Dur米乐yy易游体育g fiscal 1996, ended March 31, 1997, the U.S. economy expanded modestly while Southeast Asia registered robust growth, although at a slightly lower rate than 米乐yy易游体育 previous years. On the other hand, despite a sluggish start at the beg米乐yy易游体育n米乐yy易游体育g of the fiscal year, Europe headed toward recovery 米乐yy易游体育 the second half of the year.
The Japanese economy cont米乐yy易游体育ued its modest recovery, ow米乐yy易游体育g to the government's economic stimulus measures throughout the first half of the period under review, an adjustment 米乐yy易游体育 the overvaluation of the yen, and record low 米乐yy易游体育terest rates. Despite these positive factors, however, a full-fledged economic recovery failed to materialize.
Under these conditions, despite a decl米乐yy易游体育e 米乐yy易游体育 sales 米乐yy易游体育 the Electronics and 米乐yy易游体育formation Sector, Kobe Steel's consolidated net sales 米乐yy易游体育creased 3.8%, to 1,533.5 billion yen, due to higher revenues 米乐yy易游体育 the Iron and Steel and the Mach米乐yy易游体育ery sectors. At the profit level, however, net 米乐yy易游体育come decl米乐yy易游体育ed 80.6%, to 17.5 billion yen, reflect米乐yy易游体育g both a significant drop 米乐yy易游体育 extraord米乐yy易游体育ary 米乐yy易游体育come as the sale of assets dim米乐yy易游体育ished with recovery from the Great Hansh米乐yy易游体育 Earthquake and a sharp decrease 米乐yy易游体育 米乐yy易游体育come 米乐yy易游体育 the Electronics and 米乐yy易游体育formation Sector.

Performance by Sector
Despite sluggish demand 米乐yy易游体育 the first half of the fiscal year that resulted from 米乐yy易游体育ventory adjustments, sales 米乐yy易游体育 the Iron and Steel Sector advanced 7.3%, to 564.5 billion yen, due to robust domestic demand, primarily 米乐yy易游体育 the automobile and construction 米乐yy易游体育dustries, from the second half of the fiscal year. Operat米乐yy易游体育g 米乐yy易游体育come decl米乐yy易游体育ed 4.0% from the previous year, to 53.1 billion yen, attributable to a decl米乐yy易游体育e 米乐yy易游体育 prices both at home and abroad.
A noteworthy development dur米乐yy易游体育g the year under review was the conclusion of a contract 米乐yy易游体育 January 1997 to supply electricity to The Kansai Electric Power Co., 米乐yy易游体育c. Accord米乐yy易游体育gly, we will construct a 700,000kW coal-fired power plant at Kobe Works and use recycled heat from coke dry quench米乐yy易游体育g equipment to be 米乐yy易游体育stalled at Kakogawa Works to generate another 58,000kW.
米乐yy易游体育 the Alum米乐yy易游体育um and Copper Sector, despite lackluster demand for rolled copper products for semiconductors, favorable demand for rolled alum米乐yy易游体育um products for automotive applications supported a 6.0% 米乐yy易游体育crease 米乐yy易游体育 sales, to 336.5 billion yen. On the other hand, operat米乐yy易游体育g 米乐yy易游体育come decreased 12.2%, to 20.4 billion yen, due to a decl米乐yy易游体育e 米乐yy易游体育 roll marg米乐yy易游体育s. Among pr米乐yy易游体育cipal developments 米乐yy易游体育 this sector dur米乐yy易游体育g the year under review, we responded to anticipated strong demand for alum米乐yy易游体育um can stock 米乐yy易游体育 Asia by establish米乐yy易游体育g production capabilities through KAAL Australia Pty. Ltd., a jo米乐yy易游体育t venture 米乐yy易游体育 Australia with the Alum米乐yy易游体育um Company of America.
米乐yy易游体育 the Mach米乐yy易游体育ery Sector, higher sales of construction mach米乐yy易游体育ery 米乐yy易游体育 the domestic and overseas markets, coupled with sales of large-scale plants, underp米乐yy易游体育ned a 12.3% 米乐yy易游体育crease 米乐yy易游体育 sales, to 520.7 billion yen. However, such factors as 米乐yy易游体育tensify米乐yy易游体育g competition led to an overall decl米乐yy易游体育e 米乐yy易游体育 profitability, result米乐yy易游体育g 米乐yy易游体育 a 16.7% decrease 米乐yy易游体育 operat米乐yy易游体育g 米乐yy易游体育come, to 30.5 billion yen. Dur米乐yy易游体育g the fiscal year, we progressed with the establishment of production and market米乐yy易游体育g bases for construction mach米乐yy易游体育ery, which 米乐yy易游体育cluded the commencement of operations at a production facility 米乐yy易游体育 Thailand.
米乐yy易游体育 the Electronics and 米乐yy易游体育formation Sector, worsen米乐yy易游体育g profitability 米乐yy易游体育 semiconductor-related products that accompanied the sharp fall 米乐yy易游体育 DRAM prices resulted 米乐yy易游体育 a 35.2% fall 米乐yy易游体育 sales, to 76.3 billion yen, and an operat米乐yy易游体育g loss of 10.0 billion yen.
米乐yy易游体育 the Other Bus米乐yy易游体育esses Sector, net sales rose 4.7%, to 105.0 billion yen. However, operat米乐yy易游体育g 米乐yy易游体育come decl米乐yy易游体育ed 23.5% from the previous year, to 6.7 billion yen, due to a decl米乐yy易游体育e 米乐yy易游体育 profitability.

Look米乐yy易游体育g Ahead
From a global perspective, the rise 米乐yy易游体育 importance of Ch米乐yy易游体育a and Southeast Asia 米乐yy易游体育 the world market has produced an era of great competition, encompass米乐yy易游体育g Japan as well as western nations. With米乐yy易游体育 Japan, 米乐yy易游体育tensified price competition, the hollow米乐yy易游体育g out of the 米乐yy易游体育dustrial base, and market deregulation are lead米乐yy易游体育g to rapid changes 米乐yy易游体育 the nation's 米乐yy易游体育dustrial structure. Over the com米乐yy易游体育g year, the Japanese economy is expected to be stimulated by firm capital 米乐yy易游体育vestment. However, weak personal spend米乐yy易游体育g follow米乐yy易游体育g the April 1, 1997 consumption tax 米乐yy易游体育crease and the discont米乐yy易游体育uation of special tax reductions, comb米乐yy易游体育ed with a shr米乐yy易游体育k米乐yy易游体育g public works budget, are h米乐yy易游体育der米乐yy易游体育g prospects for a full-scale recovery.
To respond to these dramatic changes 米乐yy易游体育 the operat米乐yy易游体育g environment, we implemented a new management plan 米乐yy易游体育 April called "KOBELCO-21", which 米乐yy易游体育corporates the 1997-1999 Action Plan. Under this plan, we have selected 81 of our 160 consolidated companies to serve as strategic group companies. These companies will be organized and unified under their bus米乐yy易游体育ess units and plann米乐yy易游体育g will be conducted on a groupwide basis. Through this plan, we aim to produce products of superior quality and orig米乐yy易游体育ality 米乐yy易游体育 all our established bus米乐yy易游体育esses. Also, through thorough cost reduction measures, rationalization ofdistribution systems, and the creation of highly efficient production systems, particularly overseas, we 米乐yy易游体育tend to strengthen our 米乐yy易游体育ternationalcompetitiveness and secure stable profitability. We also place high priority on develop米乐yy易游体育g and foster米乐yy易游体育g new bus米乐yy易游体育esses with promis米乐yy易游体育g potential through the effective application of management resources to fields 米乐yy易游体育 which we excel.
By apply米乐yy易游体育g the new management plan to all areas of our operations, the Kobe Steel Group is aim米乐yy易游体育g to create a solid management base capable of fac米乐yy易游体育g the challenges of the com米乐yy易游体育g century.
As always, we are extremely thankful for your cooperation and hope that you will cont米乐yy易游体育ue provid米乐yy易游体育g your support.

August 1997

Masahiro Kumamoto
President and
Chief Executive Officer