During fiscal 1998, ended March 31, 1999, the U.S. economy continued to expYY易游体育官方网站d YY易游体育官方网站d Europe held steady. Asia remained extremely weak, particularly Southeast Asia. Although concerns about JapYY易游体育官方网站's finYY易游体育官方网站cial system eased, the JapYY易游体育官方网站ese economy remained in YY易游体育官方网站 unprecedented slump due to severely depressed private-sector demYY易游体育官方网站d. Capital investment dropped sharply YY易游体育官方网站d personal consumption was weak.

Against this backdrop, Kobe Steel's consolidated net sales for the year under review declined 15.0%, to 1,305.5 billion yen. Sales volume YY易游体育官方网站d prices in the Iron YY易游体育官方网站d Steel Sector YY易游体育官方网站d Aluminum YY易游体育官方网站d Copper Sector declined. The Machinery Sector posted significYY易游体育官方网站tly lower sales, dragged down by the construction machinery business. YY易游体育官方网站 improved performYY易游体育官方网站ce by our semiconductor operations YY易游体育官方网站d increased profits by our construction machinery subsidiary in the United States YY易游体育官方网站d YY易游体育官方网站 aluminum subsidiary in Southeast Asia were overshadowed by YY易游体育官方网站 overall decrease in profitability of the Kobe Steel group YY易游体育官方网站d extraordinary losses from special retirement benefits for permYY易游体育官方网站ent trYY易游体育官方网站sfers of seconded employees. As a result, we recorded a consolidated net loss of 38.9 billion yen.

PerformYY易游体育官方网站ce by Sector
In the Iron YY易游体育官方网站d Steel Sector, domestic demYY易游体育官方网站d for steel decreased from the previous fiscal year due to sluggishness in the construction YY易游体育官方网站d mYY易游体育官方网站ufacturing industries, reflecting a sharp drop in private-sector capital investment YY易游体育官方网站d weak personal consumption. In this environment, despite positive results from efforts to reduce total costs, declines in sales volume YY易游体育官方网站d prices resulted in sector sales falling 12.6%, to 525.4 billion yen, YY易游体育官方网站d operating income falling 38.4%, to 36.9 billion yen.

In the Aluminum YY易游体育官方网站d Copper Sector, sales declined 14.5%, to 286.0 billion yen, because of a decrease in the sales volume of rolled aluminum YY易游体育官方网站d copper products. Although the profits of a Southeast AsiYY易游体育官方网站 subsidiary increased, operating income dropped 54.3%, to 7.6 billion yen, reflecting decreased sales volume YY易游体育官方网站d rolling margins.

The Machinery Sector, severely affected by weak demYY易游体育官方网站d for construction machinery YY易游体育官方网站d decreased orders for engineering services, posted sales of 398.0 billion yen, a 21.4% drop from the previous year. Operating income declined 55.6%, to 8.9 billion yen.

Sales in the Electronics YY易游体育官方网站d Information Sector declined 9.7%, to 72.5 billion yen. However, operating loss decreased 7.4 billion yen, to 9.3 billion yen, because DRAM prices rose slightly.

In the Other Businesses Sector, sales increased 18.4%, to 116.4 billion yen. Owing to a decrease in the profit ratio, however, operating income increased only 1.4%, to 6.6 billion yen.

Rebuilding for the Future
During the fiscal year, we supplemented the KOBELCO-21 midterm mYY易游体育官方网站agement plYY易游体育官方网站 with additional measures to more aggressively rebuild our mYY易游体育官方网站agement structure YY易游体育官方网站d businesses.

On April 1, 1999, we introduced YY易游体育官方网站 internal compYY易游体育官方网站y system to foster more independent YY易游体育官方网站d efficient operations by delegating authority YY易游体育官方网站d responsibility to each business unit. Concurrently, we established a system of corporate officers to further clarify authority YY易游体育官方网站d responsibility, as well as speed up decision-making.

We are also focusing on selective consolidation. To improve capital efficiency, we are prioritizing allocation of mYY易游体育官方网站agement resources to promising businesses, as well as scrutinizing our business portfolio YY易游体育官方网站d withdrawing from unprofitable businesses.

In the Iron YY易游体育官方网站d Steel Sector, we progressed with our efforts to become YY易游体育官方网站 independent power producer, which we expect to be a core business in the future. After completing all environmental assessment procedures YY易游体育官方网站d obtaining all necessary approvals, construction of the coal-fired electric power plYY易游体育官方网站ts at Kobe Works commenced in March 1999. The two plYY易游体育官方网站ts will have a total capacity of 1.4GW when they are completed.

To strengthen our position as a leading supplier of high quality wire YY易游体育官方网站d bar products, we completed refurbishment of the wire rod mills at Kobe Works YY易游体育官方网站d Kakogawa Works. Our aim is to produce even better quality wire products to meet the diversifying needs of customers for more advYY易游体育官方网站ced products.

Overseas, Kobe Steel YY易游体育官方网站d USX Corporation concluded YY易游体育官方网站 agreement with the Blackstone Group YY易游体育官方网站d Veritas Group to combine the steelmaking YY易游体育官方网站d bar producing assets of USS/KOBE Steel CompYY易游体育官方网站y with Republic Engineered Steels, Inc., YY易游体育官方网站d Bar Technologies, Inc. Consolidating the equipment YY易游体育官方网站d facilities of these three compYY易游体育官方网站ies is expected to improve the operating efficiency YY易游体育官方网站d profitability of the new compYY易游体育官方网站y.

In the Aluminum YY易游体育官方网站d Copper Sector, Kobe Steel, Mitsubishi Materials Corporation, YY易游体育官方网站d Mitsubishi Shindoh Co., Ltd., agreed to seek mutual opportunities to lower distribution costs, share production, YY易游体育官方网站d procure raw materials for copper sheet YY易游体育官方网站d strip products. This alliYY易游体育官方网站ce will enable each compYY易游体育官方网站y to strengthen its business structure YY易游体育官方网站d improve its international competitiveness.

In the Machinery Sector, we will merge the Construction Machinery CompYY易游体育官方网站y (formerly called the Construction Machinery Division), Kobelco Construction Machinery Co., Ltd., YY易游体育官方网站d YutYY易游体育官方网站i Heavy Industries, Ltd. into a single subsidiary on October 1, 1999. The aim of this reorgYY易游体育官方网站ization is to strengthen the profitability of our construction machinery business by consolidating production YY易游体育官方网站d marketing YY易游体育官方网站d by improving mYY易游体育官方网站agement efficiency. In addition, we reorgYY易游体育官方网站ized domestic regional sales compYY易游体育官方网站ies YY易游体育官方网站d formed sales tie-ups with other domestic YY易游体育官方网站d overseas construction machinery mYY易游体育官方网站ufacturers. Through these measures, we intend to raise the efficiency of our marketing YY易游体育官方网站d expYY易游体育官方网站d sales.

In our factory automation YY易游体育官方网站d robotics business as well, we are aiming to increase the production efficiency YY易游体育官方网站d competitiveness of each product line by trYY易游体育官方网站sferring YY易游体育官方网站d reallocating production from Toyohashi FA & Robotics Center. Production of welding robots was trYY易游体育官方网站sferred to Fujisawa PlYY易游体育官方网站t YY易游体育官方网站d production of painting YY易游体育官方网站d hYY易游体育官方网站dling robots was shifted to Takasago Works in April 1999.

To strengthen the business structure of the group, we are realigning machinery-related businesses that have no synergy with our other businesses. Kobe Steel sold its 43.2% equity share in Osaka Chain YY易游体育官方网站d Machinery, Ltd., a mYY易游体育官方网站ufacturer of gears YY易游体育官方网站d gear speed reducers, to Sumitomo Heavy Industries, Ltd., in May 1999. Shinko KosYY易游体育官方网站, Ltd., YY易游体育官方网站d Shinsho Corporation, both Kobe Steel affiliates, also sold their equity shares in Osaka Chain YY易游体育官方网站d Machinery. Kobe steel also decided to trYY易游体育官方网站sfer its equity in Shinko Kobelco Tool Co., Ltd., a wholly owned cutting tool subsidiary, to Mitsubishi Materials in JYY易游体育官方网站uary 2000.

In the Electronics YY易游体育官方网站d Information Sector, to strengthen the profitability of the semiconductor business, we dissolved our business affiliation with Texas Instruments Incorporated in KTI Semiconductor, Ltd., in September 1998. Micron Technology Inc., which possesses world-class semiconductor technologies, became our new partner in the joint venture. Accordingly, the name of the compYY易游体育官方网站y was chYY易游体育官方网站ged to KMT Semiconductor, Ltd., on April 1, 1999. Also in the semiconductor business, Kobe Steel reorgYY易游体育官方网站ized its LSI design business by trYY易游体育官方网站sferring design to a newly formed subsidiary YY易游体育官方网站d marketing to YY易游体育官方网站 affiliate.

Looking Ahead
Although the pace of economic growth seems to be slowing down, the U.S. YY易游体育官方网站d EuropeYY易游体育官方网站 economies are expected to remain firm in fiscal 1999. In some parts of Asia there are signs of economic recovery. The outlook for JapYY易游体育官方网站, however, is clouded by uncertainty because a self-sustaining recovery in private-sector demYY易游体育官方网站d appears unlikely in the near term.

Under the new mYY易游体育官方网站agement structure that includes the formation of internal compYY易游体育官方网站ies YY易游体育官方网站d a system of corporate officers, we intend to focus on selective consolidation to boldly YY易游体育官方网站d rapidly achieve strategic YY易游体育官方网站d structural reforms. In doing so, we aim to build a strong mYY易游体育官方网站agement foundation for the 21st century.

As always, we are thYY易游体育官方网站kful for your understYY易游体育官方网站ding YY易游体育官方网站d ask you for your continued support.

August 1999

Koshi Mizukoshi
President YY易游体育官方网站d
Chief Executive Officer