RETURN TO REPORTS 1SK< RESTRICTED WITHIN ONE WEEK Report NO. T.O. 223a FLE COPY This report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT FUJI IRON AND STEEL CO., LTD. APPRAISAL OF BLAST FURNACE PROJECT JAPAN October 30, 1959 Department of Technical Operations CURRENCY EQUIVALENTS 1US $ - Y 360 1 million Y - $2,780 All tons are metric tons of 2,200 pounds The company's fiscal terms run from April 1 to September 30 and October 1 to March 31. When the term " fiscal year" is used, it means the year from April 1 of the year mentioned to March 31 of the following year. TABLE OF CONTENTS Paragrapha Summary and Conclusions I. Introduction 1- 8 II. The Company 9 - 46 Properties 20 - 25 Other Investments 26 Share Capital 27 - 28 Management 29 Labor 30 - 31 Earnings Record and Financial Position 32 - 39 Past Expansion and Modernization of Facilities 4o - 43 Second Modernization and Ex- pansion Program h - 46 III. The Market 47 - 51 IV. The Construction Program 52 - 73 Raw Materials, Utilities and Labor 61 Construction Schedule and En- gineering 62 - 64 Cost Estimates 65 - 71 Proposed IBRD Loan 72 - 73 V. Benefits Resulting from the Expansion Program 7h - 77 VI. Assumptions for Future Demand and Prices 78 - 80 VII. Financing Plan and Financial Prospects 81 - 99 Construction Period 83 - 90 Operating Period 91 - 94 Conclusions 95 - 99 LIST OF ANNEXES 1. Existing Facilities (March 1959) 2. List of Main Subsidiaries as at March 31, 1959 3. Past Financial Statements 4. Expenditures on Fixed Assets for Projects included in the Second Modernization Program and completed between March 31, 1956 and March 31, 1959. 5. Market Prospects of the Japanese Steel Industry 6. Raw Materials, Utilities, Labor 7. Construction Schedule 8. Order of Priority of Projects not started on January 1, 1959 as Proposed by the Company 9. Cost Estimates 10. Proposed Disbursement Schedule 11. Sales (domestic and export) and Share of the Japanese Market 12. Sales Prices 13. Return on Sales 1. Income Statement Forecasts 15. Cash Flow Forecasts 16. Balance Sheet Forecasts 17. Assumptions for Financial Forecasts 18. Consolidated Balance Sheet Forecast (with main subsidiaries) Map Chart FUJI IRON & STEEL CO., LTD. APPRAISAL OF BLAST FURNACE PROJECT SUMrJtARY AND CONCLUSIONS The Japanese Government has asked the Bank to lend the Japan Development Bank $24 million equivalent to be relent to the Fuji Iron & Steel Co., Ltd. (Fuji) to cover the imported goods and part of the local expenditures for a portion of the company's construction program. This program was initiated in 1959 and is expected to be completed by harch 31, 1962. It is designed to expand the company's iron and steel- making facilities, located at Hirohata, Auroran, Kamaishi and Kawasaki. Fuji, the second largest steel company in Japan is an inte- grated producer of plates, sheets, rails, shapes and bars. It also sells large quantities of pig iron and semi-finished steel products. The company is well organized and managed. Its financial position and its credit are good, Its earnings were large during the 1955-1957 period, but declined substantially during the 1958 recession. The company has made considerable efforts in recent years to modernize and expand its facilities. However, in order to keep pace with the countryls fast expanding demand for steel, it must increase its pig iron and steelmaking capacity. It has therefore begun to construct a large modern blast furnace, an oxygen converter plant and a slabbing mill. Its construction program also contemplates the modernization of obsolete equipment and the addition of facilities designed to widen the range of saleable products. The whole construction program from April 1, 1959 to March 31, 1962 is designed to increase annual pig iron capacity from 2,650,000 tons to 3,300,000 tons and ingot steel capacity from 3,000,000 tons to 3,750,000 tons. The construction program engineered by Fuji's staff is sound. The new blast furnace, converter plant and slabbing mill at Hirohata will enable Fuji to increase its production of plates and sheets. By spreading overhead and permitting a fuller utilization of the rolling mills, it will increase the company's earning power. Demand for plates seems likely to weaken in the near future because of a falling off in ship construction, but demand for sheet is likely to be large enough to permit full operation of its flat product facilities. There is no pro- blem in connection with the marketing of the other finished steel products manufactured by Fuji. The cost of the three-year construction program is estimated conservatively at about *73.2 billion ($203.3 million equivalent). This includes expected investments of about 31 million equivalent in renewals and repairs, but does not include interest during construction. The company's financial requirements for the three-year period ending March 31, 1962 are estimated at about Y102.4 billion ($284 million equivalent). This includes some *7 billion for working capital and some X16.1 billion for repayment of existing debt. The financing plan to meet these needs is sound. Retained earnings, depreciation and the proceeds of a share issue should pro- vide more than Yh5.6 billion; long-term borrowings (including the pro- posed Bank loan of about 48.6 billion, bond issues of about Y21.0 bil- lion and other long-term bank loans of about 926.8 billion) would total g56.4 billion. Arrangements have been made in Japan to raise part of the necessary long-term borrowings. The company is negotiating with its bankers to secure the part of the Y26.8 billion in long-term loans that has not yet been arranged and to obtain assurances concerning the underwriting of the part of the Y21,O billion in bonds that has not yet been issued. Conservative financial projections indicate that the company's consolidated debt/equity ratio should not rise above 58:h2 during the construction period and should fall rapidly thereafter. Long-term debt service should be covered by an adequate margin (not falling below 1.4) during the first four years' operations, even assuming that, contrary to normal practice, no bond issues are refunded. The current ratio would reach a low point of 1.11:1 during the construction period. In order to guard against the risk of a working capital shortage during that period the company will obtain an undertaking to provide short-term loans up to an amount of 16 billion from its main bank, the Industrial Bank. This will fund short-term loans during five years, the term of the undertaking, and, by eliminating them from current liabilities, raise the current ratio during the construction period to a minimum of 1.59:1. It is expected that this backstop would be renewed every year for the ensuing period of five years, until the last repayment of the Bank loan. The cost of the portion of the construction program for which a Bank loan has been requested - the blast furnace, the converter plant and the slabbing mill at Hirohata - is estimated at *27.1 billion .(75,3 million equivalent). It is a suitable basis for a Bank loan of $24 mil- lion equivalent, which would cover the imported goods and part of local expenditures, with a term of 15 years (including two years' grace), pro- vided that satisfactory arrangements are made for security, for a limi- tation on additional borrowings, for the protection of the company's liquidity and for financing from Japanese sources, as suggested in paras. 95 to 98. I. INTRODUCTION 1. The Japanese Government indicated to Mr. Black, during his visit to Japan in May 1957, that the development of the steel industry and, in particular, the expansion of ironmaking facilities (to reduce the industryts dependence on imported scrap) had a high priority for Japan's economic development. 2. The steel industry, after rehabilitating its war-damaged fa- cilities, carried out a substantial investment program between 1951 and 1955. Capacity was expanded sufficiently to make possible an increase in crude steel production from about 7.7 million tons in 1953 (the pre- vious peak level) to 11.1 million tons in 1956. To keep pace with the rapidly rising domestic demand, however, further expansion was needed, and in early 1956, the Japanese steel industry had embarked on a Socond Expansion and Modernization Program. It was for this program that it sought Bank help. This second program was aimed at a) expanding crude steel capacity to 20.5 million tons by 1962; b) installing facilities to enable the industry to meet the demand for higher quality and a wider range of products; and c) modernizing the mills in order to reduce opera- ting costs. 3. One of the principal objects of the investment program was an expansion of ironmaking facilities. A stimulus for this phase of the plan was the acute shortage of scrap which developed as a result of the Suez crisis, in 1956, which forced up prices and made it difficult for the Japanese producers to obtain adequate supplies of imported scrap. Although scrap is no longer in such short supply, a number of factors combine to provide continued justification for the substitution of pig iron for scrap: the fluctuations in scrap supplies and prices; the fact that iron ore can be imported from the Pacific area and India whereas scrap comes from the US; and, finally, the introduction of new oxygen techniques in steelmaking which make possible an increase in the propor- tion of pig iron in the charge. These new processes - based on oxygen converters, or an increased use of oxygen in open-hearth furnaces - are widely used in Japan. 4. Most of the projects included in the Second Expansion and Modernization Program have either been completed or are under way. Developments have amply justified the expansion of capacity. In the fiscal year 1959, production seems likely to reach 16.2 maillion tons, about 3.7 million tons in excess of the previous record level, reached in 1957. The indications are that by the early 1960's, the industry will have to operate at a high rate to meet demand. 5. The Japanese steel industry has both advantages and disadvan- tages compared with the European and US industries. It is heavily de- pendent upon imported raw materials, which carry large and fluctuating freight charges. It has been able to offset this disadvantage through low cost labor and efficient operation of facilities. Although many - 2 - 'acilities are still obsolete, the substantial investments which have been made in facilities embodying the latest advances in technology, have made it possible for Japan to compete with the US and Rawopean steel industries in export markets. 6. Some 10% to 15% of Japanese steel production is exported in the form of primary products and a substantial proportion is exported in manufactured products (mainly ships to date but increasingly machinery and other products). If Japan is to maintain its competitive position, it must continue to keep pace with the European and US industries in pro- ductivity, quality, and efficiency; this will involve continued substan- tial investments in modern facilities. 7. The Bank has already made loans to the Japanese steel industry, amounting to a total of $100.9 million equivalent. Five of the six largest steel companies have had a portion of their expansion financed by the Bank: Yawata, v5.3 million; Nippon Kokan, $24.6 million; Kawasaki, $28 million; Sumitomo, $33 million; and Kobe, $10 million. The Bank has now been asked to consider two further projects, that of Fuji Iron & Steel Co., Ltd., for $24 million equivalent, and that of Yawata Iron & Steel Co., Ltd., for $20 million equivalent. 8. The project which is appraised in the following report is the construction of facilities - the blast furnace, converter plant and slab- bing mill - at the Hirohata works of Fuji Iron & Steel Co., Ltd. (Fuji) on the inland sea. The company's construction program, which includes other facilities at Hirohata and its other works, is an integrated whole. The following appraisal therefore covers the whole construction program of the company which is designed to increase its annual output of pig iron from about 2,650,000 tons to about 3,300,000 tons and of ingot steel from about 3,000,000 tons to about 3,750,000 tons, with corresponding ex- pansion and modernization of finishing facilities. This appraisal is based upon data submitted by the company and a field investigation during July and August, 1959. - 3 - II. THE COMPANY 9. The Fuji Iron & Steel Co., Ltd. is a successor of the first inte- grated steel company to be established in Japan, the Yawata Iron Works set up in 1901 by the Imperial Japanese Government. This company dominated the Japanese steel industry in the first three decades of the century. 10. In 1934, a merger was arranged between Yawata and the independent blast furnace operators. The Imperial Government emerged as the holder of 80% of the stock of the new steel company, the Japan Iron and Steel Co., Ltd. The new company accounted for 75% of the pig iron, 43% of the raw steel and 40% of the finished steel produced in Japan in 1934. Virtually all the other steel companies in the country depended upon it for their pig iron or semi-finished steel. 11. After the close of the war, as a part of the decartelization policy, the Government sold its holdings in the Japan Iron and Steel Co., Ltd. through the security markets, and early in 1950 the company itself was dissolved. The bulk of its iron and steel facilities were transferred to two new com- panies, the Yawata Iron & Steel Co., Ltd., and the Fuji Iron & Steel Co., Ltd. 12. The two new companies, Yawata and Fuji, were formally organized on April 1, 1950 and became the two largest steel producers in Japan. The new Yawata company received the facilities at Yawata on Kyushu Island while the Fuji company was given the works at Hirohata, Kamaishi and Kawasaki in Honshu, and at Muroran in Hokkaido (see map). 13. Fuji is today the second largest integrated steel company in Japan, with about 30% of the whole country's output of pig iron, more than 18% of steel ingots and more than 15% of finished rolled steel products. It is the principal supplier of pig iron and semi-finished steel to small producerg of finished steel products. 14. The company's production capacity and output have increased by 50% since it began operations. It should be noted that in most integrated steel companies, with normally balanced facilities, pig iron, ingot steel, blooms and billets, and hot coils and hoops are used for further processing by the company and are not sold in their original form. The proportion of these products sold as such by Fuji is rather high. Production capacity ard sales in the Japanese fiscal year 1958 (April 1, 1958-March 31, 1959) were as follows (in thousand tons): Production Capacity Sales Pig iron 2,647 420 Ingot steel 3,024 - Hot Rolled Products: Blooms, billets, sheet bars and slabs 2,880 202 Rails, shapes, bars and wire rod 454 488 Plates* ( 349 Hot coils and hoops* (1,594346 Others 142 Cold Rolled Products: Cold strip and sheets* 392 235 Galvanized sheets 60 50 Tinplates 96 17 Cold formed products 12 5 * Part of these facilities came into production during the 1958 fiscal year and only a proportionate part of their capacity is included here. 15. In 1958, flat products accounted for 44.2% of the total tonnage of sales, bars and sections for 16.8%, wire rod for 4.9%, semi-finished steel and other products for 15.5% and pig iron for 18.6%. 16. The value of sales has nearly doubled in recent years. A sub- stantial proportion of total sales is for export. Fiscal Years Sales Percentage Exported (7 million) (in value) 1954 56,404 16.2% 1955 77,388 19.2% 1956 98,177 12.8% 1957 102,791 11.3% 1958 90,525 15.4% 17. The decline in exports in 1956 and 1957 was the result of the boom in those years when the strong demand on the home market was met at the ex- pense of exports. 18. Except in the recession of 1958, Fuji's export prices for finished steel products have been very close to domestic prices. In 1958, average export prices were about 4.6% lower than domestic. - 5 - 19. Fuji production costs are relatively low and compare favorably with those of other Japanese producers. Average production cost per ton of plate, a typical product for the company, was Y31,730 ($88.14 equivalent) in September 1958, not including indirect cost and financial charges. This compared with a domestic sale price of 46,000 per ton ($128 equivalent) and a U.S. sale price of $116.80 per ton (base price, fob mill). Properties 20. The major installations at the four Fuji steel works are listed in Annex 1. 21. The Kamaishi and Muroran plants are located on the coast close to iron ore and coal mines, but rather far from the market for steel products, which is largely concentrated in the area south of Tokyo. With minor ex- ceptions such as the Kamaishi iron ore, Japanese domestic coal and iron ore are rather poor in quality and relatively expensive. However, when ocean freights are high, the Kamaishi and Muroran plants gain an advantage through their use of local raw materials. When ocean freights are low, this advan- tage is reduced and at some times the raw material costs of these plants have been higher than those of Japanese plants using imported raw materials, thus aggravating the plants' basic disadvantage of distance from the market. However, industry is likely to expand in the north of Japan, mainly because of lack of space for further expansion in the south,,and both Muroran and Kamaishi can look forward to a rapid expansion of their local markets in the future. 22. Muroran is an excellent plant, with a fine natural harbor and all the space necessary for expansion. Except for an obsolete bar and shape- mill, the facilities are relatively new or recently remodeled. 23. At Kamaishi, on the other hand, there is no space for a major ex- pansion of facilities in future. Indeed, the site is inadequate for efficient operation at present and Fuji has been obliged to resort to expensive expe- dients, such as the building of a 2,000 m. tunnel to make possible the duminpg of blast furnace slag into the sea. In addition, most of the rolling facili- ties at Kamaishi are obsolete. 24. The Hirohata works are by far the finest plant of the company. Located on the inland sea, they are close to the steel market. The plant is relatively modern and efficient and the layout of the plant is good, although the rolling mill site is becoming overcrowded. 25. The company's fourth plant at Kawasaki is a small rolling mill Its excellent location in the heart of the Tokyo industrial area and the ample size of the site make it a valuable asset for Fuji. -6- Other Investments 26, As of March 31, 1959, Fuji had investments totalling Y6,808 mil- lion ($18.9 million equivalent) in shares and securities, of which Y2,526 million (37.1%) were in shares of six subsidiary companies. A list of these subsidiaries is given in Annex 2. Most of Fuji's remaining investments were in banks or investment companies (15%), mining (15.5%) and metal industries (11.6%). Such large investments are customary in Japan, where industrial companies usually hold substantial share interests in the banks with which they deal, in their main suppliers and in customers. The practice of holding such large portfolios often constitutes a heavy burden for industrial com- panies, although the investment risk is well diversified. Share ital 27. When Fuji was established in 1950, the share capital was Y400 mil- lion. Successive issues of new shares have brought its share capital up to 420,000 million , represented by 400 million shares at par value (Y50) which are distributed among 120,000 shareholders. Although over 44% of the total shares are held by financial institutions (as of March 31, 1959) the three largest shareholders, the Mitsubishi Trust Bank, the Industrial Bank and the Daiwa Bank, each hold only about 2.6% of the total. 28. Fuji stock prices have followed the same course as those of other Japanese steel companies. They reached a peak of Y86 (compared with a par value of Y50 and a book value of Y105) at the end of 1956 during the Suez orisis, fell to a low of Y59 in December 1957, during the recession, and recovered to a peak of Y122 in July 1959. The latter figure reflects an expectation of a possible share issue in the near future; according to Japanese custom, new share issues are offered to shareholders at par (Y50), and recently it has been the practice to distribute 20% of the whole issue as stock dividend (by capitalizing part of the revaluation reserve) making the effective price to shareholders Y40 per share. Mangement 29. Fuji's management is competent and conservative in its financial approach. It has successfully carried out a large expansion program in recent years without straining the company's finances. Mr. Nagano, Fuji's President, is one of the outstanding figures in Japanese industry. Iabor 30, Fuji employed about 25,000 workers in 1958 to produce about 2,300,000 tons of ingot steel. Productivity compares favorably with that of other Japanese steel companies. Iabor costs are low, as is usual in Japan. They averaged Y228 per hour ($0.63 equivalent), including all fringe benefits. The labor cost per ton of saleable product was Y6,842 ($19.00 .quivalent). - 7 - 31. labor is organized in unions, on a plant and company basis. Until this year, the occasional strikes have been settled in a few days. In March- April 1959, however, after management had granted a monthly increase of Y800 in wages (1.6%), the companyts rolling mills were paralyzed by a strike. The strike ended after 44 days, without any further wage concession by the manage- ment. Earnings Record and Financial Position 32. Total sales, adjusted net profits (after taxes) and dividend pay- ments of Fuji in recent fiscal years have been as follows (adjusted income statements are shown in Annex 3): 1954 1955 1956 1957 195 - - - - - - - - - (X million) - - - - - - - - Total sales 56,404 77,388 98,177 102,791 90!525 Net Income (236) 2,328 4,492 7,844 949 Dividends 420 872 1,101 1,560 2,171 Annual rate on share par value (50) 10% 12% 12% 12% 12% Percentage of net earnings retained - 63% 75% 80% - Total times interest covered before taxes 1.1 2.4 4,4 5.5 1.8 33. The company has followed a policy of distributing an even and rea- sonable dividend. A large proportion of profits (after ordinary depreciation) ha: been retained in good years although dividends in poor years, 1954 and 1958, have exceeded current earnings. - 8 - 34. The company's balance sheets for each of the last five years, shoun in detail and commented on in Annex 3, are summarized below: March 31 1955 1956 1957 1958 1959 - - - - - - - - (Y million) - - - - - - - Current Assets 41,352 42,759 41,937 53,106 52,323 Net Fixed Assets 40,620 38,174 45,913 57,998 70,461 Investments and Others 2.704 _,364 5,662 6,914 10,059 Total Assets 84,676 85,297 93,512 118,018 132,843 Current Liabilities 34,783 29,834 31,889 48,380 44,499 Long-term Debt 12,528 13,419 12,930 18,216 30,464 Capital Stock 4,200 8,400 13,000 13,000 20,000 Surplus and Reserves 32165 332 3693 38,422 37,880 Total Liabilities 84,676 85,297 93 512 118,018 132,843 35. Fuji is reasonably conservative in its valuation of inventories. It uses the declining balance method for depreciation. It has taken the full normal depreciation authorized by tax law and the full special acceler- ated depreciation allowed for half of its investment in new machinery. Special depreciation accruals between April 1, 1955 and Yarch 31, 1959 amounted to Y6,146 million. The company's accounts are audited by an inde- pendent auditor under Japanese regulations. 36. In spite of three successive revaluations between 1950 and 1954, adding in all over Y28 billion ($78 million equivalent) to the book value of its facilities, and of substantial investments in new equipment (about $145 million during the last five years), net fixed assets are conservatively valued; investments in fixed assets amounted, on March 31, 1959, to the equivalent of $62 per ton of ingot capacity. This compares with an invest- ment cost for a new plant in the U.S. nowadays of about $300 or more per ton of ingot capacity. Land is carried on Fuji's books at Y621 million, while its present worth would be about ll billion. 37. The company deals with all the leading banks in Japan and enjoys their full confidence. It has at present a relatively large short-term debt, which is unsecured. 38. Financial ratios in past years have been as follows: March 31 1955 1956 1957 1958 1959 Current Assets/Current Liabilities excluding short-term loans 1.75:1 1.82:1 1.46:1 1.57:1 1.84:1 Current Assets/Current Liabilities 1.19:1 1.43:1 1.32:1 1.10:1 1.18:1 Long-term Debt/Equity 25:75 24:76 21:79 26:74 34:66 Total Debt/Equity 46:54 37:63 29:71 42:58 47*53 - 9 - 39. These ratios show a marked improvement up to March 31, 1957 and a deterioration since then, in spite of a share issue in 1958 which brought Y5,820 million ($16 million equivalent) in cash to the company. The decline has been caused mainly by heavy investments during the last two years both in fixed assets (about $95 million equivalent) and in working capital (about $40 million). Past Ecpansion and Modernization of Facilities 40. When Fuji was separated from the Japan Iron and Steel Company in 1950, the production facilities which were allotted to it were unevenly balanced. Pig iron and steel ingot capacities were in excess of rolling capacity, and the company had to sell pig iron and semi-finished steel. A group of steady customers for these products has been developed. Fuji now feels obliged to continue to provide these customers with semi-finished products, although the margin of profit on such products is lower than on more highly processed products. 41. Fuji has, however, made efforts to expand its rolling and finish- ing facilities. The first step was the installation at Hirohata in 1954 of a cold strip mill, 56" wide, together with annealing furnaces and two semi- continuous galvanizing lines, at a total cost of Y7.2 billion ($20 million equivalent). In 1956, Fuji started work on a seven-year modernization and expansion program, the main emphasis of which was on finishing facilities. In 1957, a 56" wide semi-continuous hot strip mill was added at Muroran, cold forming equipment was installed at Kawasaki, and tinning lines were put in at Hirohata. In 1958, work was begun on a modern 160n wide plate mill at Hirohata. At the same time, Fuji completely modernized its obsolete wire rod mill at Muroran and the large section mill at Kamaishi. 42. However, relatively small investments in remodeling and enlarging blast furnaces, and in steelmaking plants (one additional open-hearth furnace at Hirohata in 1953 and oxygen generators at the three main works) have re- sulted in substantial capacity increases in pig iron and crude steel. As a consequence, Fuji still has a relatively high steel ingot capacity compared with its rolling capacity. 43. The company's strip mills are also unbalanced: it has only about 35% as much cold rolling capacity as hot strip capacity. As a result, a large part of the strip produced at Hirohata and at Muroran must be sold to subsidiaries or affiliated companies in the form of hot coils, on which the profit is relatively small. Second Modernization and Expansion Propram 44. Fuji's sfx.--year modernization program began officially on tarch 31, 1956. Total expenditures in fixed assets in the three years ended Malch 31, 1959 were as follows (a more detailed list is given in Annex 4): - 10 - $ million Y billion equivalent Reconstruction and expansion of blast fur- naces, coke ovens and sintering plants 5.1 14.2 11.0 Expansion of steelmaking capacity 4.2 11.6 8.9 Rolling mills 29.2 81.0 62.4 Renewals and repairs 8.3 23.2 17.7 46.8 130.0 100.0 Less payments to be made after March 31, 1959 2.5 6.9 Plus preliminary expenditures on projects to be carried out in 1959-1962 2.9 8.0 42.2 11 45. During these three years, Fuji's total requirements for new funds were as follows: $ million Y billion equivalent Investments in plant improvements 47.2 131.1 Investments in shares, securities, etc. 5.6 15.6 Increase in working capital (net) 7.8 21.7 Repayment of long-term debt 13.2 36-6 73.8 205.0 These requirements were met from the following sources: $ million Y billion eauivalent % Retained earnings and depreciation 25.3 70.3 34.2 Capital increase 9.8 27.2 13.2 Long-term loans and bonds 29.0 80.6 39.4 Net increase in short-term loans 9.7 26.9 13.2 2.8 205.0 100.0 During these three years, one of which was a recession year, while carrying out such a heavy investment program, Fuji was able to finance over one third of its requirements out of retained earnings and depreciation and close to 50% out of equity. 46. In November 1957, Fuji received a $10.3 million loan from the Export-Import Bank of the United States, to finance the imported goods for a substantial part of the Second Expansion and Modernization Program. The term of the loan is 12 years, including 2 years grace, and the interest 5.5%. - 11 - III. THE MARKET 47, A general study of the Japanese steel market and the prospect for finished products produced by Fuji is attached in Annex 5. The basic con- clusions are that by fiscal 1962, the total demand for Japanese crude steel will amount to 17.8 million tons (implying an increase of 8% per year in demand for crude steel from the 1956-58 average of 11.8 million tons per year); and that in the years following 1962, total demand for Japanese crude steel will increase at a rate of 5% per year. 48. The estimate of demand for Japanese steel in 1962 in turn rests on the following assumptions: that domestic demand for finished steel prod- ucts will increase at a rate consistent with a rise of about 5% per year in gross national product over the period 1956-1962; and that exports of finished steel will amount to 1.4 million tons, or only slightly more than actual exports in fiscal 1958 (1.3 million tons). 49. In arriving at the estimates for the years 1959-1961, it has been assumed that demand would rise at a constant rate from the actual level in 1958 to the estimated 1962 level. Since 1958 was a recession year, these estimates are lower than estimates based on the possible alternative as- sumption that demand would rise at a constant rate from fiscal 1956 to fiscal 1962. 50. On the basis of data on actual production in the first half of the fiscal year 1959 (April 1, 1959-March 31, 1960) and of estimated sales for the rest of the fiscal year, it is estimated that production will actually reach 16.2 million tons in this fiscal year. This is, of course, a very much higher figure than the estimate based on the assumptions set forth above, and is only 1.6 million tons below our estimate for the fiscal year 1962. However, it seems likely that current demand has been affected by the U.S. steel strike. Substantial quantities of steel are also going into inventories. Moreover, in view of the fact that steel production is subject to wide fluctuations, a medium-range forecast should not attach too much weight to the magnitude of demand in a boom year. On the whole, the conclusions set forth above in paras. 47 to 49, although probably somewhat conservative, do not seem unreasonable. 51. The Japanese steel industry is at present carrying out an expansion program scheduled for completion in 1962 that is aimed at (1) expanding steel- making capacity to 20.5 million tons, (2) expanding blast furnace capacity to 12 million tons to make possible the planned increase in steel production without increasing the nation's dependence upon scrap, much of which must be imported, and (3) further modernizing rolling mills, particularly those producing flat products. Even on the conservative assumptions adopted, there should be sufficient demand to enable the industry to operate at rates comparing favorably with those reached in the generally prosperous period 1953-1957. - 12 - TV. THE CONSTRUCTION PROGRAM 52. The company's construction program for the three years ending March 31, 1962 is designed to increase production capacity as follows (in thousand tons): At Ma 1 1959 1962 Blast furnaces 2,647 3,303 Steel furnaces 3,024 3,768 Blooming mill 2,880 6,720 Hot rolling mills: Bar and section mills 630 654 Wire rod mill 240 240 Plate mill 360 540 Hot strip mill 1,300 1,660 Sheet mill 18 18 Hoop mill 2,644 3,208 Cold strip mills 456 456 Galvanizing line 60 60 Tinning lines 96 96 53. In order to achieve these aims, Fuji proposes to carry out the following improvements at the steel plants. 54. At Hirohata, Fuji will build a 1,500-ton per day blast furnace with all related facilities, including facilities for the blending, crush- ing and screening of ore and coal; construct a 2,000-ton per day sintering plant; rebuild coke oven plant No. 1 (75 ovens); expand the chemical by- product facilities; install two 60-ton oxygen top-blowing converters, a new slabbing mill, and four new sets of soaking pits; remodel three sets of existing soaking pits; and improve and expand services at the plant (power and water supply, unloading and transportation facilities and store- house). It is for the above project that Fuji has requested a loan from the Bank. 55. In addition, the company plans to undertake the following other improvements. 56. At Hirohata, enlargement of the steelmaking shop and of the port facilities; addition of a reheating furnace to the plate mill; and instal- lation of a coke oven gas separator and of an electrolytic zinc coating line for sheets. 57. At Muroran, remodeling of blast furnace No. 1 to increase ca- pacity to 1,000 tons per day; construction of a 200-ton open hearth (No. 6); enlargement of the soaking pits; construction of a slabbing mill; instal- - 13 - lation of additional facilities for the existing hot strip mill; construc- tion of a cold rolling mill; modernization of the wire rod mill; expansion of plant services (water and power supply, harbor and unloading facilities, relocation of the storehouse); and construction of facilities to separate hydrogen from the coke oven gas. 58. At Kamaishi, remodeling of blast furnace No. 8 to increase capa- city to 1,000 tons per day; construction of a 1,400 tons per day sinter- ing plant; enlargement of the raw material yard; reconstruction of coke oven plant No. 2 (20 ovens); expansion of steelmaking capacity by the ad- dition of an oxygen plant; expansion of soaking pits (one set); modernization of the large and medium section mill; remodeling of existing pullover hand sheet mills to roll silicon sheets; and expansion of the stockyard and of the railroad. 59. At Kawasaki, expansion of facilities for manufacturing poles and of the existing cold-forming facilities; and installation of modern labora- tory facilitiee. 60. The expansion program is well conceived although it does not provide for a sufficient expansion of rolling mills and finishing facili- ties. The company's management, well aware of the problem, is already studying the feasibility of expanding cold rolling and coating facilities, and of installing modern bar and section equipment. Raw Materials, Utilities, Labor 61. Fuji has taken steps to assure itself of an adequate supply of raw materials. General services will be expanded in each plant to meet new production requirements. The company should have no difficulty in hiring and training the additional labor force required for the new facilities. Details are given in Annex 6. Construction Schedule and Engineering 62, The construction schedule is given in Annex 7. It is reasonable. Almost all the projects will be under way by the end of 1959. The only exceptions are two units at the Muroran works: the hydrogen separation plant which will be started in October 1960 and the cold strip mill which will be started in April 1961. These plants are last in the priority list of the company (Annex 8). 63. Fuji has a capable engineering staff, which has efficiently prepared the construction program. The company is well organized to super- vise construction and erection of the new facilities. 64. Fuji has further expansion plans for the period after April 1962. A fourth blast furnace of 2,000 tons per day and a third converter would permit an increase in the steel ingot annual capacity to 2.4 million tons at Hirohata where an additional cold strip mill and a bar and section mill would also be installed. At Muroran, a 2,000 tons per day blast furnace and two 60-ton oxygen converters would increase annual ingot capa- city to 1.9 million tons. At Kamaishi, a medium shape mill would be installed. The timing and financing of these further investments will not be decided for some time. - 14- Cost Estimates 65. The estimated cost of the entire program in the three years April 1959 to M,arch 1962 is Y-73.2 billion (8203.3 million equivalent). The main figures are as follows (for details see Annex 9): Total Local Cost Expenditures Imports Total (Y mi.) ($ million equivalent) Project proposed as the basis for a Bank loan 24,973 62.2 7.2 69.4 Rest of the program 34,677 93.8 2.5 96.3 Renewals and repairs 11,007 30.6 - 30.6 Payments on projects al- ready completed -L50 7.0 - 7.0 Total 73,177 193.6 9.7 203.3 (Contingency allowance in- cluded in estimates) (7,525) 66. The relative emphasis on different types of facility is shown in the following table: E million _. Pig iron capacity 15,396 21.0 Steelmaking capacity 6,774 9.3 Rolling capacity 17,960 24.6 General services of the plants and harbors 11,995 16.4 Renewals and repairs 11,007 15.0 Contingency reserves 7,525 10.3 Projects already completed 2-52Q 3. Total 73,177 100.0 67. Most of the present cost estimates are reliable, although the study of some projects has not yet been completed (cold strip mill and separation of hydrogen at Muroran). Construction cost estimates are based on 1958 prices, but there has been no significant change in prices since then. 68. The total contingency reserve for the entire construction pro- gram amounts to Y7,525 million, or about 10.3% of proposed expenditures from April 1, 1959 to harch 31, 1962. This figure includes E345 million, the maximum possible escalation on import orders already placed, and an allowance of 6%o on domestic orders already placed and of 12% on all orders yet to be placed. The contingency reserve should be adequate. 69. Interest during construction is not included in the cost esti- mates, but will be charged against operations. - 15 - 70. Of the estimated total expenditures on fixed assets from April 1959 to March 1962, about 5% ($9.7 million equivalent) will be for im- ported equipment. This includes the $7.2 million required for the project submitted as a basis of a proposed Bank loan. 71. All contracts already let have been placed on a competitive basis. Bids have been limited to domestic suppliers only where past experience has shown that it was clearly more advantageous for the company to purchase the goods in Japan. Fuji will follow these procedures in future. Proposed IBRD Loan 72. The Bank has been asked to make a $24 million (*8,640 million equivalent) loan, which would be sufficient to cover the imported goods ($7.2 million equivalent) and about 27% of the local expenditures of the blast furnace,converter plant and slabbing mill project at Hirohata from April 1, 1959 onward. 73. The proposed loan represents about 32% of the cost of the pro- ject (including expenditures made before March 31, 1959) and about 12% of the total cost of the company's expansion program from March 31, 1959 until March 31, 1962. Annex 10 gives an estimate of the currencies likely to be required and details of the disbursement schedule which is summarized below (in $ million equivalent): Years ending March 31 1960 1961 Total Foreign exchange 1.8 5.4 7.2 Local expenditures 8.9 7.9 16.8 Total 10.7 1 _ - 16 - V. BENEFITS RESULTING FROM THE EXPANSION PROGR1 74. It is difficult to isolate the effect on the company's pro- fits of the project covered by the Bank loan because it is only part of a larger investment program. The project is aimed almost entirely at expanding production, and reductions in production costs will be modest. 75. The return on sales (see Annex 13) would be 12.3% in 1962, which would be somewhat above the average return in 1955-1958 of 9.9%, but below the expected return of 14.8% in the current boom year. The return expected for 1962 is lower than might be expected, due in part to the conservatism of the assumptions that have been adopted with res- pect to future production and prices. 76. For the same reason, the return on the average depreciated investment in operation (Annex 13) would be about 12.,8% in 1962, against an average of 15.9% in 1955-1958 and an expected return of 15,8% in the current year. 77. A large part of Fuji's total sales will continue to consist of pig iron, crude steel and semi-finished products such as hot coils, which yield low profits. However, the program lays the foundation for a low cost expansion of finishing facilities at a later date, and both the company's earnings and the rate of return on its investment should increase substantially after Fuji has made the complementary investments in these facilities to take full advantage of its primary producing fa- cilities, VI. ASSUMPTIONS FOR FUTURE DEMIAND AND FRICES 78. The financial forecasts are based on the assumption that the total demand for crude steel in Japan would rise to 17.8 million ingot tons in 1962, as explained in Chapter III, and that Fuji would in general maintain its present share of the market for each type of product (see Annex 11). Changes in its share of the market for some products have been assumed to take account of expected severe competition (sheets) or of large investment by Fuji in modern facilities (shapes and rods). 79. In estimating prices (see Annex 12), it has been assumed that both raw material costs and finished product prices will recover from the levels to which they fell in the recession year 1958, but will not regain the average level of the preceding years. 80, In the case of raw materials, it has been assumed that prices would be lower than before 1958 because of an expected shift from higher- priced to lower-priced sources of imported iron ore and coking coal and of a reduction in the cost of importing iron ore in Japanese boats rather than in chartered vessels. dith respect to finished products, it has seemed prudent to assume that competition would oblige producers to pass on at least part of the savings in raw material costs to their customers. The resulting assumption is that the margin between finished product prices and raw material costs would return gradually to the average level of the past four years. - 17 - VII. FIANCING PLAN AND FINANCIAL PROSPECTS 81. Financial projections are attached showing the expected earnings of the company (Annex 14), its cash flow (Annex 15), and its financial position (Annex 16) during the construction period and the first four operating years. The assumptions on which the calculations are based are given in Annex 17, 82. The projections indicate that the financing plan is sound and that the cormpany's earnings should be adequate to enable it to pay dividends at a reasonable rate after meeting all financial obligations. The prospectiv financial structure of the company is satisfactory. Further details are giiei in the following paragraphs. A. Construction Period Financing Plan 83. The corpany s financial requirements for the construction period, the three years from April 1, 1959 to March 31, 1962 are as follows: $ million million equivalent Investment in fixed assets 73,177 203.3 Other investments 5,940 16.5 Increase in working capital 7,166 19.9 Repayment of long-term loans 16,109 4.8 Total 102,392 284.5 84. Most of the expenditures are planned to be made in 1959 and 1960 and the part of the program which is covered by the Bank's loan is scheduled to be completed by November 1960. 85. Fuji proposes to meet these requirements from the following sources $ million million equivalent % Retained earnings and depreciation 37,615 106.5 36.9 Share issue 8,000 22,2 7.8 Long-term loans: ITBRD 8,640 24.0 8,6 Bonds 21,000 58.3 20,5 Long-term bank loans 26,820 74.5 26.2 Increase in short-term loans 317 0.9 - Total 102,392 284,5 100,0 - 18 - 86. The estimate that the company's retained earnings and depreciation during the three-year construction period will reach '37,615 million is based on the market assumptions discussed above (paras. 47-51 and 78-80). 87. A share issue of 10 billion (par value) is planned for 1960, As usual in Japan, the shares will be offered to existing shareholders at par value(50), and 20% of the total issue will be distributed to them as a stock dividend, making the effective price '90 per shares The ccmpany has been asked to consider the desirability of offering part of the total share issue to the general public. Such shares could be sold at a price substantially above par, which would increase the total cash proceeds of the share issue. 88. Fuji has concluded an agreement with the Industrial Bank: the bank will be leader of a syndicate for the issue of N20 billion in bonds during the construction period. The company is expected to obtain satis- factory assurances as to the underwriting of all the bonds still to be issued during the construction period, and as to the total amount of long- term bank loans which have not yet been arranged for. 89. Fuji also expects to receive an undertaking from the Industrial Bank as leader of a group of banks to provide such funds as may be required for working capital needs on short-term up to an amount of *16 billione This undertaking would run for a period of five years, during which short- term debt can for practical purposes accordingly be treated as long-term debt. The undertaking is expected to be renewed every year for the ensuing five years, until the last repayment of the Bank loan., Analysis of Projections 90. The projections show that during the three-year construction period: a) Earnings after depreciation, interest, taxes, pre-profit re- serve allocation and dividends of 12% would amount to 49,152 million. Total retained earnings, including a Yl,657 million allocation to free reserves and depreciation amounting to Y26,806 million, would amount to *37,615 million (see Annex 15)e b) The company would complete its construction program and meet all its financial obligations with a net cash accrual of *2,602 million. c) Interest on all debt would be covered by from 2.3 to 3.1 timese d) The current ratio would reach a low of 1.11:1 by March 31, 1961. However, if short-term loans are excluded from current liabili- ties, because of the expected backstop on short-term loans, the current ratio would be 159:1 on that date. Until the end of the construction period, the company's working capital would be slightly lower than it was on March 31, 1959, but would still be adequate if short-term loans are covered by - 19 - a backstop agreement. If necessary, Fuji could easily fi- nance an increase in current assets of as much as 1016 by relying more heavily on its suppliers. It could also increase its short-term debt without any difficulty. e) The ratio of long-term debt to equity would rise from 3466 on March 31, 1959 to 47:53 on March 31, 1962. The ratio of the consolidated total debt of the company and its subsidiaries to its consolidated equity would reach a high of 58:h2 on March 31, 1962 (see Annex 18). For the construction period, these ratios are acceptable. B. Operating Period 91. The company has further expansion plans, the details of which are being finalized at present. However, it has seemed preferable not to take account of them in these financial forecasts, as the construction timing has not yet been fully decided and as the cost estimates, the sources of funds and the benefits to be derived from the facilities have not yet been studied in detail. The financial forecasts during the operating period shown here are therefore somewhat unrealistic, since they assume that the company will limit its investment in fixed assets to normal repairs and renewals. These financial forecasts show what Fuji's financial results would be if the company limited its expansion to the prasent construction program. 92. During the four years after the completion of construction (April 1, 1962 - March 31, 1966) cash generated from the company's operations (after payment of taxes, interest and a cash dividend at the rate of 10% per annum) would amount to about *55.3 billion, and proceeds of a planned share issue in 1962 would amount to '12 billion. Fuji is planning to reduce the dividend rate from 12% to 10% in order to prevent the continuing issues of bonus shares from increasing the cash burden of dividends dis- proportionately. 93. These monies would enable the company: - to invest about 528.1 billion in normal renewals and re- pairs together with some expenditures on the present con- struction program not to be incurred until 1962, - to invest about 9.3 billion in shares and subsidiaries, - to increase net working capital by about ;6,5 billion, - to reduce net long-term loans by about '17.7 billion, and - to decrease short-term loans by about 5.7 billion. 94. By the end of the period, assuming no further investments in fixed assets other than normal renewals and repairs, the ratio of its long-term debt to equity would have been reduced to 33:67 and the ratio of consolidated total debt to equity to 4:56. The company should be - 20 - able to carry out reasonable further expansions without having to increase the proportion of its consolidated debt to equity beyond a prudent level. Fuji's liquidity would improve, the current ratio reaching 1.32:1 on March 31, 1966 (or 1.62:1 excluding short-term loans from current liabilities). Conclusions 95. The Japan Development Bank, which would relend the proceeds of the proposed Bank loan to the company, has the primary interest in security arrangements. The company's long-term loans and bonds are secured by mortgages, and the Japan Development Bank should be satisfied that the arrangements proposed are in accordance with its usual require- ments. 96. Before the subsidiary loan agreement is made effective, the proposed financial undertakings to backstop short-term loans, to under- write future issues of bonds and to supply long-term loans, should have been evidenced in form satisfactory to the Japan Development Bank and to the Bank. 97. It is recommended that the companyts freedom to incur debt should be limited, so as to provide that the ratio between consolidated total debt and equity should not rise above 60:40 before March 31, 1964 and 50:50 on or after March 31, 1964. 98. In order to protect the company's liquidity, it is recommended that Fuji's freedom to distribute cash dividends should be limited, so as to provide that such distribution does not result in lowering the ratio of current assets to current liabilities (after excluding short- term debt) below 1.50:1 during the life of the Bank loan. 99. Provided that the contractual arrangements include protective provisions along the lines indicated in paras. 95 to 98, the project (the Hirohata blast furnace No. 3, the converter plant and the slabbing mill) is suitable for a Bank loan of $24 million equivalent, with a term of 15 years, including two years of grace. The borrower would be the Japan Development Bank which would relend the proceeds of the loan to the company. The loan would be guaranteed by the Japanese Government. ANNEUX 1. FUJI IRON & STEEL CO.. LTD. Existin Facilities (March 199) Annual Capacity thous. m. tons) Hirohata Works 2 x 1,350 tons/dRy blast furnaces 986 7 x 200-ton open hearth furnaces 1,320 1 blooming mill 1,320 1 semi-continuous hot strip mill 86" 820 1 5-stand cold strip mill 56" 360 1 wide cold mill 80" 96 1 galvanizing line 60 1 tinning line 96 1 plate mill 160" 360 Muroran Works 1 x 1,000 tons/day and 2 x 850 tons/day blast furnaces 986 5 x 200-ton open hearth furnaces 1,080 1 blooming mill 840 1 semi-continuous hot strip mill 56n 480 1 medium and small section mill 150 1 wire rod mill 240 Kamaishi Works 1 x 850 tons/day and 1 x 1,000 tons/day blast furnaces 675 1 x 200 and 4 x 140-ton open hearth furnaces 624 1 blooming mill 720 1 large section mill 216 1 medium section mill 108 1 small section mill 96 1 sheet mill 18 Kawasaki Works 1 small section mill 60 1 hoop mill 96 FUJI IRON & STEEL CO., LTD. Listj f Main Subsidiaries as at March 31, 1959 Guarantees Percentage Total given by of shares Ratio Ratio loans Fuji on Capital held by F.Y. 1959 Cur. Assets/ Total Debt/ Investment from loanatoits Nature of Stock Fuji Sales Cur. lIabs. EAuity Proaram -FuJ subsidiary Business ( mil.) (V mil.) ( mil.) $ mil.) (ML.) Kayanuma Coal Coal Mining - Mining Co. 188 88.0 744 0.16:1 117: (17) 334 257 213 being liqui- dated at present. Kanto Steel Co. 250 65.8 869 2.20:1 51:49 203 178 415 Steel. Daido Steel Sheet Mfg. Co. 750 63.1 5,730 1.20:1 58:42 2,5501/ 1,205 74 Steel Sheet. Fuji Cement Co. 800 55.0 1,914 0.60:1 70:30 1,350V - 702 Cement and fertilizer. Tokai Iron and Steel company Steel Co. 2,500 51.7 - - 0:100 8,2221 - - to be estab- lished in Ngoya. Yamato Steel Works 350 24.3 3,820 0.90:1 48:52 - - 100 Steel. 1,640 1,504 / Daido Steel Sheet Mfg. Co. is planning to issue 1750 million in shares in 1960, and to raise 1950 million in long-term debt in 1959. 3/ Fuji Cement Co. is planning to raise 1864 million in new loans in 1959 and 1960. / Tokai Iron and Steel Co. is planning to raise 15,581 million in loans between 1959 and 1961. The Tokai Co. was established in 1958 under Fuji's sponsorship for the construction af a new integrated steel mill in the Nagoya area. Present plans are to build a cold strip mill, for which hot coils will be supplied by Fuji. At a later stage, the proposed plant will have 2 x 1,500 tons/day blast furnaces, converters and hot strip mill. ANNEX 3 Page 1 FUJI IRON & STEEL CO., LTD. Adjusted Profit & Loss Statements (I million) Apr. '54- Apr. '55- Apr. '56- Apr. t57- Apr. '58- Mar. 155 Mar. '56 Mar Mar. '58 Mar. '5S Net Sales 56,404 77,388 98,177 102,791 90,525 Operating Expenses Cost of sales excluding depreciation 46,420 62,492 79,427 79,857 72,132 Normal Depreciation 4,113 4,013 3,999 4,693 5,992 General Administrative and Selling Expenses _,182 3.928 4,839 5,158 .34 53,715 70,433 88,265 89,708 83,471 Operating Income 2,689 6,955 9,912 13,083 7,054 Non-operating Income 426 358 1,02 825 Gross Income 3,562 7,381 10,270 14,103 7,879 Non-operatirg Expenses Interest 2,788 2,520 1,944 2,257 3,682 Other 1 1.602 1.268 Net Inccme before Taxes 284 3,463 6,552 10,244 2,929 Income Taxes 520 1,135 2,060 2,400 1,980 Net Income (236) 2,328 4,492 7,844 949 Surplus and Reserves at beginning of year 23500 2,165 22Lkh JL6U 38,422 Available for Appropriation 23,244 35,493 38,136 43,537 39,371 Surplus Appropriations: Dividends 420 872 1,101 1,J60 2,171 Officers' Bonus 9 11 17 20 19 Additional Depreciation (568) 497 683 1,734 (1,070) Miscellaneous Adjustments (including changes in revaluation reserve and capital surplus reserve) (9,762) 4 6 1.801 Surplus and Reserves at end of year 33116 6 3722880 Net Income before Taxes and Interest 3,072 5,983 8,496 12,501 6,611 Times Total Interest Covered 1.1 2.4 4.4 5.5 1.8 Net Income after taxes, before depreciation and interest 6,665 8,861 10,435 14,794 10,623 Times Debt service Covered 0.9 0.9 1.5 2.6 2.3 Earnings per share (after taxes)9/ Y (2.81) 13.9 17.3 30.2 2.4 Dividends per share X 5.0 6.0 6.0 6.0 6.0 Total Retained Earnings and Depreciation 3,448 5,458 7,373 20,957 4,751 1/ See page 3 for adjustments 2/ Earnings per share are based on number of shares outstanding at the end of the year. ANNEX3 Page 2 FUJI IRON & STEEL CO.,LTD. Adjusted Balance Sheets (Y million) March 31, March 31, March 31, March 31, March 31, March 31, 1954 1955 1956 1957 1958 1959 Assets Cash and Bank Deposits 7,996 7,887 4,090 5,455 7,076 6,885 Notes Receivable 6,810 6,850 10,861 1,792 1,903 1,309 Accounts Receivable (sales on credit) 4,253 3,436 3,887 3,716 4,356 4,090 Less: Reserve for Bad Debts 5 __ _12 209 29 _85 Total Receivables 11,008 10,211 14,609 5,299 5,962 5,014 Inventories 17,791 16,904 17,818 26,448 35,316 34,859 Other Current Assets 6.625 6.350 6. 4,723 _752 5565 Total Current Assets 43,420 41,352 42,759 41,937 53,106 52,323 Fixed Assets 41,057 51,861 54,086 66,710 84,867 102,345 Less: Depreciation (including special repairs) 7,770 11 2a1 15.912 262 31884 Net Fixed Assets 33,267 40,620 38,174 45,913 57,998 70,461 Investmentsand other minor assets 1,945 2,704 4,364 5,662 6,914 10,059 Total Assets 22 86676 85,29 9512 118,018 12,28 Liabilities and Equity Current Liabilities other than Short-term Loans 31,406 23,593 23,532 28,753 33,524 28,424 Short-term Loans 8,931 11_ 100 3. 1M56 160 75 Total Current Liabilities 40,337 34,783 29,834 31,889 48,380 44,499 Other Long-term Debt 13,248 15,455 12,522 10,694 16,719 26,822 Bonds 4,436 5,277 5,986 5,666 6,117 7,618 Less: Maturing within 12 months _ 089 8. 205 _._4 _I20 4.620 3976 Total Fixed Liabilities 10,595 12,528 13,419 12,930 18,216 30,464 Total Liabilities 50,932 47,311 43,253 44,819 66,596 74,963 Share Capital 4,200 4,200 8,400 13,000 13,000 20,000 Surplus and Reserves 23,500 33165 3364 ,6U 38,422 37,880 Total Equity 27,700 37,365 42,044 48,693 51,422 57,880 Total Liabilities and Equity 78,632 84,676 85,297 93,512 118,018 132,843 Notes Receivable Discounted (12,099) (10,538) (6,471) (3,765) (3,761) (4,430) Guarantees on loans - - - - (3,773) (4,184) Ratios: Current Assets/Current Liabilities 1.08:1 1.19:1 1.43:1 1.32:1 1.10:1 1.18:1 Current Assits/Current Liabilities (excluding short-term loans) 1.38:1 1.75:1 1.82:1 1.46:1 1.57:1 1.44:1 Long-term Debt/Equity 28:72 25:75 24:76 21:79 26:74 34:66 Total Debt/Equity 49:51 46:54 37:63 29:71 42:58 47:53 Total Debt (including guarantees)/Equity - - - - 45:55 49:51 Note: See page 3 for adjustments ANNEX 3 Page 3 FUJI IRON & STEEL CO. LTD. NOTES Adjustments to Income Statements Fuji's formal income statements have been adjusted in accordance with conservative practice used in the United States: - "Cost of sales" include all operating expenses such as interest on payableand discount charges on receivables. - "Normal depreciation" is an amount of depreciation which would be adequate to depreciate the facilities over their economic life. The difference between "ordinary deprecia- tion" plus "special depreciation" as permitted by tax law and "normal depreciation" as taken here, is shown under "additional depreciation" in the surplus appropriation. - "Interest" shown in "non-operating expenses" includes only interest on bank debt and bonds. - "Miscellaneous adjustments" include all transfers to and from reserves which are considered part of equity, such as Employees Retirement Reserve, Price Fluctuation Reserves, etc. Adjstments to Balance Sheets Fuji's formal balance sheets have been adjusted in accordance with conservative practice in steel companies in the United States: - Long-term debt maturing within 12 months has been deducted frmm fixed liabilities and added to current liabilities. - Dividends and officers' bonus as well as estimated taxes to be paid on ending period's earnings, currently carried in equity in Japanese practice, have been transferred to current liabilities. - Reserve for bad debts is deducted from Accounts and Notes Receivable. "Money received in advance from customers" is deducted from current liabilities and from inventories. - Receivables due in more than 12 months are included in "In- vestments" and are not in current assets. - Spare parts are accounted with the corresponding fixed assets, and depreciated accordingly. - The company finds no need to set aside a reserve for Special Repairs, but charges them to operation. ANNEX 3 Page 4 FUJI IRON & STEEL CO., LTD. Comments on Financial Records Inventories "last in, first out method" of valuation of inventories is used except for "operating supplies" which represent a small proportion of the total and which are carried at average cost or market, whichever is lower. At September 1958, the book value of inventories was at 94% of the market value at the same date. The proportion has been consistently lower on previous dates. Total inventories amounted to Y34,859 million on March 31, 1959, over 38% of sales in the preceding year. This proportion was higher than for all preceding years (lowest at March 31, 1956, when inventories repre- sented about 25% of annual sales). Almost 36% of inventories were raw materials, 32% goods in process, 7% finished products and 27% operating supplies. These proportions were not significantly different from that of other years. Inventories, as usual in Japan, run much higher than is cus- tomary for the steel industry in the United States, where they vary from 15% to 18% of sales. Receivables Total receivables decreased sharply three years ago and have re- mained low since then. Year-end receivables represented 37% of the year's sales in 1954/1955 but only 9.4% of the year's sales in March 1958 and 10.4% in March 1959. For reference, the corresponding figure is about 8% in the United States. This is most remarkable because the tight money policy pre- vailing since June 1957 might have been expected to put some pressure on the company from its customers. It shows the reliability and financial strength of Fuji's wholesalers. Fuji has always been able todiscount a substantial part of its total receivables in the past. Working Capital Net working capital excluding short-term debt is rather low compared to other steel companies. It is now up to 26.4% of the year's sales, but it was as low as 13.4% of sales at March 31, 1957. It ran up to over 42% for some other Japanese steel companies, who do not enjoy Fuji's financially strong wholesalers. Net working capital for U.S. steel companies would be about 22% of sales. ANNEX 3 Page 5 Short-term Loans Short-term loans have increased very substantially in the past two years. About 410.7 billion waa required to finance the increased work- ing capital, and a relatively small amount, about Y2.2 billion, was used for fixed investments. It is recalled that short-term loans are usually rolled over regularly for a considerpble time in Japan and should be considered more as a fixed liability than as a current liability. Fixed Liabilities Fixed liabilities also have increased by 136%, from Y12,930 million on March 31, 1957 to Y30,464 million on March 31, 1959. This increase was required to carry on the heavy construction program undertaken by Fuji. ANNEX 4 FUJI!IONLaTEEL.C., LTD. Expenditures on Fixed Assets for Projects included in the Second Modernization Program and completed between March 31, 1956 and March 31, 1959 Expenditures Total Cost $ Million after Y million equivalent Aril 1.19 9 J million Hirohata Works Reconstruction of Blast Furnace No. 1 to 1,350 t/d 533 1.5 - Oxygen plant - Soaking Pit No. 7 auxiliary furnaces 2,495 6.9 241 *-Reversing plate mill, 160" wide 105,5 29.1 761 -x-Reversing cold strip mill, 80" wide 1,847 5.1 180 *Continuous annealing furnace 1,574 4.4 332 Hot dip tinning line 770 2.1 - Electrolytic tinning line 2,4.6a 6.8 120 20,136 55.9 1,634 Muroran Works Rcconstruction of Blast Furnace No. 2 to 1,000 t/d 697 1.9 - Sintering plant, 1,000 tons/day 792 2.2 - Reconstruction of Coke Plant No. 2 - 73 ovens 1,05 2.9 35 Oxygen plant, dust precipitator 1,669 4.6 83 Semi-continuous hot strip mill, 56" wide 8,616 24.0 84 Modernization of wire rod mill 844 2.3 237 13,673 37.9 439 Iaunishi Works Reconstruction of Blast Furnace No. 10 to 1,000 t/d 1,012 2.8 186 Expansion of raw material yard 359 1.0 - Construction of Coke Plant No. 1 (30 ovens) 671 1.9 34 Expansion of soaking pits 500 1.4 - Hodarnization of large section mill 1,929 5.4 182 Silicon sheet mill 37 0.1 13 Stockyard expansion 71 0.2 - 4,579 12.8 4l ANNEX 4 Page 2 FUJI IRON & STEEL CO., LTD. Expenditures Total Cost $ Million after I million equivalent April 1,1959i/ (Y million) awasaki *Cold forming mill and minor equipment 132 o.4 32 132 o.4 32 tenewals and Repairs 8,276 23.0 - Total 6,796 130.0 2 ,20 + Projects financed with Export-Import Bank loan. I/ Included in Total Cost. ANNEX 5 Page 1 MARKET FROSPECTS OF THE JAPANES STEEL INDUSTRY Development of the Japanese Steel Industry The Japanese steel industry dates back to the beginning of the century, and expanded considerably during the first world war, but as late as 1924, produced only one million tons of crude steel, By 1930, however, production had increased to 2.3 million tons, and the more rapid expansion of the 1930's and early 1940's, when armament and war demand provided a growing market, carried it to a peak of 7.65 mil- lion tons in 1943. At the close of the second world war, the industry was vir- tually prostrate. War damage and a lack of imported iron ore, coking coal, and scrap, on which the industry depends heavily, reduced produc- tion to a little over half a million tons in 1946. Although damaged facilities were repaired promptly, and foreign aid and Korean war de- mand made possible a steady and rapid expansion, it was not until 1953 that production recovered to the previous high level. In the next four years, however, output shot upward, and by 1957 had reached 12.6 million tons. The first break in the hitherto uninterrupted post-war rise came in 1958. The recession was relatively mild, with production falling by only half a million tons, and was followed by a sharp recovery in 1959. On the basis of figures for the first half of the year, it seems likely that production will exceed 15 million tons in 1959. Production in the fiscal year 1959 (April 1, 19t9 - March 31, 1960) is estimated at 16.2 million tons (see Table 1). In 1958, Japan ranked sixth in the world as a steel producer, following France, which had a production of 14.6 mil- lion tons. The 65% increase in output between 1953 and 1957 and the 25% increase in 1959 alone were made possible by a massive expansion program (the first Modernization Program, initiated in 1951 and completed in 1955) accompanied by improvements in facilities that narrowed the technological gap between Japan and other leading steel producers and i1rproved the com- petitive position of the Japanese industry both in costs and quality of product. The Second Modernization Program The rapid increase in demand for Japane.e steel in the middle 1950's encouraged the industry to continue expansi i-n and modernization. A socalled Second hodernization Program was initiated in 1956, Scheduled for completion by fiscal 1962, the program is aimed at 1) expanding steel- making capacity to 20.5 million tons; 2) expandirng pig iron c, -city to 12 million tons, to make possible the planned increase in steel production without a corresponding increase in the industryis requirements for scrap, a large fraction of which must be imported, mainly from the US; and 3) com- pleting the industryts program to modernize rolling mills, particularly for ANNEX 5 Page 2 flat products. By the close of fiscal 1962, hot strip mill capacity is expected to rise to five million tons, compared with 850,000 tons on March 31, 1953 and 1.5 million tons at the end of 1955, and cold strip mill capacity to three million tons, compared with 160,000 tons on March 31, 1953 and 1.2 million tons at the end of 1955. Steel Demand Prospects Whether demand for Japanese steel will continue to grow rapidly enough to permit operation of the industry's greatly expanded facilities at a relatively high rate depends, of course, upon growth prospects both at home and in Japan's principal export markets. The rapid increase in demand for steel in the 1950's was one aspect of the rapid expansion of the Japanese economy in this period; between 1951 and 1958 Japanese gross national product increased at an average annual rate of 7,5% 1/, All the indications are that growth prospects are still good. Although there is likely to be some slowing down in economic growth com- pared with the mid 1950Ts, over the next few years, the average annual increase in the gross national product is not likely to fall below 5%. An increase of this magnitude should be accompanied by a substantial in- crease in domestic demand for steel. Export prospects are more diffi- cult to estimate. However, the successful promotion of exports by Japanese steel producers in the two recession years 1954 and 1958, when declining domestic demand provided both incentive and capacity for in- creased exports, indicates the industry's enterprise and its ability to compete in foreign markets. Estimates of Demand for Steel, 1959-1962 1. Demand for Crude Steel, 1962 On the assumptions that gross national product will show an average annual increase of 5% over the period fiscal 1956 - fiscal 1962, that domestic demand for carbon steel rolled products (which accounts for about 80% of total demand for crude steel) will show a related in- crease of 7% per year, that domestic demand for special steel rolled products and cast and forged steel will increase proportionately, and, finally, that exports of carbon steel rolled products will rise to 1.4 million tons, as against 1.3 million tons in fiscal 1958, it is estimated that total demand for crude steel will amount to 17.8 million tons by fiscal 1962. The estimates of domestic and export demand for carbon steel rolled products and of domestic demand for special steel rolled products and cast and forged steel and their crude steel equivalents are given in Table 2 and the underlying assumptions are set forth in detail in the notes to that table. In view of the probable results in 1959, the estimates seem reasonably conservative, 1/ Based on a least squares line fitted to values for gross national pro- duct at constant prices (preliminary estimate for 1958). ANMEX 5 Page 3 2, Demand for Individual Carbon Steel Rolled Products, 1962 The estimate of domestic demand for carbon steel rolled pro- ducts in fiscal year 1962, given in Table 2, was based on an estimate prepared by the Japanese 'Ministry of Industry and Trade (MITI), adjusted in the light of Bank assumptions as to future Japanese economic growth which are somewhat more conservative than the assumptions adopted by MITI. MITI's estimate of total demand for carbon steel rolled products was supported by an alternative estimate built up from estimates of de- mand for individual products by major end use, which corresponds very closely to its first estimate. MITI's estimates of demand for individual carbon steel rolled products in fiscal 1962 show a distribution of total demand very similar to the actual distribution in recent years. Such changes as appear in the proportion of total demand accounted for by individual products seem reasonable: e.g. a decline in the proportion of total demand for carbon steel rolled products accounted for by plates, expected to result from a decline in shipbuilding activity, and increases in the proportion of total demand accounted for by thin flat products (sheets, tinplate and silicon Zelectricaf7 sheets) expected to result from respectively: greater than average increases in the output of such heavy sheet-using products as automobiles and other consumer durables, the output of canned foods for domestic use and export, and the output of electrical machinery. MIlTI's estimates of demand for individual carbon steel rolled products were therefore used to determine the distribution of total de- mand among products, and the resulting percentages were applied to the Bankts estimate of total demand given in Table 2. 3. Demand for Carbon Steel Rolled Products, 1959-61 To arrive at estimates of demand for carbon steel rolled pro- ducts in fiscal 1959-61, it was assumed arbitrarily that demand for each product would increase at a constant rate from the actual level in 1958 to the estimated level in 1962. The estimate for 1959 is, of course, well below the probable actual level for that year, and the estimates for 1960-62 are probably on the conservative side. These estimates are compared in Table 3 with actual demand for the products in 1953-58. Operating Rates 1959-62 A comparison of estimated demand with estimated capacity in 1959-62 indicates that even on our conservative assumptions as to demand the industry should be able to operate at rates comparing favorably with the operating rates in the prosperous years 1953-57. Prices Prices of raw materials rose steadily and substantially from 1954 to 1957 but declined sharply in 1958. The 1958 declines were at- tributable in large measure to a decline of as much as 50% in ocean ANNEX 5 Page 4 freights which account for a large fraction of the delivered cost of Japanese raw materials. However, there were also declines in the fob prices of domestic ore, imported and domestic coking coal and imported and domestic scrap. It seems prudent to assume that ocean freights may return to their earlier level and that there will also be a recovery in the fob prices of raw materials. However, average raw material costs should be lower than in 1954-58 as a result of the expected replacement of some of the higher priced imported iron ore and coking coal by ma- terials from lower cost sources and a reduction in the cost of transpor- ting ore to Japan by the substitution of Japanese industry-owned vessels for chartered vessels. In estimating future prices of finished products, however, it seems prudent to assume that competition will oblige producers to pass on to their customers at least part of their savings on raw ma- terials, and that, on the average, the margin between costs and prices will not exceed the margin earned in 1954-58. Estimates of Demand for Steel after 1962 As a basis for financial forecasts for the years beyond 1962, it has been assumed roughly that crude steel production will increase at a rate of 5% per year after 1962. This estimate seems reasonably conservative when compared with the actual increase of 13% per year from 1953-55 to 1956-58 and the estimated increase of 8% per year from 1956-58 to 1962. TABLE 1 Japan: Production, Imports, Exports, and Apparent Home Supply of Steel in Crude Steel Equivalent, 1939, 1943, 1946, 1950-58 (Thousand Metric Tons) Production Imports Exports Apparent Home Supply 1939 6,696 506 1,069 6,133 1943 7,650 159 125 7,684 1946 557 - 1 556 1950 4,839 2 727 4,114 1951 6,502 33 1,269 5,266 1952 6,988 31 1,988 5,031 1953 7,662 124 1,035 6,751 1954 7,750 106 1,465 6,391 1955 9,408 82 2,305 7,184 1956 11,106 283 1,570 9,820 1957 12,570 1,584 1,219 12,935 1958 12,118 200 2,116 10,202 1957 Jan-Mar. 3,103 363 282 3,184 Apr-June 3,366 529 244 3,651 July-Sep. 3,252 595 282 3,565 Oct-Dec. 2,819 97 411 2,505 1958 Jan-Mar. 2,872 60 430 2,502 Apr-June 2,987 40 508 2,519 July-Sep. 3,040 63 491 2,612 Oct.-Dec. 3,217 37 687 2,567 1959 Jan. (p.) 1,153 Source: 1939, 1943, 1946, 1950-57 - Japan Iron & Steel Federation, Annual Report. 1957 Quarterly data - Production: Japan Iron & Steel Federation, Monthly Statistics Exports and Imports: Prorated on the basis of data from Monthly Statistics on exports of semi-finished steel, finished products and secondary products. 1958 - Annual and quarterly data from monthly data given in Monthly Statistics on production of crude steel and exports and imports of semi-finished steel, finished products and secondary products. Exports and imports converted into crude steel equivalent on basis of relationship between Monthly Statistics and Annual Statistics data for earlier years. 1939, 1943, 1946, 1950-57 (Annual Data) Exports and imports cover semi-finished and finished steel and secondary products converted into crude steel according to the U.N. method. ANNEX 5 Page 6 TABLE 2 Japan - Demand for Steel, FY 1962 (thousand tons) Carbon Steel Rolled Products: Domestic demand 11,500 Exports 1 40O Less Rerolled 460 Total (finished basis) 12,b0 Carbon Steel Rolled Products (hot rolled basis) 12,750 Special Steel Rolled Products 824 Cast and Forged Steel 530 Crude Steel: For carbon steel rolled products 15,680 For special steel rolled products 1,270 For castings and forgings 870 Total 17,820 Notes Domestic Demand for Carbon Steel Rolled Products Domestic demand for carbon steel rolled products in fiscal year 1962 was estimated by the Japanese Ministry of Industry and Trade (MvITI) in a study prepared for the Bank in December 1958, at 12.3 mil- lion tons. The underlying assumptions were as follows: 1) an annual average increase in gross national product over the six-year period fiscal 1956 - fiscal 1962 of 5.85%; 2) an associated average annual in- crease in industrial production over the same period of 8.2%; and 3) an average annual increase in domestic demand for carbon steel rolled pro- ducts over the same period equal to the increase in industrial production. The assumed rates of growth in gross national product and industrial production were estimates by the Japanese Economic Planning Agency, embodied in its Long Range Plan (1956-62). The assumption that domestic demand for carbon steel rolled products would increase at the same rate as industrial production was based on past relationships shown between these two factors in Japan and other leading industrial countries. Because the wide swings that characterize demand for steel make it difficult to select an appropriate base year for projections, the estimate of domestic demand for carbon steel rolled products in ANNEX 5 Pag67 fiscal 1962 was calculated by correlating the index of mining and manufacturing production and domestic demand for carbon steel rolled products for the fiscal years 1951-58 and applying the resulting re- gression equation to the estimated 1962 value for the index of mining and manufacturing production (calculated by assuming an increase of 8.2% per year from the actual value in fiscal 1956) to deiive an esti- mate of domestic demand for carbon steel rolled products in fiscal 1962. In effect, however, this was equivalent to assuming an increase of 8.2% per year in domestic demand for carbon steel rolled products starting from the "normal" value for fiscal 1956. MITI's assumption that domestic demand for carbon steel rolled products should increase at a rate equal to the rate of increase in industrial production seems reasonable for a country at Japan's cur- rent stage of economic development. The implied relationship between the assumed rate of growth in gross national product and the estimated rate of growth in domestic demand for carbon steel rolled products of ll.h (585:8.2) seems reasonably conservative; between fiscal 1951 and fiscal 1958, the ratio between these two rates of growth was 1:1.67 1/. However, the assumed rate of growth for gross national product (5.85o per year from fiscal 1956 to fiscal 1962) is higher than the estimate used for purpose of this report (roughly, 5% per year). The estimate of domestic demand for carbon steel rolled pro- ducts in fiscal 1962 shown in Table 2 (11.5 million tons) was arrived at, therefore, on the assumption of an increase of 7% per year from the "normal" value for demand in fiscal 1956, that is of an average annual increase 1.h times the increase of roughly 5% per year in gross national product. Domestic Demand for Special Steel Rolled Products Domestic demand for special steel rolled products in fiscal 1962 was estimated by 4ITI at 870,000 tons. This estimate was arrived at by applying to MITI's estimate of domestic demand for carbon steel rolled products for fiscal 1962 a regression equation arrived at by cor- relating actual values for domestic demand for carbon steel rolled pro- ducts and for special steel rolled products for the years 1951-58. In view of the high correlation shown between these two series, the method seemed acceptable, However, the Bank reduced MITI's estimate propor- tionately to the reduction made in its estimate of domestic demand for carbon steel rolled products, to 824,000 tons. Domestic Demand for Cast and Forged Products MITI's estimate of domestic demand for cast and forged products in fiscal 1962 of 560,000 tons was similarly calculated by applying to its estimate of domestic demand for carbon steel rolled products for fiscal 1/ Based on least squares trend lines fitted to each of these series. ANNEX 5 Page8 1962 a regression equation derived by correlating actual values for the latter in fiscal 1951-58 with actual values of demand for cast and forged steel. As a result of an adjustment similar to the adjustment made for domestic demand for special steel rolled products, MITI's esti- mate was reduced to 530,000 tons. Exports of Carbon Steel Rolled Products On the basis of an analysis of past exports by product and market and of prospects for the next few years, MLITI estimated exports of carbon steel rolled products in fiscal 1962 at 1.4 million tons. The estimates allow for a prospective decline in exports to India, one of Japan's leading markets, on the completion of its current expansion pro- gram, and on the whole seem reasonably conservative, in view of the fact that they imply an overall increase of only 100,000 tons from the actual level of exports in fiscal 1958. Rerolled Steel The estimate of production of rerolled steel is MITI's esti- mate. It compares with an actual (estimated) consumption of rerolled steel in fiscal 1958 of 450,O00 tons (domestic - 360,000, imports - 90,000). Crude Steel Total demand for carbon steel rolled products (domestic plus export minus rerolled) was converted to a hot-rolled basis, using con- version factors supplied by MqITI, Conversion factors supplied by i4ITI were used in converting estimated demand for carbon steel rolled pro- ducts (on a hot-rolled basis), for special steel rolled products and for cast and forged steel to their crude steel equivalents. ANNEX 5 TABLE 3 Japan: Domestic Demand and Exports of Carbon Steel Rolled Prcducts, Actual, Fiscal Years, 1953-58, Estimated 1959-621/ (to. tons) Rails Shapes Bars ire Rods Hoo9 Plates Sheets lin Plate Silicon Sheets Steel Tubes Others Total (T1res) 1953 Total 298 629 1 106 512 172 1,365 839 123 76 442 27 5,589 FDomestic yIT5 6zT '1 I 5371 1,193 T97112 t ,207 Export 23 1b 55 5 6 172 L-2 11 2 57 - 382 1954 Total 299 514 1 287 613 118 1 226 1 21h 152 65 425 44 5 957 Domestic _10 4-9- 1 o97 1,121 13T 7 IN 1t7 Export 111 24 242 17 10 250 93 18 10 57 - 832 1955 Total 319 725 1 346 740 120 1 859 1 301 207 63 499 74 7 253 baestic 195 69-0 '0, W~ 1,70 T_BT 172 7f 7674 t Export 124 35 260 35 34 154 135 35 5 83 - 900 1956 Total 385 1 027 1 672 74 163 2,504 1 328 321 117 617 75 8 956 ]Domestic 2-71 72 -117 2,322 ',F9 2F71-15 -57-3 yt Export 111 62 99 18 16 182 30 34 2 69 - 623 1957 Total t46 1 139 1 813 757 149 2,753 1 479 276 135 561 84 9 622 Domestic 327 f2 t2Bl W_3 791 2, 683 T1M 3 -2 7 Export 149 76 127 18 4 150 75 44 9 34 - 686 1958 Total 487 1 009 1 801 900 113 2 109 1 827 280 96 562 80 9 264 Domestic 27 S2 90 1,709 17 6 L B7B Export 230 60 275 92 23 340 154 44 18 82 - 1,318 1959 Total 494 1,078 1,936 943 132 2,333 1,960 323 117 643 85 10,098 1960 Total 500 1,153 2,081 988 154 2,580 2,103 373 13 737 91 10,903 1961 Total 507 1,232 2,237 1,03h 179 2,853 2,257 431 174 844 97 11,845 1962 Total 514 1 317 2 416 1 084 209 3 155 2 425 497 214 966 103 12 900 Domestic 3 1 !2: ~1 2, 175 IDj 17 T5 103 11,5;6 Export 158 75 300 95 25 292 250 60 30 115 - 1,400 Sources: 1953-57 - KITI Report, Dec. 1958 1958 - Fuji Submission to Bank, April 1959 (MITI figures) 1958-62 - Domestic, IBRD estimates; Exports, MITI estimates, Dec. 1958. Estimates for 1959-62 computed as follows: 1) Total domestic demand in 1962 estimated by assuming a 7% per year rise from the "normal" level of demand in fiscal 1956, as estimated by ITI (see Table 3); this is consistent with the assumption that gnp will rise at a rate of 5% per year over the period 1956-62. 2) Estimated domestic demand for carbon steel rolled products in 1962 distributed among individual products in the same proportions as shown in MITI's estimates. 3) Total demand (domestic plus export) for individual products in 1959-61 estimated on the assumption that demand for each product will increase at a constant rate from the actual level in 1958 to the estimated level in 1962. 2/ Hoops for sale, not including hoops for welded pipe. ANTNEX 6 Page 1 FUJI IRON & STEEL CO LTD. Raw Materials, Utilities, Labor To produce 2,129,000 tons of pig iron in 1958, Fuji con- sumed 1,757,000 tons of imported iron ore, which vere blended with 870,000 tons of domestic iron ore and 566,000 tons of iron sand, pyrite cinder, etc. The blast furnaces operated with 58% sintered ore. In 1962, the pig iron production is forecast at 3,213,000 tons for which 3,179,000 tons of imported iron ore will be required, olus 883,000 tons of domestic iron ore and 768,000 tons of pyrite cinder, iron sand, etc. Blast furnaces are planned to operate on 62% sintered ore. The increase in Fuji's iron ore requirements is only part of the expected increase of the entire Japanese industry. Imports will come from Malaya (27%), India and the Philippines (13% each), Goa,*(11%) and miscelaneous small suppliers (36%). The industry is taking steps to assure that these increased requirements will be met. A Japanese mission concluded last year an agreement with the Indian Government which will secure two million tons per annum of Rourkela ore for Japan after 1962. Negotiations are under way to secure a further four million tons from the Bailadila mines (India). Fuji's blast furnaces operate vith a blend of 46% domestic coking coal (mainly low-grade coking coal) and 54% imported coal (mainly high-grade imported from the United States). Its require- ments for imported coking coal in 1962 when it expects to produce 3,213,000 tons of pig iron, will be 1,775,000 tons (of Thich a little less than half are expected to come from Australia or sources other than the U.S.A.). The company should have no difficulty in importing that quantity of high-grade coking coal from the United States and Australia, which is becoming an increasing and cheaper source of coking coal. Total consumption of purchase- scrap in Fuji's steel furnaces amounted to 302,000 tons in 1958, to produce 2,306,000 tons of steel ingots - pig iron/total scrap ratio of 69.2%. In 1962, for a scheduled production of 3,441,000 tons of ingot steel, purchased scrap will amount to 290,000 tons - pig iron/total scrap ratio of 72.6%. As at present, half of the total scrap will come from imported sources, mainly from the U.S.A. Limestone annual requirements ill increase from the present 649,000 tons to about 1,023,000 tons in 1962. The company should have no difficulty in securing that amount from domestic sources. Fuji is spending over Y4 billion (11.1 million equivalent) to expand its power plant at Hirohata, and its nower distribution and ANNTX 6 Page 2 water supply at both Hirohata and Mtrroran, in order to take care of the expected requirements. Arrangements have been made with the Kansai Power Co., the Hokkaido Power Co., the Tohoku Power Co. and the Tokyo Power Co. for the purchase of additional po-er for its four vorks. TransDortation facilities vill be strengthened at the four works. Harbors at Hirohata and Muroran ill be deepened and enlarged, and unloading equipment added to enable these works to receive iron ore from modern carriers up to 45,000 tons. Government subsidies for these two ports ill amount to !91,110 million out of a total cost of 95,810 illion. Additional labor requirements are limited to only about 1,100 new vorkers, as productivity vill greatly increase. Fuji is taking steps to train these workers during the construction period. At the same time, Fuji is hiring from 40 to 70 engineers each year which should be adequate to take care of all new facilities, MFX7 FUJI IRON & STEEL CO.- LTD. Constructicn Schedule Construction Period Start Comnpletionl Hirohata *Blast Furnace No. 3 - Raw Material preparation and reconstruction of coke plant No. 1 Jan. 1959 Nov. 1960 *Sintering plant Jan. 1959 Sept.1960 .3Slabbing mill Jan. 1959 Sept.1960 *Services Oct. 1957 Nov. 1960 Port Enlargement Apr. 1959 Mar. 1962 Reheating furnace for plate mill Jan. 1959 Sept.1960 Coke oven gas separator Oct. 1959 Mar. 1961 Electrolytic galvanizing line Apr. 1959 Mar. 1960 Muroran Reconstruction of Blast Furnace No. 1 July 1959 Sept.1959 Construction of open hearth No. 6 Feb. 1959 Jan. 1960 Soaking Pit expansion Feb. 1959 Feb. 1960 Construction of slabbing mill Feb. 1959 Feb. 1960 Additional facilities for hot strip mill Dec. 1958 Feb. 1960 Cold Strip Mill Apr. 1961 Mar. 1963 Modernization of wire rod mill - bar mill Jan. 1960 June 1961 Services Apr. 1961 Mar. 1963 Port Enlargement Apr. 1959 Mar. 1962 Hydrogen separation plant Oct, 1960 Sept.1962 Kamaishi Reconstruction of Blast Furnace No. 8 Oct. 1960 Dec. 1960 Sintering plant Apr. 1959 Dec. 1960 Reconstruction of Coke Plant No. 2 Oct. 1958 Nov. 1959 Expansion of steelmaking capacity: oxygen plant Oct. 1959 Mar. 1961 Soaking pit expansion Oct. 1959 Mar. 1961 Expansion of large section mill Oct. 1959 Sept.1960 Silicon sheet equipment Apr. 1958 Sept.1959 Modernization of medium section mill Apr. 1960 Sept.1961 Services Apr. 1960 Mar. 1962 Kawasaki Pole manufacturing equipment Apr. 1959 Mar. 1960 Cold Forming mill Apr. 1959 Mar. 1961 *Facilities covered by IBRD Loan ANNEX 8 FUJI IRON & STEEL CO.. LTD. Order of priority of projects not started on January 1, 1959 as proposed by the company to be Total Cost started 9 million Jan. 1959 Hirohata : Project covered by the proposed Bank loan 27,119 Feb. 1959 Muroran : Construction of open hearth furnace #6 720 Feb. 1959 Muroran : Expansion of soaking pits. Installation of slabbing mill and additional facilities for hot strip mill 3,980 Apr. 1959 Central Research Laboratory 4,000 Apr. 1959 Kamaishi : Construction of a sintering plapt 800 Apr. 1959 Kawasaki : Installation of a cold forming mill 833 Apr. 1959 Hirohata: Installation of an electrolytic zinc coating line 500 Oct. 1959 Kamaishi : Second expansion of the large section mill 2,812 Jan. 1960 Muroran : Second expansion of the wire rod mill 386 Apr. 1959 Hirohata : Expansion of harbor facilities 2,500 Apr. 1959 Muroran : Expansion of harbor facilities 2,200 Oct. 1959 Kamaishi : Expansion of steelmaking facilities (oxygen plant) 500 Oct. 1959 Hirohata : Installation of the coke oven gas separating equipment 1,957 Apr. 1961 Muroran : Installation of the cold strip mill 4,500 Oct. 1960 Muroran : Construction of the hydrogen separation plant 2,000 FUJI IRON & STEEL CO.,.LTD. Cost Estimates .pnil1959 -.vrnt 1962 Expenditures Amount spent from April 1, Expenditures before 1959 to $} million after Total Cost March 31 1959 March1, 1262 equivalent March 31. 1962 - - - - - - - - - million - - - - - - - - (Y million) Under IBRD Loan (To be completed by Nov. 1960) Hirohata Blast furnace No. 3 3,346 1 3,345 9.3 - Preparation of raw materials 2,293 - 2,293 6.4 - Sintering Plant 2,000 t/d 1,508 - 1,508 4.2 - Reconstruction of coke oven Plant 1 1,551 52 1,499 4.2 - 2 x 60 tons oxygen converters 4,032 523 3,509 9.8 - Expansion and reconstruction of soaking pits 1,530 465 1,065 3.0 - Slabbing mill 4,699 6 4,693 13.0 - Expansion of by-product plant 1,129 - 1,129 3.1 - Expansion of power plant 1,428 298 1,130 3.1 - Expansion of water supply 1,618 628 990 2.8 - Expansion of transportation facilities 759 144 615 1.7 - Storehouse enlargeiaent 475 29 446 1.2 - Contingency reserve _22% - _&L751 7.6 - 27,119 2,146 24,973 69.4 - Rest of the froggram Hirohata Construction of steelmaking shop facilities 2,045 - 2,045 5.7 - Expansion of harbor facilities 2,500 - 2,500 6.9 - Wide plate mill, reheating furnace 1,105 14 1,091 3.1 - Coke oven as separator 1,957 - 1,957 5.4 - Electrolytic zinc coating line _ 50 - 50)0- _1 - Sub-total Hirohata 35,226 2,160 3066 91.9 - Expenditures Amount spent from April 1, Expenditures before 1959 to $ million after Total Cost March 31.152 March-31. 1962 equivalent March 31, 1962 Res of Progam, (cont'd) - - - - - - - - Y million - - - - - - - - Muroran Reconstruction of blast furnace No. 1 850 3 847 2.3 - Construction of open hearth furnace No. 6 720 - 720 2.0 - Soaking pits expansion 880 3 877 2.4 - Construction of slabbing mill 2,500 436 2,064 5.7 - Additional facilities for hot stripmn 600 - 600 1.7 - Cold strip mill 4,500 - 2,000 5.6 2,500 Wire rod mill modernization and bwmM1 386 - 386 1.1 - Expansion of water and power supply 1,000 - 300 0.8 700 Expansion of harbor 2,200 - 2,100 5.8 100 Unloading facilities 888 321 567 1.6 - Warehouse enlargement 200 - 57 0.2 143 Separation of hydrogen from 0.0. gas 00 - 800 2.2 1.200 Sub-total Muroran 16,724 763 11,31 31.4 -,643 Kamaishi Reconstruction of blast furnace No. 8 900 - 900 2.5 - Sintering plant - 1,400 t/d 800 - 800 2.2 - Reconstruction of coke plant No. 2 337 19 318 0.9 - Oxygen plant and dust precipitator 500 - 500 1.4 - Expansion of soaking pits 500 500 1.4 - Expansion of large sec. mill 2,812 - 2,812 7.8 - Silicon sheet equipment 125 10 115 0.3 - Modernization of medium section mill 390 - 390 1.1 - Expansion of store yard 640 640 1.7 Modification of railroad track 850 850 2.4 - Sub-total Kamaishi 7,854 29 7,825 21.7 - Expenditures Amount spent from April 1, Expenditures before 1959 to $ million after Total Cost March 31,_1959 March 31, 1962 eIvalent March 31. 1962 - - - - - - - - Y million - - - - - - - - (0 million) Rest of Program (cont'd) Kawasaki Poles manufacturing facilities 60 26 34 0.1 Cold forming mill 833 - 833 2.3 - Central Research Laboratory 4000 - 1,800 5.0 2,200 Sub-total Kawasaki 4,893 26 2,667 7.4 2,200 Contingency Reserve 6,029 - 4,774 13.3 1,255 Renewals and Repairs 31,007 - 11,007 30.6 20,000 101,733 2,978 70,657 196.3 28,098 Payments on Projects com- pleted prior to liarch 31, 1959 2,520 7.0 73,177 203.3 ANNEX 10 FUJI IRON & STEEL CO., LTD. EE2spoed Disbursement Schedule Total Expenditures on Project Proposed as Basis for Bank Loan $ million 195. 1960 Total equivalent --- -Y million ---- Foreign exchange expenditures 632 1,960 2,592 7.2 Local expenditures 11,990 10,391 22,381 12,62 12351 2L4973 Proposed Disbursement Schedule of Bank Loan Foreign exchange 632 1,960 2,592 7.2 Local expenditures 2 2L816 6,048 16.8 1.864 LL t4 _ ($ million equivalent): Foreign exchange 1.8 5.4 7.2 Local expenditures 8.9 7.9 16.8 10.7 13.3 24.0 Estimated Foreign 2urrency Requirements for Foreign Exchange Part of the Proposed Loan - - U.S.1000 dollars - - - U.S. dollars 1,252 4,436 5,688 D.M. (in $ equivalent) 502 1.008 1.510 Total 1.754 2Ag 7.198 Note: Foreign exchange expenditures on the Project incurred after April 1, 1959 are assumed to be fully reimbursed. A proportion of 27%o on local expenditures after April 1, 1959 are also assumed to be re- imbursed as they are incurred. FUJI IRON & STEEL CO., LTD. Sales (domestic and export) and share of the Japanese market - - - - - - - - - - - - - - actual - - - - - - - - - - - - - - - - - - - - - - - - - - - -forecasts - - - - - - - - - - - - Fiscal Year: 1954 1955 1956 1957 1958 1960 1961 1962 .1,000 1,000 1,000 1,000 1,000 1 000 1,000 1,000 1,000 . Tons _Tone L Tons L Tons L Tons % 2on L Tons .. _ Tons L _as Rails 16.3 49 21.9 70 19.7 76 23.9 114 26.9 131 26.9 133 26.9 135 26.9 136 26.9 138 Shapes 13.2 68 14.6 106 13.6 140 14.4 164 11.0 111 12.1 130 12.7 147 12.6 155 13.0 171 Bare 12.6 162 12.3 166 11.2 187 9.2 166 8.0 144 8.4 162 9.2 192 9.5 213 9.5 229 Wire rods 16.8 103 17.1 127 17.1 128 17.2 131 13.8 124 16.5 155 16.9 167 17.2 178 17.5 190 Hoops 17.6 21 23.3 28 17.2 28 22.1 33 28.3 32 37.8 50 39.0 60 38.6 69 40.0 84 Plates 24.1 295 19.6 365 15.9 399 15.1 416 19.5 412 19.3 449 19.8 511 19.9 566 20.0 631 Sheets 11.5 140 16.6 216 19.8 263 19.4 287 20.9 381 19.3 378 19.1 402 18.9 427 18.6 451 Tin Plate - - - - - - 0.7 2 6.1 17. 17.6 57 18.5 69 19.5 84 18.6 96 Silicon sheets - - -- - -- - 6 __ 14 Sub total 1" 83 1107 613. L 3 14,6 1,(g 1Jjj5.~ iA LIU2 12,.2,0 Hoops for pipe 46 61 67 73 108 104 114 115 120 Hot coils for sale - - 8 60 172 231 301 402 516 Semi-finished steel for sale .A4. 421 337Q~i 20.--2 10 209 Sub total 39 48 412 -3 . - -A39 5- -3 Total IAJ22 i56 ~ ____Q 12 83 1.2±1 1,953 ?Q 219~ 2 O4 a 2L2 FUJI IRON & STEEL CO., LTD. Sales Prices ------- ------------Domestic------------ --------Domestic-------- -- -------- ---Export--- March 31, March 31, March 31, March 31, March 31, Current 1963 and Current 1960 ard 1955 1956 195 1958 199 Prices 1960 1961 1962 after Prices after ---- ------------Xperton------------ ----------Xperton--------- -- Tperton-- Rail 37 kg. 45,000 47,000 52,000 50,000 48,000 50,000 50,000 50,000 50,000 50,000 115 120 Shapes 75 x 75 m/m 37,000 45,000 50,000 45,000 41,000 44,000 44,000 44,000 44,000 44,000 110 115 Bars 19 m/m 35,000 43,000 49,000 44,000 40,000 42,000 42,000 42,000 42,000 42,000 100 105 Wire rod 5.5 m/M 39,000 44,000 49,000 47,000 42,000 44,000 44,000 44,000 44,000 44,000 105 110 Plate 12 m/m 39,000 48,000 56,000 54,000 48,000 52,000 52,000 50,000 48,000 48,000 110 115 Cold rolled sheet 0.8 m/m 54,000 60,000 67,000 62,000 57,000 61,000 61,000 59,000 57,000 57,000 150 155 Hot dip tinplate 95 lbs. 110,000 110,000 108,000 108,000 103,000 103,200 103,200 101,200 99,200 99,200 220 225 Basic pig iron 24,000 25,500 30,000 29,000 25,500 25,500 26,500 26,500 26,500 26,500 - - Foundry pig iron 25,000 26,500 32,500 31,500 28,000 28,000 29,000 29,000 29,000 29,000 - - Average price during fiscal Current 1963 and years (c.i.f.) 1 1956 11958 Prices 1960 1 1962 after Imported iron ore 4,979 6,217 7,369 8,298 5,694 5,389 6,365 6,286 6,159 6,159 Imported coal (U.S.A.) 6,264 7,855 10,318 11,012 7,473 6,883 9,108 9,288 9,288 9,288 Domestic iron ore 3,824 4,069 4,231 4,437 35,083 3,427 3,484 3,541 3.598 3,598 Domestic coal 6,073 6,092 6,230 7,032 6,560 6,613 6,613 6,613 6,613 6,613 Scrap: Imported 16,204 19,901 27,846 27.443 17,676 21,600 23,400 23,400 23,400 23,400 Domestic 15,977 20,427 25,527 23,901 17,768 20,000 21,000 21,000 21,000 21,000 FUJI IRON & STEEL CO., LTD. Returnion Sales -- - --- ------ actua --------- - - - - - - - - - - - - - - - - - - forecast - - - - - - - - - - - - - - - - - - Apr.'54- Apr.'55- Apr.'56- Apr.'57- Apr.'58- Apr.'59- Apr.'60-. Apr.161-. Apr.'62- Apr.'63- Apr.'64- Apr.'65- Ma Mar.56 Mar.'57 Mar.'58 MrL59 Mar.'60 Mar.'61 Mar.'62 M Mar.'64 Mar.'65 Mar.'66 Sales 56,404 77,388 98,177 102,791 90,525 105,286 119,297 131,015 142,096 146,841 152,042 153,475 Net operating income 2,689 6,955 9,912 13,083 7,054 15,572 14,875 16,294 17,421 17,788 18,501 19,179 Return on sales 4.8% 9.0% 10.1% 12.7% 7.8% 14.8% 12.5% 12.4% 12.3% 12.1% 12.2% 12.5% Return on average derreciated investment in operat,on (X million) Net operating innome 2,689 6,955 9,912 13,083 7,054 15,572 14,875 16,294 17,421 17,768 18,501 19,179 Net fixed assets in operation 30,618 38,636 36,559 35,567 45,393 66,954 83,756 102,344 108,876 110,790 105,804 99,114 92,852 Net working capital excluding short-term loans from current liabilities 12014 1 19,227 13.1 1 23,899 22.09 22171 24.513 27.118 29,059 30875 29,462 42,632 56,395 55,786 48,751 64,975 90,853 105,850 124,515 133.389 137.908 134,863 129.989 122,314 Average depreciated inv.in operation 49.514 56,091 52,269 56,863 77.914 98,351 115,183 128,952 135,649 136,386 132,426 126,152 Return on avg.depre- ciated investment in operation 5.4% 12.4% 19.0% 23.0% 9.1% 15.8% 12.9% 12.6% 12.8% 13.0% 14.0% 15.2% ! FUJI IRON & STEEL CO., LTD. INCOME STATEMENT FORECASTS (Y million) Apr. '59- Apr. '60- Apr. '61- Apr. '62- Apr. '63- Apr. '64- Apr. '65- Mar. '60 Mar. '61 Mar. '62 Mar. '63 Mar. Mar. 165 Mar. '66 Net Sales 105,286 119,297 131,015 142,096 146,841 152,042 153,475 Operating Expenses Cost of sales excludlg depreciation 76,517 88,898 97,007 106,228 110,779 115,547 116,368 Normal depreciation V 7,142 9,001 10,663 10,840 10,425 9,882 9,396 General administrative and selling expenses 6,055 6.523 7.051 7,607 84 8,112 _ 8,532 89,714 104,422 114,721 124,675 129,053 133,541 134,296 Operating Income 15,572 14,875 16,294 17,421 17,788 18,501 19,179 Non-operating Income 806 1.006 1,11 1,226 1. 1.465 Gross Incom 16,378 15,779 17,300 18,535 19,014 19,844 20,644 Non-operating Expenses Interest 4,709 5,917 6,732 6,753 6,220 5,777 5,301 Other 1.791 1,876 1.907 2.268 Net income before taxes 9,725 8,071 8,692 9,875 10,663 11,906 13,075 Income Taxes 3.816 3 -IW8 3,957 4,30 4,419 4.919 Net Income 5,909 4,934 5,244 5,918 6,358 7,487 8,156 Surplw and Reserves at beginning of year 37,880 41.369 41283 42907 41755 43 45560 43,789 46,303 46,527 48,825 48,113 51,080 53,716 Less: Surplus Appropriations Dividends 2,400 3,000 3,600 4,050 4,500 4,500 4,500 Officers$ Bonus 20 20 20 20 20 20 20 Additional Depreciation - - - - 1,000 1,029 Stock Dividend - 2.- - - Surplus and Reserves at end of year Ag6 41,28 0 42907 43593 45.560 I8 167 Net Incane before Taxes and Interest 14,434 13,988 15,424 16,628 16,883 17,683 18,376 Times Total Interest Covered 3.1 2.4 2.3 2.5 2.7 3.1 3.5 Net Income after Taxes, before Deprec. and Interest 17,760 19,852 22,639 23,511 23,003 23,146 22,853 Times Debt Service Covered 2.0 1.8 1.6 1.4 1.4 1.4 1.4 Earnings per share (on shares at end of year) y 14.8 8.2 8.8 6.5 7.1 8.3 9.1 Dividends per share X 6.0 6.0 5.0 5.0 5.0 5.0 5.0 Total Retained Earnings and Depreciation 10,631 10,915 12,287 12,688 12,263 12,849 13,032 V For definition of depreciation, see Annex 17, Page 1 FUJI IRON & STEEL CO., LTD. Cash Flow Forecasts (E million) Apr. '59- Apr. 160- Apr. '61- Construction Apr. '62- Apr. '63- Apr. '64- Apr. '65- Operating Mar. '60 Yar. '61 Mar. '62 Period Mar. '63 M Mar. '65 Mar. '66 Period tources of Funds Profit for the year, before taxes, interest, dividends and bonus 14,694 14,248 15,684 44,626 16,888 17,143 16,943 17,607 68,581 Ordinary Depreclation 7,142 9,001 10,663 26,806 10,840 10,425 9,882 9,396 40,543 PreDrofit free reserves (net) 503 4 606 1,657 5 53 1,564 1.611 4,291 Extraordinary de,reciation - - - - - - 1,000 1,029 2,029 Increase in reserve for bad debts 70 80 56 206 35 16 16 5 72 Increase in reserve for renairs and maintenance 433 46 550 1,451 549 516 548 577 2,190 Total csh generated from onerations 22,339 23,797 26,953 73,089 28,312 28,100 28,389 28,614 113,415 Canital increase - 8,000 - 8,000 12,000 - - - 12,000 Lo-term Debt 1 17 776 1550 56 460 7, 000 7,0 00 24.000 IBDt6 T4 - -- Bonds 7,000 7,000 7,000 21,000 3,000 7,000 7,000 7,000 24,000 Long-term Loans (Domstic) 12,320 6,000 8,500 26,820 - -- - Increase in short-term debt 167 137 13 317 - - - - Decrease in current assets other than cash - - - - - - Increase in current liabilities other than short- tern debt 2.7 1,9 196jJj2.3 ~ j 102 .2tAJ2 Total 47,764 51,503 44,452 143,719 45,542 36,511 3684ol 35.63 154,092 , 'cation of Funds Investments in Fixed Assets 2Q,73 2822 163117 13,098 50 5,000 5.000 28,098 Projects related to IBRD Loan 12,622 12,351 - 24,973 - - - - - Other Projects in Exoansion Program 13,106 12,893 11,198 37.197 8,098 - - - 8,098 Renewals and Renairs 3,007 3,000 5,000 11,007 5,000 5,000 5,000 5,000 20,000 Investments 1,880 1,80 2,080 5,940 2,180 2,280 2,380 2,480 9,320 Interest 4,709 51 6l732 17,358 6,753 6,220 5,777 5-301 24,051 bhort-tenn Debt 1,119 1,132 1,137 3,388 1,121 1757 986 842 4,015 IBRD Loan 116 375 544 1,035 524 496 466 434 1,920 Bonds 798 1,256 1,734 3,788 2,055 2,313 2,684 2,982 10,034 Other Long-tern Loans 2,676 3,154 3,317 9,147 3,053 2,345 1,641 1,043 8,082 Amortination 3.976 4f86 7.264 16.109 9.856 10, 10.993 10,301 IBRD - - 212 212 444 471 499 530 1,944 Bonds 965 807 454 2,226 1,297 1,536 2,559 3,530 8,922 Long-term Loans (Domestic) 3,011 4,062 6,598 13,671 8,115 8,534 7,935 6,247 30,831 Taxes 2,888 3,476 3,293 9,657 3,702 4.131 4,362 4,669 16,864 Dividends and Officers' Bonus 2,419 2,420 3,620 8,459 3,620 4,520 4,520 4,520 17,180 Decrease in short-term Debt - - - - 474 1,108 1,222 2,911 5,715 Increase in Current Assets other than cash 2,411 3,506 4,493 10,410 5,096 2,228 1,657 345 9,326 Decrease in Current Liabilities other than short- tern debt ___- - " T o t a l 4 7 0 1 8 5 4 3 . 6 8 0 1 4 1 _ 10 i a 3 6 0 2 3 5 . 9 1 1 , 5 3 3 1 5 2 .2 5 Cash surplus (shortage) for the year 746 1,091 772 z,609 763 483 490 105 1,841 Available at beginning of year 6,885 7,631 8,722 6,885 9,494 10,257 10,740 11,230 9,494 Available at end of year 7,631 8,722 9,494 9,494 10,257 10,740 11,230 11.335 11,335 ANNEX 16 FUJI IRON & STEEL CO., LTD. Balance Sheet Forecasts ( million) March 31, March 31, March 31, March 31, March 31, March 31, March 31, March 31, 195 196 1961 1962 1963 196 1965 1966 Assets Cash and Bank Deposits 6,885 7,631 8,722 9,494 10,257 10,740 11,230 11,335 Notes Receivable 1,309 1,348 1,535 1,701 1,858 1,928 2,004 2,025 Accounts Receivable (sales on credit) 4,090 3,839 4,373 4,847 5,294 5,492 5,709 5,769 Less: Reserve for Bad Debts 385 45 5 5 626 642 6 663 Total Receivables 5,014 4,732 5,373 5,957 6,526 6,778 7,055 7,131 Inventories 34,859 37,700 40,111 43,772 47,964 49,890 51,211 51,480 Other Current Assets 5,56 5 5 6.162 6,265 6.376 6,406 Total Current Assets 52,323 55,429 59,881 65,144 70,909 73,673 75,872 76,352 Fixed Assets 102,345 131,311 158,880 172,851 185,064 187,615 191,345 195,340 Less: Deprec.(including spec.repairs) 31,884 3 48,063 59.116 , 0,311 9 100,98 Net Fixed Assets 70,461 92,376 110,817 113,735 114,719 107,304 100,614 94,352 Investments kncluding other assets) 1 1 13,965 15,991 18,230 20,441 22.753 25,198 Total Assets 132,843 159,725 184,663 12j,870 203,858 201,418 199.2 02 Liabilities and Equity Current Liabilities othor than shcrt-term Loans 28,424 33,335 37,710 40,636 43,791 44,614 44,997 46,890 short-term Loans 1 16.242 16.l9 16,392 1 14.81 13.58 10.6 Total Current Liabilities 44,499 49,577 54,089 57,028 59,709 59,424 58,585 57,567 Proposed IBRD Loan - 3,864 8,640 8,428 7,984 7,513 7,014 6,484 Other Long-term Debt 26,822 36,131 38,069 39,971 31,856 23,322 15,387 9,140 Bonds 7,618 13,653 19,846 26,392 28,095 33,559 38,000 41,470 Less: Maturing within 12 months .97 7,264 _ 10.541 10993 10,307, 11.926 Total Fixed Liabilities 30,464 48,779 59,291 64.935 57,394 53.401 50,094 45,168 Total Liabilities 74,963 98,356 113,380 121,963 117,103 112,825 108,679 102,735 share Capital 20,000 20,000 30,000 30,000 45,000 45,000 45,000 45,000 Surplus and Reserves 37,880 4 41,283 42.907 41.755 435950 48,167 Total Equity 57,880 61,369 71,283 72,907 86,755 88,593 90.560 93,167 Total Liabilities & Equity 132,843 159,725 184,663 194,870 203,858 201,418 199,239 195.902 Notes Receivable Discounted (4, 430) (4,563) (5,198) (5,761) (6,293) (6,528) (6,786) (6,857) Guarantees on Loans (4,184) (5,592) (10,022) (11,147) (10,664) (9,989) (9,102) (8,570) Ratios: Current Assets/Current Liabilities 1.18:1 1.12:1 1.11:1 1.14:1 1.19:1 1.24:1 1.29:1 1.32:1 Current Assets/Current Liabilities (excluding short-term loans) 1.84:1 1.66:1 1.59:1 1.60:1 1.55:1 1.65:1 1.68:1 1.62:1 Long-tens Debt/Equity 34:66 44:56 45:55 47:53 4o:60 38:62 35:65 33:67 Total Debt/Equity 47:53 53:47 54:46 56:44 49:51 47:53 45:55 42:58 Total Debt (incl.guarantees)/Equity 49:51 55:45 57:43 58:42 52:48 50:50 48:52 45:55 ANNEX 17 Page 1 FUJI IRON & STEEL CO..LTD, Assumptions for Financial Forecasts The company's financial forecasts are based on the following assumptions: 1) The volume of production and prices would be as shown in Annexes 11 and 12. Wages would increase by 5% p.a., at about the same rate as productivity. 2) Ordinary depreciation would be, as in past years, the maximum amount permitted by law. 3) The maximum amount of special depreciation permitted by law on equipment coming into production during the construction period, totalling Y11,422 million, has been distributed over a five-year period following the com- pletion of each item of equipment. The distribution has been such that in each year ordinary depreciation plus special depreciation equals what Fuji considers to be an adequate or "normal" rate of depreciation (10% on a declining balance method). In 1964 and 1965, however, the total amount of ordinary and special depreciation exceeds normal depreciation by Y2,029 million. 4) The increase in the Reserve for Retirement Allowance and the Reserve for Bad Debt would be the maximum allowed by law. 5) The increase or decrease in the Reserve for Repairs and Maintenance corre- sponds to the estimated cost and timing of relining and major repairs of the blast furnaces. 6) The company would be able to secure new long-term loans before March 31, 1962 as follows: (a) IBRD loan - 124 million (I8,640 million equivalent) for 15 years, including a two-year grace period, at an interest of 6.3% (6% for IBRD plus 0.3% for JDB). (b) New long-term Bank loans - 426,820 million for seven years (including a two-year grace period) at an interest rate of 9%. (c) New bonds - Z21,000 million for seven years (including two-year grace period) at an interest rate of 7.5%. 7) The company would be able to increase short-term borrowings by E317 million during the construction period. Interest rate would be 7. 8) Investments in fixed assets after the end of the expsnsion program would be limited to normal renewals and repairs. Estimated amount is Y5,000 million annually through 1965. ANNEX 17 Page 2 9) Annual investments in shares, securities or loans to other companies - subsidiary companies included - would increase by R1OO million each year, starting from an estimated amount of Y1,880 million in 1959. 10) Taxes would continue at a rate of 43% on the net profit after ordinary and special depreciation, interest and reserve allocation permitted by law. 11) Dividends would continue to be paid in cash at the rate of 12% of the face value of the shares until September 30, 1962 and at the rate of 10% afterwards. 12) As at present, 71% of sales would be paid in cash and 29% in notes receivable having an average life of 80 days. As invoices are pre- pared on the 20th of each month, accounts receivable at the end of the month are assumed to amount to 50% of the monthly sales - 770 of total nnotes receivables would be discounted. 13) R9w material inventories would amount to a three-month supply for in-po)rted iron ore and scrap, a two-month supply for imported coal, a s"lr.ly of aboul 2.3 months for domestic ore and one month for doreatic c;C>. Finis)hed produ;ts inventories wculd increase in p3oportion to sal'es, goods in process in proportion o p.roduction of difPfrEnt ty.es of products, and manufacturing supplies in priportion to ingot output. 14) As at present, domestic raw materials would be paid for in cash, except for coal which would be paid for in three-,non-h notes. Accounts pac- able woud be 2.3 months for the total amount of imported raw materials after which notes payable would be issued having an average life of 1.2 months. As usual terms are four-month notes for imported iron ore, or U.S. coal, three months for other imuorted coals and two months for imported scrap, Fuji could increase substantially the arount of its notes payable if required. FUJI IRON & STEEL CO.,LTD. Consolidated Balance Sheet Forecast (with main subsidiaries) (Y million) March 31, March 31, March 31, March 31, March 31, March,31, March 31, March 31, 1959 1960 1961 1962 1963 1964 1965 1966 Assets Current Assets 60,843 63,515 68,835 74,758 81,371 84,097 86,546 87,579 Net Fixed Assets 77,371 103,302 127,370 131,599 132,548 125,098 118,373 112,076 Investrmnts and other assets 6253 7 _ 10,666 12.2 18 1 . Total Assets 14,6 174.472 205.2 217.023 226.185 223.08 220,461 217.62 Liabilities and Equity Current Liabilities other than short-term loans 33,133 39,514 44,718 48,650 52,320 53,433 54,287 56,699 short-term Loans 18,130 18,633 19.259 20,184 20062 1 16398 123,48 Total Current Liabilities 51,263 58,147 63,977 68,834 72,382 71,77P 70,685 70,047 Bonds 7,618 13,653 19,846 26,392 28,395 34,159 38,950 42,770 Long-tern Loans 28,802 43,142 53,937 56,431 46,687 36,546 26,637 19,002 Less: Maturing within 12 months 4,43O 5,333 7764 11,274 12.178 12,878 12,460 14 190 Total Pixed Liabilities 31,990 51,462 65,019 71,549 62,904 57,827 53,177 47,582 Minority Interest 2,591 3,072 3,488 3,395 3,607 3,980 4,553 4,939 share Capital 20,000 20,000 30,000 30,000 45,000 45,000 45,000 45,000 burnlus and Reserves 38,623 4171 41 43245 42,292 44,500 47.046 50.061 Total Equity 61,214 64,863 75,232 76,640 90,899 93,480 96,599 100,000 Total Liabilities and Equity 144,467 174,472 205,228 217,023 226,185 222,08 220,461 21 ,629 Guarantees given by Fuji (2,680) (2,921) (3,270) (3,591) (3,993) (4,154) (4,342) (4,368) Ratio: Total Debt (incl. guarantees)/Equity 48:52 55:45 56:44 58:42 52:48 50:50 47:53 44:56 0) JAPAN HOKKAIDO LOCATION OF PLANTS FUJI IRON a STEEL CO.,LTD. 1. Muroran Works 1 2. Kamaishi Works 3. Kawasaki Works MURORAN 4. Hirohata Works 2 KAMAISHI SEA OF JAPAN d lTOKYO KAWASAKI SHIKOKU KYUSHU \I 0 50 100 150 200 Miles SEPTEMBER 1959 18RO-615 jか