take Full Force
Aluminium and carbon fibres have come to replace steel materials used in such areas as railway
vehicles and aircraft. Going forward, such competition between materials is also expected to take full
force for automobiles, one of the primary areas of demand for steel materials, in order to meet weight
reduction requirements.
Reorganisations Continue in Japan’s Steel Industry
Amongst blast furnace companies, domestic steel leader Nippon Steel and third place Sumitomo Metal
underwent an absorption-type merger in October 2012, establishing Nippon Steel & Sumitomo Metal,
which then became number two globally in crude steel production volume after ArcerolMittal. In that
same month, Nisshin Steel and Nippon Metal Industry underwent management integration. More
recently, Nippon Steel & Sumitomo Metal announced its agreement with Nisshin Steel to turn the
latter into a subsidiary by March 2017, thus consolidating Japan’s blast furnace manufacturers into
three companies: Nippon Steel & Sumitomo Metal, JFE Steel, and Kobe Steel.
In electric furnaces for regular steel, on the other hand, there are around 40 SMEs. As such, in June
2015, Japan’s Ministry of Economy, Trade and Industry (METI) announced that it would promote
business reorganisation in the field, through such activities as the consolidation of production facilities
and integration between companies. However, amidst a contracting market due to a decline in the
construction of new homes and investment in public infrastructure, electric furnace companies are
currently in a state of structural oversupply. While pushing for overseas expansion, METI will also hold
an investigation based on Article 50 of the Act on Strengthening Industrial Competitiveness and
proceed with reorganisation if the oversupply does not improve over the next two to three years. With
this flow of events, Osaka Steel turned Tokyo Kohtetsu into a subsidiary via a public tender offer in
March 2016.
Global Steel Market Conditions
In order to confirm the global market conditions for steel, it is important to first take a look at the
crude steel production volumes by major region. In 2005, China’s production volume exceeded that of
Europe, and rose to the top thereafter. Other regions, however, are showing a flattening trend to
marginal decline.

9. 09
A Brief Glance at Japan's Blast Furnace Steel-Related Industries
Even with the rise in production volume, is it balanced with supply and demand?
By 2005, the gap between crude steel production capacity and the apparent consumption of steel was
approximately 210 million tonnes. However, by 2015, that gap more than tripled to about 750 million
tonnes.

10. 10
A Brief Glance at Japan's Blast Furnace Steel-Related Industries
Furthermore, a look at the price trends for iron ore, a raw material for blast furnaces, shows that the
price rose gradually from USD 28.11 per tonne in 2005 to USD 187.18 per tonne by February 2011. The
price of iron ore had recently declined, but has been back on an uptrend since 2016.
Similarly, the price of coking coal rose sharply from 2008 to 2009, and relaxed thereafter. However,
the price has not yet returned to the level it was at before 2003.
Such price increases for raw materials (iron ore and coking coal) put pressure on the operating profits
of steel manufacturers.
Ten Years Ago and Now: A Comparison of Figures for Leading Companies
The following compares trends for leading industry players over FY2005–15.
See below for trends in revenues, operating profits, and operating profit margins.

11. 11
A Brief Glance at Japan's Blast Furnace Steel-Related Industries

12. 12
A Brief Glance at Japan's Blast Furnace Steel-Related Industries
These trends show that operating profits are declining overall.
Steel-related industries witnessed substantially more rapid growth than other fields in FY2005, owing
to increased demand from China, but then experienced a remarkable decline due to negative effects
from the global financial crisis. There was no recovery thereafter, which is thought to be a result of
worsening conditions in the global steel market and price rises for raw materials caused by increased
production capacity in China and South Korea.
In terms of revenue, Nippon Steel & Sumitomo Metal and Hitachi Metals saw increases in their
revenues due to management integrations. JFE Holdings, Kobe Steel, and Yamato Kogyo also reported
substantial revenue increases.
Market Capitalisation and EPS Fluctuation

13. 13
A Brief Glance at Japan's Blast Furnace Steel-Related Industries
Above is a list of companies based on the amount of growth in their market capitalisations (excluding
treasury stocks) in FY2015. There were only two companies that experienced an increase over FY2005–
15. Nippon Steel & Sumitomo Metal is ranked top in market capitalisation in the industry.

14. 14
A Brief Glance at Japan's Blast Furnace Steel-Related Industries
Capital Investment

15. 15
A Brief Glance at Japan's Blast Furnace Steel-Related Industries
A look at the ratio of capital investment (capex) to revenue for FY2015 shows that this industry has a
high percentage of capital investment compared to other industries, given that it handles industrial
processes.
Employees in the Blast Furnace Steel Industry
In terms of employee number for the entire group, Nippon Steel & Sumitomo Metal is at the top with
about 85,000 employees. Furthermore, the margins of increase for both Nippon Steel & Sumitomo
Metal and Hitachi Metals are high due to their management integrations. JFE Holdings and Kobe Steel
have also been increasing their number of employees through M&A activities.
Few companies have decreased their employee numbers substantially despite worsening operating
profits.

16. 16
A Brief Glance at Japan's Blast Furnace Steel-Related Industries
A look at the amount of revenue per employee reveals that electric furnace companies rise above blast
furnace companies. In particular, although the number of employees is decreasing for Mizushima
Ferroalloy, the company’s revenue is on the rise, and is at a high level compared to FY2005.
Tokyo Steel was at the top in FY2005 with over JPY 220 million. However, there have not been any
changes in the company’s number of employees, yet its revenue is declining tremendously, pushing
the company down to second in FY2015.

17. 17
A Brief Glance at Japan's Blast Furnace Steel-Related Industries
Note: Average salary and average age are on a non-consolidated basis.
When looking at the average employee salary for each company, blast furnace companies like JFE
Holdings and Nippon Steel & Sumitomo Metal, and special steel electric furnace companies like Hitachi
Metals, Aichi Steel, Daido Steel, and Sanyo Special Steel all make the top ranks.

18. 18
A Brief Glance at Japan's Blast Furnace Steel-Related Industries
In Closing: Potential in Superior Technology
With an oversupply in China, conditions in the steel industry are worsening, and companies are taking
on domestic consolidation and overseas expansion as their primary strategies.
However, Japanese companies possess a high level of technological ability in such areas as weight
reduction and high tensile strength. For automobile components in particular, they have superior
technologies in high tensile strength steel plates and special steel.
In its medium-term management plan, Nippon Steel & Sumitomo Metal plans to increase R&D
expenses by 10%, suggesting that the extent to which companies can enhance their superiority in
technological ability will be the topic moving forward.

19. 19
A Brief Glance at Japan's Blast Furnace Steel-Related Industries
Tokyo
Uzabase, Inc.
Ebisu First Square. 10F 1-18-14 Ebisu, Shibuya-ku, Tokyo 150-0013, Japan
+81-3-4574-6552
+81-3-4574-6553
customer@uzabase.com
Singapore
20 Collyer Quay, #23-01, Singapore 049319
+65-6653-8314
customer@uzabase.com
Hong Kong
30/F Entertainment Building, 30 Queen's
Road Central, Central, Hong Kong
+852-5808-3148 +852-3103-1011
customer@uzabase.com
Sri Lanka
48/4/1, Parkway building, Park Street,
Colombo 2. Sri Lanka.
+94-114-232-622
customer@uzabase.com
Shanghai
606, No.1440 Yan’An Rd.(M), Shanghai,
China
+86-21-6103-1677
customer@uzabase.com
©2017 UZABASE, Inc.
About US