Lookback on FY2022 results
In FY2022, we made significant progress in building a solid earnings foundation to support all of our efforts. However, it also brought into focus the stark reality that the global steel industry is entering an exceptionally challenging period. In the midst of a global downturn in steel production, iron ore and coking coal prices remained high, resulting in a decoupling between raw materials and finished products. We have now entered a new era of fierce competition that is forcing us to navigate the uncharted waters of an exceptionally challenging landscape to survive. Reflecting on FY2022, as the COVID-19 pandemic continued, the outbreak of the conflict in Ukraine pushed up energy and resource costs, marking the transition to an inflationary era. In Japan, inflation accelerated due in part to the rapid depreciation of the yen. In addition, the impact of production disruptions due to semiconductor shortages has intensified, particularly in the automotive sector. In addition, the slowdown of the Chinese economy, which accounts for the majority of world steel demand, led to a sharp decline in steel demand both domestically and internationally. This required us to significantly reduce our nonconsolidated crude steel production from just over 38.5 million tons in FY2021 to just under 34.5 million tons. In this challenging environment, we made a concerted effort to fundamentally improve our break-even point and optimize earnings by consistently implementing profit-oriented strategies such as streamlining production, refining the order mix, upgrading facilities and improving direct contract-based sales. As a result, despite operating with reduced crude steel production, both underlying consolidated business profit and consolidated profit attributable to owners of parent surpassed the previous record highs of FY2021, setting new highs for the second consecutive year. We view this achievement as the fulfillment of our commitment to build a solid business foundation by consistently securing more than 600 billion yen in consolidated underlying business profits regardless of external circumstances.
Acknowledgment of the External Environment
Global steel demand in FY2023 is not expected to improve from current levels. In China, the real estate sector continues to experience a slowdown, with no clear signs of a revival in domestic demand. Likewise, in Europe and the United States, the economic outlook remains uncertain. In addition, raw material prices are expected to remain at high levels, while product prices are expected to remain flat. Spreads (the difference between the market prices of raw materials and steel products) in the global market are not expected to improve. The domestic steel demand is expected to gradually decrease in line with population decline. At the same time, the export of steel products from Japan is likely to face increasing challenges due to the growing trend toward local production in various regions of the world. In addition, there are risks associated with increased volatility in raw material and product markets due to supply and demand trend in China. On the other hand, we see potential for growth in global steel demand, particularly in Asia, including countries such as India. We are determined to capitalize on the opportunities presented by the projected growth, supported by increased demand for high-grade steel and a competitive advantage through the establishment of carbon-neutral technologies.
Progress of the Medium- to Long-Term Management Plan
In this challenging environment, we are committed to achieving underlying consolidated business profits of 800 billion yen or more by delivering the effects of structural reforms and launching new initiatives. We aim to make FY2023 a pivotal year as we move toward achieving 100 million tons of global crude steel production and consolidated business profit of 1 trillion yen.
- Rebuild domestic steel business and strengthen group management
As part of the ongoing restructuring of our domestic steelmaking business, we have worked diligently to streamline and refine our production system through product and equipment selection and the consolidation of production into more competitive facilities. Our consolidation efforts continued in FY2022, focusing on transferring production to more competitive facilities. This included the shutdown of certain facilities, including the No. 3 casting machine in Kansai Works Wakayama Area, No. 1 hot-dip galvanizing and aluminum plating line in Setouchi Works Hanshin Area (Sakai), and pickling line No. 1 in the East Nippon Works Kashima Area.
By strategically positioning high-grade steel in recognition of the projected surge in demand in the future, we have proactively invested in plants and equipment to enhance the capacity and quality of our production. This includes the introduction of a state-ofthe-art hot rolling line at the Nagoya Works, dedicated to producing ultra-high-tensile steel sheets and other steel plates, and new lines at Setouchi Works Hirohata Area, Hanshin Area (Sakai) and Kyushu Works Yawata Area for the manufacturing of electrical steel sheets used in electric vehicle motors and transformer iron cores.
In addition to these facility initiatives, we have successfully achieved “margin improvement in direct contract-based sales” by carefully reviewing and optimizing our approach to the direct contract-based sales system. By maximizing earnings through the continuation of these fundamental profit structure measures, we have established a foundation that will enable us to achieve stable high earnings even at low production levels.
We are also working to improve the allocation of management resources throughout the Group. As part of this effort, we are transferring a segment of steelmaking plant business of Nippon Steel Engineering Co., Ltd. to our company. This move is aimed at strengthening the plant engineering system, which plays a key role in supporting our high-level investment in plants and equipment.
- Overseas business
With regard to our overseas business, we are nearing completion of our exit from unprofitable operations. Our focus is now on improving and expanding profitability through enhancement of “selection and concentration,” for instance, by focusing our efforts on higher valueadded, integrated steelmaking businesses.
We have developed our business mainly in Asia (especially India and the ASEAN countries), whose market size and growth rate are relatively large globally, and we are well positioned to profit from the scale and growth of this market.
We will move toward 100 million tons of global crude steel capacity through expanding integrated production framework in areas with demand and firmly capturing local demands in “districts and areas where demand is promisingly expected to grow” and in “sectors in which our technologies and products are appreciated.”
Specifically, we have taken aggressive action at ArcelorMittal Nippon Steel India Limited in India. This includes investing in the expansion of its integrated steelmaking capacity, including the construction of two new blast furnaces, the decision to acquire key assets and key infrastructure companies such as ports and power, the acquisition of downstream production capacity and the start of studies for the construction of a new integrated steel mill. While FY2022 saw a decline in profit from the previous year due to onetime effects such as inventory valuation differences, etc., we remain committed to improving profitability by further expanding integrated production capabilities in key overseas markets.
- Carbon neutral
Nippon Steel is also taking concrete steps to decarbonize its operations. We have announced our “Nippon Steel Carbon Neutral Vision 2050,” which outlines our goal to reduce total CO2 emissions by 30% from 2013 levels by 2030 and ultimately achieve carbon neutrality by 2050. This is a high-level goal that meets the Japanese government’s target and exceeds that of our overseas competitors.
We are making efforts from two aspects: provision of highperformance steel products and solutions to reduce CO2 emissions throughout society, and that of carbon neutral steel through decarbonization of the steelmaking process.
With regard to the former, we have decided to expand our production capacity for electrical steel sheet, an essential component of high-efficiency motors and transformers, and for ultra-hightensile steel sheet, which plays a key role in reducing the weight of automobiles. Construction has already begun on these initiatives. As part of these efforts, we decided to raise funds by issuing green bonds to increase both the capacity and quality of non-oriented electrical steel sheets, which are specifically designed for eco-car drive motors. The issuance of these bonds was completed in March 2023.
With regard to the latter, we are actively involved in the further development of three highly innovative technologies: high-grade steel production in large size electric arc furnaces, hydrogen injection into blast furnaces, and hydrogen direct reduction of iron. In a recent development, we have announced our plans to initiate a full-scale study of the transition from the BF steelmaking process to the EAF steelmaking process, with Kyushu Works Yawata Area and Setouchi Works Hirohata Area identified as potential sites for this transition. In addition, we intend to demonstrate the breakthrough technology of reduction with hydrogen in blast furnaces using actual blast furnaces to accelerate both our R&D efforts and the implementation of related facilities.
As part of this effort, we have also launched NSCarbolex™ as a brand to collectively refer to our “products and solution technologies that help reduce CO2 emissions across society.” By establishing a stable supply system at an early date, we are committed to supporting our customers’ decarbonization efforts and the reduction of CO2 emissions across multiple sectors of society.
As previously discussed, efforts to reduce CO2 emissions in the steel industry require a fundamental transformation of the production process itself. This transformation requires the development of innovative process technologies and subsequent implementation. However, substantial capital investment and a significant increase in operating costs are expected to realize the implementation. In addition, the function and quality of the goods will remain unchanged, as the production process will be changed primarily to reduce CO2 emissions.
Under these circumstances, achieving the government’s emission reduction targets and making investments in implementation for CO2 reduction, which in turn contributes to Japan’s economic growth, will rely on improving the predictability of investment decisions. This requires robust and comprehensive government support measures comparable to those in Europe, the U.S. and China. Based on this premise, we are committed to meeting the challenge of realizing measures that can deliver economic rationality.
- Digital transformation
As part of our digital transformation strategy, we are driving improvements in operational and production processes using data and digital technology. This approach encompasses every aspect of our steel business processes, from production planning, sales, manufacturing and maintenance to quality control, engineering, research, procurement, and finance. Over the next five years, we will invest ¥100 billion or more into our digital transformation strategy, with the aim of becoming a digitally advanced company in the steel industry. Specific measures include the wider use of “NS-IoT,” a wireless IoT sensor application platform, to centralize data collected from multiple sites, enabling more advanced analysis and monitoring. In April 2022, the actual operation for early detection of facility abnormalities began at East Nippon Works Kimitsu Area and Kashima Area. To further expand the application of this system, we decided on investments to accelerate the plan toward the start of operation in FY2023 at North Nippon Works Muroran district, Nagoya Works, Kansai Works Wakayama Area, Kyushu Works Yawata Area and Oita Area.
We will realize “smarter manufacturing,” “strengthening of flexible and optimal supply systems,” and “building of business intelligence” through the integration of our technologies and expertise (competitiveness in the real world) with digital technologies.
Evolving into a vertically-integrated business structure
Our efforts are currently focused on building and strengthening an integrated business structure from raw materials to manufacturing and distribution, enhancing our competitiveness throughout the supply chain, and developing a more resilient business model in line with our goal of achieving carbon neutrality. In FY2022, the raw material business maintained its high profitability, supported by a favorable sales environment characterized by high raw material market prices and the depreciation of the Australian dollar against the US dollar. In the future, we will remain committed to becoming a further verticallyintegrated business by ensuring the consistent procurement of high-quality raw materials that are essential for carbon-neutral steelmaking, mitigating business profit volatility due to raw material cost fluctuations, and securing new resources essential for future decarbonization efforts. By converting Nippon Steel Trading, an affiliate accounted for under the equity method, into both a subsidiary and a privately held company, Nippon Steel has successfully expanded its business scope into the distribution sector downstream of the steel manufacturing supply chain. We are determined to strengthen our capacity to assume responsibility for all steel trading activities. Our commitment extends to strengthening our competitiveness throughout the supply chain by optimizing and improving efficiency in production, distribution and processing. In addition, we are seeking to create new value through innovative approaches.
Our Corporate Philosophy articulates the company’s commitment to “pursue world-leading technologies and manufacturing capabilities, and contribute to society by providing excellent products and services.” In this context, we recognize that solving sustainability challenges is a fundamental pillar of our Group’s existence and growth. Based on this understanding, we have defined materiality (key issues) in focus areas such as health and safety, environment (including climate change measures), disaster prevention, quality, diversity and inclusion, human resource development, and other dimensions of sustainability and have been promoting initiatives in these areas. As we face new challenges, such as carbon neutrality, and pursue sustainable growth, the importance of attracting and retaining a diverse workforce will only increase. We will gradually implement concrete measures, including the formulation of public relations strategies to enhance the company’s appeal and recognition across generations. In addition, we will implement aggressive recruitment tactics, improve employee compensation levels, and increase employee engagement.
Our Group will continue to pursue cutting-edge technological advances and product capabilities, positioning itself at the forefront of the global steel industry. This commitment will be underpinned by our dedication to advancing sustainable social growth (SDGs). I am determined to lead the way, and will do my utmost to overcome new and formidable competition, move forward toward carbon neutrality, and ultimately claim the top position in the world in terms of overall corporate value-driven strength. We will formulate a concrete plan to realize the ambitious goals of achieving 100 million tons of global crude steel production and consolidated business profit of 1 trillion yen. At the same time, we will build a new business structure and take on the challenge of raising our aspirations to even greater heights. I invite you to continue to look forward to the future endeavors of our Group.