RESTRICTED

RETURN 'R R e p o r t N o. T.O. 224a

RE-PORlTS ESK F.w1THIN t"1L\ CO PY

ONE WEEKThis report was prepared for use within the Bank. In making itavailable to others, the Bank assumes no responsibility to them forthe accuracy or completeness of the information contained herein.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

YAWATA IRON AND STEEL CO., LTD

APPRAISAL OF BLAST FURNACE PROJECT

JAPAN

October 30, 1959

Department of Technical Operations

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENTS

1 US $ - Y3601 million Y - $2,780

All tons are metric tons of Z,200 pounds

The company' s fiscal terms run from April 1to September 30 and October 1 to March 31.

When the term " fiscal year" is used, it meansthe year from April 1 of the year mentioned toMarch 31 of the following year.

TABLE OF CONTENTS

Paragraphs

Summary and Conclusions

I. Introduction 1 - 7

II. The Company 8 - 45Properties 18 - 21Other investments 22 - 23Share Capital 24 - 25MAanagement 26Labor 27 - 28Earnings Record and Financial Position 29 - 37First Modernization and Expansion Program 38 - 39Bank Loan 133-JA 40 - 41Secornd Modernizationr Program 1956-1961 42 - 45

III. The Market 46 - 50

IV. The Construction Program 51 - 71Raw Materials, Utilities, Labor 58Construction Schedule 5nd Engineering 59 - 61Cost Estimates 62 - 68Proposed IBRD Loan 69 - 71

V. Benefits Resulting from the Expansion Program 72 - 75

VI. Assumptions for Future Demand and Prices 76 - 79

VII. Financial Plan and Financial Prospects 80 - 97Construction Period 82 - 88O'-erating Period 89 - 92&,Jnclusions 93 - 97

LIST OF ANNEXES

1. Existing Facilities(in operation)

2. List of Main Subsidiaries (as at March 31, 1959)

3. Past Finahcial Statements

4. Xarket Prospects of the Japanese Steel Industry

5. Raw MIaterials, Utilities, Labor

6. Construction Schedule

7. Cost Estimatee

8, Estimated Disbursement Schedule

9. Return on Sales, on Investment and on Equity

10 Sales (domestic and export) and Share of JapaneseMarket

11. Sales Prices

12. Income Statements Forecasts

13. Cash Flow Forecasts

1h. Balance Sheet Forecasts

l15 Assumptions for Financial Forecasts

16. Capital Structure from Forecast ConsolidatedBalance Sheet

!i,'ap

Chart

YAWATA IRON & STEhL CO., LTD.

APPRAISAL OF BLAST FURNACE PROJECT

SUi'1ARY AND CONCLUSIONS

The Bank has been asked to lend The Japan DevelopmentBank '20 million equivalent to be relent to the Yawata Iron & SteelCo., Ltd* (Yawata) to cover the imported goods and part if thelocal expenditures for a portion of the company's construction program.This program was initiated in 1956 and is expected to be completed byMiarch 31, 1962, It is designed to modernize and expand the company'spig iron and steelmaking facilities located at Yawata, Tobata andHikari.

Yawata, the largest integrated steel company in Japan pro-duces plates, sheets, rails, shapes and bars. It also manufacturessilicon steel sheets. It sells some pig iron and semi-finished products.

The company is well organized and rmanagedv Its financialposition is somewhat strained as a result of heavy investments in re-cent years, but its credit is good. Its earnings have been good dur-ing past years, even through the 1958 recession,

The company has made considerable efforts to modernize andexpand its facilities. At present, the company is continuing itsSecond Expansion and hodernization Program, which is designed to in-crease annual pig iron capacity from 2,100,000 tons to 3,400,000 tons,that of ingot steel from 2j800,000 tons to 5,250,000 tons, with corres-ponding modernization and expansion of finishing facilities. Althoughsubstantial expenditures are still to be made for rolling mills andfinishing facilities, the main emphasis is on pig iron and steel ingotproduction facilities. At Tobata it will construct two large blastfurnaces, a converter plant and a slabbing mill,thus converting theseworks *nto an integrated plant. It is for this project that Yawatahas requested a loan from the Bank. The construction program is soundand arrangements for supervision satisfactory.

These facilities should reduce production costs becauseYawTata will be able to reduce the proportion of scrap used for steel-making, to increase efficiency and to reduce transportation betweenthe works. The companyts earning power should be strengthened. De-mand for plates is likely to weaken in the near future because of afalling off in ship construction, but demand for sheets is likely tobe large enough to permit full operation of facilities at the Tobataworks, There should be no problem in connection with the marketing ofthe other finished steel products manufactured by Yawata.

The expenditures to be incurred to complete the constructionprogram, including the project proposed as a basis for a Bank loan,during the period from April 1, 1959 to March 31, 1962 are estimated

- ii -

conservatively at *87.9 billion ($244.2 million equivalent). Thisincludes about 115.7 billion in renewals and repairs, but does notinclude interest during construction.

The company's financial requirements for the three-yearperiod ending March 31, 1962 are estimated at about 41h7.4 billion($409.6 million equivalent). This includes some {10.9 billion forworking capital, some *42.3 billion for repayment of existing debt,and some *6.4 billion for investment in shares and securities.

The financing plan to meet these needs is sound. Retainedearnings, depreciation and the proceeds of a share issue should provide*79.2 billion; long-term borrowings (including the proposed Bank loanof about *7.2 billion, bond issues of about *19 billion and other long-termBank loans of about 4h2.0 billion) would total *68.2 billion.

Arrangements have been made to raise part of the necessarylong-term borrowings in Japan. The company is negotiating with itsbankers to secure the part of the 942.0 billion in long-term loansthat have not yet been arranged and to obtain assurances concerningthe underwriting of the part of the X19.0 billion in bonds that havenot yet been issued.

Conservative financial projections indicate that the company'sconsolidated debt/equity ratio should not rise above 57:43 during theconstruction period and should fall rapidly thereafter. Even assumingthat, contrary to normal practice, no oond issues are refunded duringthe first three yearst operation, long-term debt service coverage shouldnot fall below 1.3. The current ratio would improve from the presentlow 0,99:1 to 1.22:1 during the construction period. In order to guardagainst the risk of a working capital shortage, the company will obtainan undertaking from its main bank, the Industrial Bank, to provide short-term loans up to an amount of -17 billion. This will fund short-termloans during five years, the term of the undertaking, and, by eliminatingthem from current liabilities, raise the current ratio during the con-struction period to a minimum of 1.53:1. It is expected that this back-stop wculd be renewed every year for the ensuing period of five years, untilthe last repayment of the Bank loan.

The cost of the portion of the construction program for whicha Bank loan has been requested - the two blast furnaces, the converterplant and the slabbing mill at Tobata - is estimated at *42.3 billion($117,6 million equivalent). It is a suitable basis for a Bank loan of$20 million equivalent, which would cover the estimated cost of importedgoods and part of the local expenditures from IM4arch 31, 1959 onward, witha term of 15 years (including two years' grace), provided that satisfac-tory arrangements are made for financing from Japanese sources, for se-curity, for a limitation on additional borrowings and for the protectionof the company's liquidity as suggested in paras. 93 to 96.

I. INTRODUCTION

1. The Japanese Government indicated to Mr. Black, during his visitto Japan in May 1957, that the development of the steel industry and, inparticular, the expansion of ironmaking facilities (to reduce the industry'sdependence on imported scrap) had a high priority for Japan's economic development.

2. The steel industry, after rehabilitating its war-damaged facilities,carried out a substantial investment program between 1951 and 1955. Capa-city was expanded sufficiently to make possible an increase in crude steelproduction from about 7.7 million tons in 1953 (the previous peak level) to11.1 million tons in 1956. To keep pace with the rapidly rising domesticdemand, however, further expansion was needed, and in early 1956, theJapanese steel industry had embarked on a Second Expansion and ModernizationProgram. It was for this program that it sought Bank help. This second pro-gram was aimed at a) expanding crude steel capacity to 20.5 million tons by1962; b) installing facilities to enable the industry to meet the demandfor higher quality and a wider range of products; and c) modernizing themills in order to reduce operating costs.

3. One of the principal objects of the investment program was anexpansion of ironmaking facilities. A stimulus for this p,ase of the planwas the acute shortage of scrap which developed as a result of the Suezcrisis, in 1956, which forced up prices and made it difficult for theJapanese producers to obtain adequate supplies of imported scrap. Althoughscrap is no longer in such short supply, a number of factors combine toprovide continued justification for the substitution of pig iron for scrap:the fluctuations in scrap supplies and prices; the fact that iron ore canbe imported from the Pacific area and India whereas scrap comes from theUS; and, finally, the introduction of new oxygen techniques in steelmakingwhich make possible an increase in the proportion of pig iron in the charge.These new processes - based on oxygen converters, or an increased use ofoxygen in open hearth furnaces - are widely used in Japan.

4. Host of the projects included in the Second Expansion andModernization Program have either been completed or are under way. Develop-ments have amply justified the expansion of capacity. In the fiscal year1959, sales seem likely to reach 16.2 million tons, about 3.7 million tonsin excess of the previous record level, reached in 1957. The indicationsare that by the early 1960's, the industry will have to operate at a highrate to meet demand.

5. The Japanese steel industry has both advantages and disadvantagescompared with the European and US industries. It is heavily dependent uponimported raw materials, which carry large and fluctuating freight charges.It has been able to offset this disadvantage through low cost labor andefficient operation of facilities. Although matny facilities are stillobsolete, the substantial investments which have been made in facilitiesembodying the latest advances in technology, have made it possible forJapan to compete with the US and European steel industries in exportm&:kets, Some 10% to 15% of Japanese steel production is exported in the

" 2 -

form of primary products and a substantial proportion is exported inmanufactured products (mainly ships to date but increasingly machineryand other products). If Japan is to maintain its competitive position,it must continue to keep pace with the European and US industries inproductivity, quality, and efficiency; this will involve continued sub-stantial investments in modern facilities.

6. The Bank has already made loans to the Japanese steel industry,amounting to a total of $100.9 million equivalent. Five of the six lar-gest steel companies have had a portion of their expansion financed bythe Bank: Yawata, $5.3 million; Nippon Kokan, $24.6 million; Kawasaki,$28 million; Sumitomo, t;33 million; and Kobe, $10 million, The Bank hasnow been asked to consider two further projects, that of Fuji Iron & SteelCo., Ltd., for $24 million equivalent, and that of Yawata Iron & Steel Co.,Ltd., for $20 million equivalent.

7. The project which is appraised in the following report is theconstruction of facilities - the two blast furnaces, converter plantand slabbing mill - at the Tobata works of Yawata Iron & Steel Co., Ltd.(Yawata) in the north of Kyushu. The company's construction program,which includes other facilities at Tobata and its other works, is anintegrated whole. The following appraisal therefore covers the wholeconstruction program of the company from i4arch 31, 1956, which is de-signed to increase its annual output of pig iron from about 2,100,000tons to about 3,h00,000 tons and of ingot steel from about 2,800,000tons to about 5,250,000 tons, with corresponding expansion and moderniza-tion of finishing facilities. This appraisal is based upon data submittedby the company and a field investigation during July and August 1959.

- 3 -

II. THEQ COANY

8. The Yawata Iron & Steel Co., Ltd. is a successor of the firstintegrated steel company to be established in Japan, the Yawata Iron Worksset up in 1901 by the Imperial Japanese Government. This company dominatedthe Japanese steel industry in the first three decades of the century.

9. In 1934, a merger was arranged between Yawata and the independentblast furnace operators. The Imperial Government emerged as the holder of80% 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 rawsteel and 40% of the finished steel produced in Japan in 1934. Virtuallyall the other steel companies in the country depended upon it for their pigiron or semi-finished steel.

10. After the end of the war, as a part of the decartelization pol-icy, the Government sold its holdings in the Japan Iron & Steel Co., Ltd.through the security markets, and early in 1950, the company itself wasdissolved. The bulk of its iron and steel facilities were transferred totwo new companies, the Yawata Iron & Steel Co., Ltd., and the Fuji Iron& Steel Co., Ltd.

11. The two new companies, Yawata and Fuji, were formally organizedon April 1, 1950 and became the two largest steel producers in Japan. Thenew Yawata Company received the facilities at Yawata on Kyushu Island. whiicthe Fuji Company was given the works at Hirohata, Kamaishi and Kawasaki inhonshu and at M4uroran in Hokkaido (see map).

12. Yawata is today the largest integrated steel company in Japan,with about 32% of the whole country's output of pig iron, more than 24%of steel ingots and more than 25% of finished rolled carbon steel products.

13. The company's Droduction capacity and sales have greatly in-creased since it began operations. They were as follows in fiscal year1958 (April 1, 1958 - March 31, 1959). (in thousand tons):

ProductionCapacitv Sales

Pig iron 2,118 123Ingot steel 4,080 -

Hot rolled products:Blooms, billets, tube roundsand slabs 3,870 199

Rails, shapes, bars and wire rod 1,060 727Plates, hot rolled sheets and hotcoils 1,602 710

Cold rolled products:Cold rolled sheets 735 368Galvanized sheets 132 108Tinplate 296 144Bonderized stieets 22 22

- 4 -

14. In 1958, flat products accounted for 56.41a of the total tonnageof sales, bars and sections for 21.0%, wire rod for 9.2%, semi-finishedsteel products for 8.3%0 and pig iron for 5.1%.

15. The value of sales has substantially increased in recent years.A substantial proportion of the total was for export.

PercentageFiscal Years Sales Exported

(X million) (in value)

1954 71,687 19.8%1955 90,495 18.0%1956 127,635 10.4%1957 138,677 12.5%1958 117,228 18.6%

16. The decline in exnorts in 1956 and 1957 was the result of thebnom in those years when the st-rong demand on the home market was met atthe expenses of exports.

11. Yawata's production costs are relatively low and compare favorablywith those of other Japanese producers. Average production cost per tonof plates, a typical product for the company, was X39,204 ($108.90 equi-valent) in September 1958, excluding non-operating expenses. This compareswith a domestic sale price of 446,000 per ton ($128 equivalent) and a USsale price of $116.80 per ton (base price, f.o.b. mill).

Toperties

18. The major installations at the three existing steel works are1lsted in Annex 1.

19. The Yawata works, located on the sea shore in northern Kyushu areclose to low-grade coking coal mines, and not far distant from the country'smain steel market. However, the harbor is rather shallow and can only rece'veore carriers up to 18,000 tons. Although the company has made considerableefforts to modernize the existing equipment, several facilities at the Yawataworks are still obsolete. Furthermore, as it is an old plant, having startedoperations in 1901, its layout is complicated; this results in transportati.onproblems.

20. In 1940, the company began to build a new plant, the Tobata works, inthe immediate vicinity of its Yawata works. Until now, the new plant hasoperated with only continuous hot and cold strip mills. Galvanizing and tinnInglirnes were added in the post-war period. The Tobata works are now being co.nnleted

-5-

into an integrated steel plant. The harbor at Tobata will be deep enoughto receive modern ore carriers up to 45,000 tons. These works will rankfirst in Japan because of their size, excellent layout and modern facili-ties.

21. In 1955, the company installed a continuous wire rod mill ata newly purchased site, Hikari, on the inland sea. The plant has spaceto grow and a good harbor. For the time being, it receives all its bil-lets from the Yawata works.

Other Investments

22. As of March 31, 1959, Yawata had investments totalling G*,845million in shares and long-term loans, of which U3,616 million (40.8%)were in subsidiaries. A list of major subsidiaries is given in Annex 2.Most of Yawata's investments in shares and securities, including sub-sidiaries, are in steel industries (26%), in mining (19%), and bank andinvestment companies (15%). Such large investments are customary inJapan, where industrial companies usually hold substantial share interestœin the banks with which they deal, in their main suppliers and in theircustomers. The practice of holding such large portfolios often con-stitutes a heavy burden for industrial companies, although the investmentrisk is well diversified.

23. Yawata has invested Y719 million in two recently formed foreigncompanies, the Arabian Oil Company aad the Iippon Usiminas (Brazil), asani effort to develop export markets. In the latter case, Yawata actedas leader of a group of prominent Japanese industrial companies.

Share Capital

24. When Yawata was established in 1950 its share capital was Y800million. Successive issues of new shares have brought its share capital-ap to Y23,000 million; represented by 460 million shares at par valuek';;50) which are distributed among 126,000 shareholders. Although 41%of the total were held by financial institutions (as of 11arch 31, 1959)the two biggest shareholders, the Daiwa Bank and the Industrial Bank,each held only about 2.9% of the shares.

2ff. Yawata's stock prices have followed the same course as thoseof other steel companies. They reached a peak of Y88 at the end of 1956,during the Suez crisis, fell to a low of *65 in November 1957, during therece3sion, and recovered to a peak of )141 in June 1959. The latter figur:reflects an expectation of a possible share issue in the near future; ac-cording to Japanese custom, new share issues have been offered to share-holders at par (1'50) and recently it has been the practice to distribute20% of the whole issue as stock dividend (by capitalizing part of the re-

- 6 -

valuation reserve) making the effective price to shareholders Y40 perehare.

Management

26. Yawata's management is competent and aggressive in its invest-ment policy. It has maintained the company's supremacy in the nationalsteel industry, but this has resulted in some strain in Yawata's financesin recent years. Mr. Ojima, Yawatats President, serves at the same timeas President of the Japan Iron and Steel Federation. As such, he has aprominent voice in the policies of the Japanese steel industry.

Labor

27. Yawata employed about 38,000 workers in 1958 to produce about3,064,000 tons of ingot steel, while operating at 75% of capacity. Pro-ductivity compares favorably with that of other Japanese companies. La-bor costs are low although higher than in other industries or steel com-panies. They averaged Y286 per hour ($0.794 equivalent), including allfringe benefits. The labor cost per ton of saleable product was *8,287($23.10 equivalent).

28. Labor is organized in a union. There have been six strikesin the post-war period, but they have been settled in relatively shorttime. The longest one, in October 1957, lasted for 19 days, and endedwithout any concession by the management.

Earnings .Record and Financial PosItion

29. Total sales, adjusted net profits (after taxes) and dividendpayments of Yawata in recent fiscal years have been as follows (adjustedincome statements are shown in Annex 3):

1954 1955 1956 1957 1958

_ million …

Total sales 71,687 90,495 127,636 138,677 117,228Net income 676 2,681 7,850 6,O94 4,3%sDividends 480 960 1,259 1,800 2:44CAnnual rate on share par

va'Lue (-50) 10% 12%o 12% 12% 12%Percentage of net profits

retained 29% 64% 84% 70% 44oTotal times interest covered

before taxes 1.4 2.2 4.9 4.0 2.2

- 7 -

30° The company has followed a policy of distributing an evenanc reasonable dividend. A large proportion of profits (after normaldepreciation)has been retained in recent years.

31. The companyts balance sheets for each of the last five years,shown in detail and commented on in Annex 3, are slrmmarized below:

March 31 1955 1956 1957 1958 1959

-- - - nillion-- - -

Current Assets 48,851 51245 51,356 68,h26 65,701Net Fixed Assets 49,639 50,734 55,008 73,587 1Oh,526Investments and others 1,794 2,970 5,167 6,8h3 9,040

Total Assets l00,28ht l04,949 111,531 1h8 856 L79>267

Current Liabilities 142 ,021 40,076 389h7 66,818 66,225Fixed Liabilities 155860 17,214 15,683 23,124 46,052

Capital Stock 4,800 9,600 15,000 15,000 23,000Surplus and Reserves 37,603 38,059 41h,901 43,914. 03,990

Total Liabilitiesand Equity 100,284 lo4,949 111,531 148 856 179.267

32. Yawata uses the last-in first-out method of valuation for itsinventories.

33. The company uses the declining balance method for depreciation,It takes the full normal depreciation authorized by tax law, and the fullspecial accelerated depreciation allowed for half of its investment innew machinery. Special depreciation accruals between April 1, 1955 andMarch 31, 1959 amounted to 95,463 million. Except fcr 1954L, in every pastyear, total ordinary plus special depreciation have been substantiallyhigher than the 10 rate which the company considers to be an adequatedepreciation rate. The company's accounts are audited by an independentaaditor under Japanese regulations.

34. Its net fixed assets correspond to an investment of about $71per ton of annual ingot capacity wnich is at about the level of theUnited States steel industry (where net fixed assets amount to about $66per ton of ingot capacity).

35. The company deals with most of the leading banks in Japanand enjoys their full confidence. It has at present a large short-termdebt which is unsecured.

36. Financial ratios in past years have been as follows:

- 8 -

March 31, March 31, i4arch 31, March 31, Miarch 31,1955 1956 1957 1958 1959

Current Assets/CurrentLiabilities 1.16:1 1.28:1 1.32:1 1.02:1 0.99:1

Current Assets/CurrentLiabilities exclud-ing short-term debt l.8h:1 1.56:l 1.56:1 1.50:1 1.78:1

Long-term Debt/Equity 27:73 36:64 22:78 29:71 40:60Total Debt including

Guarantees/Equity 48:52 ho:60 33:67 49:51 57:h3

37. These ratios show a marked improvement through Viarch 31, 1957and a quick deterioration since then, in spite of a share issue in 1958,which brought Y6.5 billion ($18 million equivalent) cash to the company.The decline has been caused by financing heavy investments in fixed as-sets (about $j179 million in the last two years), and in working capital(about 1$20 million excluding short-term loans), mainly from borrowings.

First Mlodernization and Expansion Program

38. In 1951, Yawata embarked on its first five-year modernizationprogram. Expenditures for improvement of fixed assets up to MIarch 1956amounted to ;L8,665 million ($135 million equivalent).

39. The main improvemnents included the construction of a continuouswire rod mill at Hikari, a second cold strip mill and continuous galvaniz-ing and electrolytic tinning lines at Tobata and a sintering plant, two50 ton oxygen top blowing converters and, a new 160"? plate mill at Yawat2.

Bank Loan 133-JA

4o. The total cost of the 1601? plate mill was ;7,852 million ($21.8million equivalent): the Bank financed the project in October 1955, andp;oceeds of Loan 133-JA ($5.3 million equivalent) covered the foreign ex-change requirements for the imported equipment. Construction was success-fully carried out but the final investment was 40% higher than forecastpartly because of additional equipment to increase capacity, and partlybecause of increasesin prices. The mill started operations ln July 1957as originally planned. Its annual capacity was 360,000 tons, but thiswas increased to 480,000 tons by adding finishing facilities.

41. A small part of the Bank loan ($171,142) was cancelled by theborrower, as savings were made on foreign exchange equipment.

Second Modernization Program 1956-1961

42. In April 1956, Yawata started its second expansion and moderniza-tion program. Expenditures in fixed assets up to i'iarch 31, 1959 amountedto '76.5 billion ($21235 million equivalent). During the first three yearsof its second expansion program, Yawata put the emphasis on the construc-tion of rolling mills and finishing equipment, particularly for flat pro-ducts. At Tobata, the companyr installed a new semi-continuous 80"1 widehot strip mill, a reversing cold strip mill, a third galvanizing line andtinning line, and renmodelled the existing hot and cold strip mills. Thecompany also started the construction of the blast furnaces, the harborand general services of the p'ant. At Yawata, the company installed aSendzimir mill (for silicon steel sheets) and a 48" slabbing mill and ex-panded the wide plate mill, The company also remodelled two blast fur-naces and a coke oven battery.

43. From April 1, 1956 to Pfarch 31, 1959 Yawata's total requirementsfor new funds were as follows:

A millionY million equivalent

Investments in plant improvement 76,512 212.5Increase in working capital (net) 1Q,272 28.5Investments in shares, loans, etc. 5,952 16.5Repayment of long-term debt 16,825

Total 1_? 561 3C4.3

These requirements were met from the following sources:

$ millionmillion equivalent %

Retained earnings and depreciation 32,826 91.2 30.0Capital increases 11,368 31.6 10.4Long-term loans and bonds 43,923 122.0 ]g0.Net increase in short-term loans 21,Uh l9jU5 19,6

Total 109,561 304.3 10O0X

b4. About 40% of the company's total requirements were financed outof equity and depreciation, and 60% out of debt. This explains the dete-rioratioil of Yawata's financial position.

45. In August 1958, the comDany received a $26 million loan from theLxport-Import Bank of the United States, to finance the imported goods for2 substantial part of the Second Expansion and Miodernization Program.. Theterm of the loan is 14 years, including two years' grace, and the interestrate 5.75/.

- 10 -

III. THE MkRKET

40 A general study of the Japanese steel market and the prospect forfinished products produced by Yawata is attached in Annex 4. The basicconclusions are that by fiscal 1962, the total demand for Japanese crudesteel will amount to 17.8 million tons (implying an increase of 8o peryear in demand for crude steel from the 1956-58 average of 11.8 milliontons per year); and that in the years following 1962, total demand forJapanese crude steel will increase at a rate of 5% per year.

47. The estimate of demand for Japanese steel in 1962 in turn restson the following assumptions: that domestic demand for finished steelproducts will increase at a rate consistent with a rise of about 5% peryear in gross national product over the period 1956-62; and that exportsof finished steel will amount to 1.4 million tons, or only slightly miorethan actual exports in fiscal 1958 (1.3 million tons).

48. In arriving at the estimates for the years 1959-61, it has beenassumed that demand would rise at a constant rate from the actual level in1958 to the estimated 1962 level. Since 1958 was a recession year, theannual demand figures assumed are lower than estimates based on the pos-sible alternative assumption that demand would rise at a constant ratefrom fiscal 1956 to fiscal 1962.

49. On the basis of data on actual production in the first half ofthe fiscal year 1959 and of estimated sales for the rest of the fiscalyear, it is estimated that production will actually reach 16.2 milliontons in this fiscal year. This is, of course, a very much higher figurethan the estimate based on the assumptions set forth above, and is only1.6 million tons below our estimate for the fiscal year 1962. However,it seemas likely that current demand has been affected by the U.S. steelstrike. Substantial quantities of steel are also probably going intoinventories. Moreover, in view of the fact that steel production is sub-ject to wide fluctuations, a medium-range forecast should not attach toomuch weight to the magnitude of demand in a boom year. On the whole, theconclusions set forth above in paras. 46 to 48, although probably some-what conservative, do not seem unreasonable.

50, The Japanese steel industry is at present carrying out an ex-pansion program scheduled for completion in 1962 that is aimed at (1) ex-panding steelmaking capacity to 20.5 million tons, (2) expanding blastfurnace capacity to 12 million tons to make possible the planned increasein steel production without increasing the nationts dependence uponimported scrap, and (3) further modernizing rolling mills, particularlythose producing flat products. Even on the conservative assumptionsadopted, there should be suffic-ent demand to enable the industry tooperate at rates comparing favorably with those reached in the generallyprosperous period 1953-57.

- 11 -

IV. THE C0OSTRTUCTION ?ROGRAM

51. The second modernization and expansion plan which started in April19%6 is designed to increase the annual production capacity as follows:

March 31, 1956 1962- -t000 tons - -

Pig iron 2,118 3,386Steel ingot 3,450 5,245

Bar and section mills 810 1,178Wire rod mill 108 300Plate mills 222 600Hot strip mills 960 2,160

Cold strip mills & sheetmill 735 891

Galvanizing lines 66 198Tinning lines 182 296Bonderizing lines 22 52

52. In order to achieve these aims, Yawata is carrying out the follov-ing improvements at the steel plants.

53. At Tobata, Yawata will build two 1,500 tons/day blast furnaces,two 1,150 tonsday coke plant and coal washing plants, one 3,500 tons/daysintering plant, thlree 60 tons oxygen top blowing converters and one 48"slabbing mill with four sets of soaking pits. It is for the abovie projectthat Yawata has requested a loan from the Bank.

54. In addition, the company has undertaken the following otherimprovements.

55. At Tobata, the construction of an additional semi-continuous hotstrip mill, S0" wide, the remodelling of the existing one a.nd of cold stripmill No. 1, the construction of an 80" reversing cold strip m3.ll, theexpansion of the gFlvanizing line No. 3, the construction of an additionalelectrolytic tinning line, and of a bonderizing line, the construction ofa complete new harbor, able to receive ore carriers up to 45,000 tons, andinstallation of all auxiliary fecilities.

56. At Yawata, the remodelling of two blast furnaces and of cokeplant No. 4, the construction of a 1,000 tons/day sintering plan- and ota 48" slabbing mill, the expansion of the 16.0" plate mill to an annualcapacity of 540,000 tons, the construction of a siliccn sheet mill(Sendzimir mill) and the remode'..ling of the rail mill and of the mediumand small section mill.

57. At Hikari, the construction of an extrusion press, and of enclectric furnace with continuous casting equipment.

- 12 -

58. Yawata has taken steps to assure itself of an adequate supply ofraw materials. General services will be expanded in each plant to meet newproduction requirements. The company should have no difficulty in hiringand training the additional labor force required for the new facilities.Details are given in Annex 5.

Construction Schedule and Eng1enerinZ

59. The construction schedule for the company's complete constructionprogram is given in Annex 6. According to the present schedule, the entireprogram ought to be completed by March 31, 1962, the bulk being finishedby March 1961. The project covered by the Bank loan is scheduled to becompleted in December 1960, but one blast furnace, tw^o oxygen convertersand the slabbing mill should start operations in September 1959. Most ofthe construction is therefore well under way; about 20%o of total expendi-tures for the project proposed as a basis for the Bank loan were madeprior to M4arch 31, 1959.

60. The engineering has been done efficiently by Yawata's own staff.The company is well organized to supervise the construction and erection ofthe new facilities.

61. Yawata has further expansion plans for Tobata to take placeafter April 1961, which will include a third blast furnace, a new oxygenconverter plant, a cold strip mill and coating facilities. Tobata's layoutis adequately nlanned for a final ingot steel capacity of about 2,200,000tons per annum.

Cost Estimates

62. A breakdown of the cost estimates for the entire 87,906 millionin7restment in fixed assets ($244.2 million equivalent) from April 1, 1959to March 31, 1962 is given in Annex 7. The main figures are as fol'lows:

- Construction Program -Apr. 1, T56-Mar. 31, '62 Expenditures

Apr. 1, '59 -

Total Cost Imports Mar.31, '62(X million) ($ million) (0 million)

Project proposed as a basisfor a Bank loan 42,351 7.3 34?040

Pro iects covered by- Export-import Bank loan 43,391 26.0 25,332

Rest of Program 24,387 - 8,039Renewals & Repairs 51,605 - 15,72?Contingency Reserve 3,641 1.9 3,641ln-estments charged to Operation _1132 - 1 132

Total 166,507 35.2 67.906.1- ~ _ L9-2

- 13 -

63. The relative emphasis on different types of facilities is shownin the following table:

Y Million .

To increase pig iron capacity 27,512 16.5To increase steelmaking capacity 8,943 5.4To increase rolling capacity 56,634 34.0General services of the plant & harbor 14,881 9.0Renewals and Repairs 51,605 31.0Contingency Reserve 5,800 3.5Investments charged to operation 1.132 0.6

166,507 100.0

64. Present cost estimates are reliable. They are based on 1958prices, but present prices are not significantly different from those.

O5. The total contingency reserve for the whole construction programamounts to 45,800 million, about 6.7% on proposed expenditures from April 1;1959 to March 31, 1962. It includes 983 million representing the maximumpossible escalation on orders placed, 10% contingency on domestic ordersalready placed and 12% on the uncommitted part of the program. The.ontingency reserve is satisfactory.

66. Interest during construction is not included in constructioncosts, but will be charged against operations.

67. Of the estimated total expenditures in fixed assets for theoecond Modernization Program, from April 1, 1956 to March 31, 1962 about7.6% ($35.2 equivalent) will be for imported equipment. This includesthe $7.3 million required for the project submitted as a basis of aproposed Bank loan ($5.7 million of which are to be spent between April 1,1959 and March 31, 1962).

68. Most contracts already let have been placed on a competitivebasis. Bids have been limited to domestic suppliers only where pastexperience has shown that it was clearly more advantageous for the com-pany to purchase the goods in Japan. Assurances were received thatYawata will follow these procedures in future.

Proposed IBRD Loan

69. The Bank has been asked to make a $20 mil'lion (*7,200 millionequivalent) loan, which would be sufficient to cover the imported goods($5.7 million equivalent) and about 16, of the local expenditures of theblast furnaces, converter plant and slabbing mill project at Tobata frcmApril 1, 1959.

70. The proposed loan represents about 17% of the cost of theproject (including expenses incurred before Mkrc} 31,1959) and about 8.3'oof the total cost of the company's expansion program from April 1, 1959to March 31, 1962.

- 14 -

71. Anmex 8 gives an estimate of the currencies likely to be re-quired and details of the proposed Bank loan disbursement schedule, Ti~iCLis summarized below:

Year ending March Q960 March 1961 March 1962 Total…- Million Fquiv. - - - - - -

Foreign exchange 3.2 2.5 - 5.7

Local expenditures dis-bursement 72A1 J5.8 1L.3

Total 120.30

V. ERWETFITS R7SULTING FR' FXANSION PROGRAM

72. The project proposed as a-basis for a Ba-ik loan is designed toincrease the proportion of hot metal in steelmaking, to expand stocl pro-duction and to produce high -qu;ility slabs at Tobata for the strip mills.ThiL will substantially reduce production costs; savings on slab productinncosts wuld represent a high return on the investment for the project atTobata.

'73. The return an sales, (see Annex 9) w.lue be 14.7% in 1962 wvichwould be much above the average return in 1955-1958 of 9.9%, and even abovethe expected return of 14.0% in the curreTit boom year.

74. The return-on the- average--depreciated investment in operation(Annex 9) wculd be 16.6% in 1962 against 16.8% in 1955-1958 and an expectedreturn of 16.5% in 1959. The return-exnected for 1962 is lover than mightbe expected in part-due to the conservatisr, of the assumption3 that have beeradopted with -respect to future -production and -prices.

75. In addition, the program lays the foiudation for a 1mo--Tenst expexi-sion of p rfdutixon capacity at Tobata at a further-stage. Both the companyT searnings and -the rate of return on its investmeirt Ahnuld -inmresse substantl.alwhen demand will justify the construction of additional facilities.

- 16 -

VI. ASSLTMPTIONS FOR. FUTURE DEMIAND AND PFTJES

76. The financial forecasts are based on the assumption that thetotal demand for crude steel in Japan wiould rise to 17.8 million ingottons in 1962, and that Yawata would in general maintain its present shareof the market for each type of product (see Annex 10). Changes in its shareof the market for some products have been assumed to take account of itslarge investment in modern facilities (shapes and rails).

77. The estimates of Yawata's 1959 sales are based on actual resultsduring the first half year and prudent estimates for the second half, ratherthan on the assumptions used in the general market study summarized inChapter III.

78. In estimating prices (see Annex 11), it has been assumed thatboth raw material costs and finished product prices will recover from theievels to which they fell in the recession year 1958, but will not regainthe average level of the preceding years.

79. In the case of raw materials, it has been assumed that priceswould be lower than before 1958 because of an expected shift from higher-priced to lower-priced sources of imported iron ore and coking coal andof a reduction in the cost of importing iron ore in Japanese boats ratherthan in chartered vessels. With respect to finished products, it bas,eemed prudent to assume that comipetition would oblige producers to passon at least part of the savings in raw material costs to their customers.The resulting assumption is that the margin between finished product pricesarnd raw material costs would return gradually, to the average level of thepast four years.

- i6 -

VII. FINANCIAL PLAN AND FINANCIAL PROSPECTS

8o. Financial projections are attached showing the expected earningsof t,he company (Annex 12), its cash flow (Annex 13) and its financial positior(Annex 14) during the construction period and the first operating years. Theassumptions on which the calculations are based are listed in Annex 15.

81. The projections indicate that the financing plan is sound endthat the company's earnings should be adequate to enable it to pay dividendsat a reasonable rate after meeting all financial obligations. Both the pros-pective flnancial structure and the liquidity of the company are satisfactcry.Further details are given in the following paragraphs.

A. Construction Period

Financing Plan

82. The company's financial requirements for the construction period(the three years from April 1, 1959 to 14arch 31, 1962) are as follows:

$ millionY million equivalent

Investment in fixed assets 87,906 244.2Other investments 6,350 17.7Increase in working capital 10,913 30.1Repayment of long-term loans 26,109 72.7Decrease in short-term loans 16.169 44.9

_47t447 409.6

The bulk of the investment in fixed assets will occur in 1959 and 1960, whilerepayment of long-term debt is heavier in 1961.

83. The company plans to meet these requirements as follows:

$ raillionmillion equivalent %

Retained earnings & deprec. 56,232 156.2 38.1Share issue 23,040 64.0 15.6Lonig-term loans

IBRD 7,200 20.0 4.0Bonds 19,000 52.8 12.9Long-term Bank loans __1,975 116.6 23,5

147 447 409.6 1CO.C

84. The estimate of the company's retained earnings and depreca`iio.iduring the three-year construction period is based on the market assumutionsdiscusced above (paras. 46-50 and 76-79).

- 17 -

85. 'iTe company has recently announced a Y15 billion share issiue forFebruary 1960, increasing its share capital to Y38.0 billion. Out of thetotal increase, Y2.8 billion will be a bonus issue from the revaluation reserveYll.O billion will be offered to present shareholders at par value and 11.2billion will be sold to the general public. The company plans a furtherKl2.0 billion issue in late 1960. The shares sold to the public can be soldat a price substantially above par, wh.ich will increase the total cash pro-ceeds of the share issue.

s6. The company is expected to obtain satisfactory assurances aS tothe underwriting of all the bonds to be issued during the construction period,and as to the total amount of long-term loans which have not yet been arrangPd

87. Yawata also expects to receive an undertaking from the IndustrialBank, as leader of a group of banks, to provide such funds as may be requiredfor working capital needs, on short term up to an amount of -17 hillion. Thnsundertaking would run for a period of five years during which short-term debtcan for practical purDoses accordingly be treated as long-term debt. Theundertaking is expected to be renewed every year for the ensuing five years,until the last repayment of the Bank loan.

AnalLsis of Projections

88. On the basis of the assumptions discussed above, the projectionsshow that during the three-year construction period:

a) Earnings after depreciation, interest, taxes, pre-profitreserve allocation and dividends of 12% would amount toX10,352 million. Total retained earnings, including aY4,690 million allocation to free reserves, and deprecia-tion amounting to Y41,190 million, would amount to Y56,232(see Annex 13).

b) The company would complete its construction program and meetall its financial obligations with a net cash accrual ofY2,926 million.

c) Interest on all debt would be covered by from 2.2 to 2.9 times.

d) The current ratio would improve from the present low 0.99:1 toabout 1.23:1. However, if short-term loans are excluded fromcurrent liabilities because of the expected backstop on short-term loans, the current ratio would be 1.53:1 on that date.If necessary, Yawata could easily finance an increase incurrent assets by relying more heavily on its suppliers.It could also postpone the repayment of its bank borrovingswithout any difficulty.

- 18 -

e) The ratio of long-term debt to equity would rise from 40:6Con March 31, 1959 to 43:57 on March 31, 1962. The ratio ofthe consolidated total debt of the company and its subsidiaries(including guarantees on debt) to its consolidated equity wouldremain at 57:43 until March 31, 1961, and decrease to 55:45 byMarch 31, 1962 (see Annex 16). For the construction period,these ratios would be acceptable.

B. Operating Period

89. The company has further expansion plans, the details of whichare being finalized at present. However, it has seemed preferable not totake account of them in these financial forecasts, as the constructiontiming has not yet been fully decided and as the cost estimates, thesources of funds and the benefits to be derived from the facilities havenot yet been studied in detail. The financial forecasts during the lastyear of the "Construction Period" and during the "OperatIng Period" aretherefore somewhat unrealistic, since they assume that the company willlimit its investments in fixed assets to the construction program underway and to normal repairs and renewals. These financial forecasts sho-wsrhat Yawata's financial results would be if the company limited its ex-pansion to the present.construction program.

90. During the three years after the completion of the construction(April 1, 1962 - March 31, 1965), cash generated from the company's oper-ations (after payment of taxes, interest and a cash dividend at a rate of10% per annum) would amount to about 260.6 billion. Yawata is planningto reduce the dividend rate from 12% to 10% in order to prevent the con-tinuing issues of bonus shares from increasing the cash burden of dividends.Short-term loans would increase by 2 billion.

91. These monies would enable the company:

- to invest about Yl3.2 billion in rnormal renewals and repairs,- to invest g6.0 billion in shares and subsidiaries,- to increase net working capital (excluding short-term loans)

by about 11.3 billion and,- to reduce fixed liabilities by about *32.1 billion.

92. By the end of the period, assuming no further investments infixed assets other than normal repairs and renewals, the ratio of consoli-dated total debt to equity would have been reduced to 43:57. Theresiore,Drovided that the company does not commit itself to overambitious furtherexpansions, it should be able to maintain its ratio of consolidated debtto equity at a prudent level. Yawatats liquidity would improve and thecurrent ratio would reach a maximum of 1.39:1 on MIarch 31, 1965 (or 1.77:1excluding short-term loans from current liabilities).

- 19 -

Conclusions

93. The Japan Development Bank, which would relend the proposedbank loan to the company, would have the primary interest in securityarrangements. The company's long-term loans and bonds are secured bymortgages, and the Japan Development Bank should be satisfied that thearrangements proposed are in accordance with its usual requirements.

9h. Before the subsidiary loan agreement is made effective, theproposed financial undertakings to provide short-term loans, to under-write future issues of bonds and to supply long-term loans, should havebeen evidenced in form satisfactory to the Japan Development Bank andto the Bank.

95. It is recommended that the companyts freedom to incur debtshould be limited, so as to provide that the ratio between consolidatedtotal debt and equity should not rise above 60:h0 before March 31, 1964and 50:50 on or after March 31, 1964.

96. In order to protect the company's liquidity, it is recommendedthat Yawatats freedom to distribute cash dividends should be limited, soas to provide that such distribution does not result in lowering the ratioof current assets to current liabilities (after excluding short-term debt)below 1.50:1 during the life of the Bank loan.

97. Provided that contractual arrangements include protective pro-risions along the lines indicated in paragraphs 93 to 96, the project(the two blast furnaces, the converter plant and the slabbing mill atTcbata) is suitable for a Bank loan of $20 million equivalent, with aterm of 15 years, including two years of grace. The borrower would bethe Japan Development Bank which would relend the proceeds of the loansto the company. The loan would be guaranteed by the Japanese Government.

Idfl\1X 1

m2!ATA, IRON e. STPFL CO.LTD,

Existing Facilities (in oper tion)

Annual Capacity('000 tons)

Yawata 8 blast furnaces Nos. 1, 2, 3, 4 - Kukioka)3, 4, 5, 6 - Higashida) 2,118

3 sintering plants (2 Dvight Lloyd, 1 AIB) 9495 coke oven plants Nos. 1, 2, 5 - Kukioka)

1, 2 - Higashida) 1,49333 open hearth furnaces from 20-150 tons 3,5042 oxygen converters - 50 tons 4804 electric furnaces - 20 tons 964 blooming mills 1,6562 slabbing mills 2,2141 rail mill 3244 large and m-edium section mills 4862 plate mills 5761 Sendzimir mill 481 Cold sheet mill 15

Tobata 1 sintering plant (Greenawalt) 3651 continuous hot strip mill - 43" 9602 cold strip mills 720

2 Electrolytic tinning lines -

1 hot dip tinning line 2962 galvanizing lines 1321 bonderizing line 22

Hikari 1 wire rod mill 250

YAWATA IRON & STEEL CO. LTD,

List-of Main Subsidiaries(As at March 31, 1959)

Percent-age of Value of Loansshares stock in 1958/59 Curr. Total Invest- Loans guaran-

Capital held by Yawata's Anmual Assets/ Dabt/ ment from teed by Nature ofStock Yawata Books Sales Curr.Liab. i4!ity Program Yawata Yawata Business(Y mill.) % -(F Xill. -------(E mill.)----

Nakanoshima Steel Light gauge steelCo. Ltd. 200 90.0 160 1,693 3.2:1 90:10 245 417 999 industry,

Nakatsu Steel SheetCo. Ltd. 150 73.3 110 1,117 1.3:1 6:94 - - - Rolled steel products

Yawata Welding ElectrodeCo. Ltd. 200 42.5 93 909 0.87:1 63:37 - 152 55 Wfelding electrodes

Daiwa Can Co. Ltd. 75 51.7 39 2,967 1.1:1 76:34 300 945 394 Metal cans

Kyushu Can Co. Ltd. 300 67.0 206 3,148 1.14:1 82:18 176 - 918 Metal cansYawata Metal Form Co.Ltd. 50 100.0 50 287 1.37:1 0:100 - _ _ Metal Iorm2Nippon Fish Can Co. Ltd. 60 51.7 29 158 1.62:1 23:77 - _ _ FiaW cansYawata Chemical Industry Xx. by-product de-

Co. Ltd. 600 100.0 600 4,619 1.24:1 81:19 15,248 190 4,254 partment of YawataIron & Steel Co.

Tobata Chemical IndustryCo. Ltd. 1 100.0 1 47 1.05:1 23:77 - - - Chemical products

Kurosaki Yogyo Co. Ltd. 800 52.0 416 3,310 1.17:1 69:31 407 17 - RefractoriesTaihei Kogyo K.K. 200 52.9 106 2,207 1.29:1 13:87 - 21 - Construction enter-

priseNittetsu Yawata Koun K.K. 36 50.0 16 284 1.36:1 18:82 - - - Shipping companyYawata Building K.K. 20 50.0 10 37 0.13:1 52:48 - 19 -

2,856 1,760 6,620

_ : _ _:~~~~~~~~~~~

ANNEX 3YAWATA IRON & STEEL CO., LTD. Page 1

AdJusted Income Statements( Million)

Apr. 1954 Apr. 1955 Apr. 1956 Apr. 1957 Apr. 1958Mar. 1955 Mr. 956 Mar. 197 E. 198 Mar. 1959

Net Sales 71,687 90,495 127,636 138,677 117,228

Operating Expenses:Cost of Sales exclading Depreciation 58,420 74,025 103,213 114,207 93,805Normal Depreciation 4,286 4,419 4,505 5,092 6,210General Administrative and Selling Expenses 3,561 4.268 5.284 5.583 5,851

66,267 82,712 113,002 124,882 105,866

Operating Income 5,420 7,783 14,634 13,795 11,362Non-Operating Income 270 352 7 722 1,897

Gross Income 5,690 8,135 15,388 14,517 13,259

Non-Operating Expenses:Interest 3,366 3,295 2,583 3,056 5,421Other Expenses 923 959 2.57 2.367 1.363

4,289 4,254 5,158 5,423 6,784

Net Income before Taxes 1,401 3,881 10,230 9,094 6,475

Income Taxes 725 1.200 2,38 3.000 2.120

Net Income after Taxes 676 2,681 7,850 6,094 4,355

Surplus and Reserves at beginning of year n.a. 37.603 38.059 4A290l 43,A914

Available for appropriation n.a. 40,284 45,909 47,995 48,269

Surplus appropriation:Dividends 480 960 1,259 1,800 2,440Officers' bonus 10 11 17 20 20Additional depreciation (237) 282 1,246 2,188 444Miscellaneous adjustments (includingchanges in revaluation reserve andcapital surplus reserve) n.a. 972 1,486 73 1,375

Surplus and Reserves at end of year 37,603 38,059 41,901 43,914 43,990

Net Income before Taxes and Interest 4,767 7,176 12,813 12,150 11,896Timestotal Interest is Covered 1.4 2.2 4.9 4.0 2.2

Net Income after taxes, beforeDepreciation and Interest 8,328 10,395 14,938 14,242 15,986

Times debt service is covered 1.1 1.0 0.8 1.8 1.6

Earnings per share (on shares at end of year) I 7.0 13.9 26.2 20.3 9.5Dividends per share 1 5.0 6.0 6.o 6.0 6.o

Total Retained Earnings and Depreciation 4,472 6,129 11,079 9,366 8,105

ANNEX 3YAWATA IRON & STEEL CO.. LTT. Page 2

Ad usted Balance Sheets(Y Million)

March 31, March 31, March 31, March 31, March 31,ASSETS 1955 _ 1956 1957 1958 1959

Cash aind bank deposits 8,843 6,526 7,676 7,705 8,980

Notes and Accounts Receivable 9,509 10,877 9,893 7,539 7,147[ass: Reserve for Bad Debts 250 103 511 818 92Total Receivables 9,259 10,774 9,382 6,721 6,226

Inventories 30,317 31,075 31,619 50,339 47,135

Other Current Assets 432 2.870 2.679 3.661 3J6

Total Current Assets 48,851 51,245 51,356 68,426 65,701

Fixed Assets 58,295 63,930 73,195 98,917 136,294Less: Depreciation (incl. Special Repairs) 8.656 13.1 18.187 25.33 31,768Net Fixed Assets 49,639 50,734 55,008 73,587 104,526

Other Assets (incl. investments andlong-term loans) 1,794 2,970 5,167 6,843 9,040

rotal Assets 100,284 104.9L9 111.531 l48.856 129.267

LIABILITIES AND EQUITY

Current Liabilities other thanshort-term loans 26,881 32,511 33,229 45,060 37,056

Short-term loans 15.140 7.565 5,718 21,758 29.169Total Current Liabilities 42,021 40,076 38,947 66,818 66,225

IBRD Loan 133-JA - 534 993 1,773 1,680Export-Import Bank loan - - - - 6,895Other long-term loans 17,188 16,734 12,945 19,382 33,467Bonds 5,648 6,704 6,397 6,833 8,633Less: Maturing within 12 months 6.976 6.758 4.653 4,8 4.623Total Fixed Liabilities 15,860 17,214 15,683 23,124 46,052

Total Liabilities 57,881 57,290 54,630 89,942 112,277

Share Capital 4,800 9,600 15,000 15,000 23,000Surplus and Reserves 37,6o3 38.059 41.90 43.9 4.99Total Equity 42,403 47,659 56,901 58,914 66,990

Total Liabilities and Equity 100,28 104.99 111.531 1488.856 179.267

Notes Receivable discounted (12,471) (10,628) (3,134) (4,002) (3,495)Ouarantees on loans (1,759) (895) (2,014) (5,927) (11,157)

RatiosICurrent Assets/Current Liabilities 1.16:1 1.28sl 1.32:1 1.02:1 0.99:1Current Assets/Current Liabilities(excluding short-term loans) 1.84:1 1.56:1 1.56:1 1.50:1 1.78:1Long-term Debt/Equity 27:73 36:64 22s78 29:71 40:60Total Debt/Equity 47:53 40:60 31:69 46:54 54:46Total Debt (incl. Guarantees)/Equity 48:52 40:60 33:67 49051 58:42

YAWATA IRON & STEEL CO. LTD. age 3

NOTES

Adjustments to Income Statements

Yawata's formal income statements have been adjusted in accordancewith conservative practice used in the United States:

- "Cost of sales" include all operating expenses such as in-terest on payables and discount charges on receivables.

- "Normal depreciation" is an amount of depreciation whichwould be adequate to depreciate the facilities over theireconomic life. The difference between "ordinary depre-ciation" plus "special depreciation" as permitted by tax lawand "normal depreciation" as taken here, is shown under"additional depreciation" in the surplus appropriation.

- "Interest"shown in"non-operating expenses" includes onlyinterest on bank debt arid bonds.

-"Miscellaneous adjustments'" include all transfers to andfrom reserves which are considered part of equity, suchas Employees Retirement Reserve, Price Fluctuation Reserves,etc.

.aLdustments to Balance Sheets

Yawatats formal balance sheets have been adjusted in accordancewith conservative practice in steel companies in the United States:

- Long-term debt maturing within 12 months has been deductedfrom fix-ed liabilities and added to current liabilities.

- Dividends and officers' bonus as well as estimated taxes tobe paid on ending period's earnings, currently carried inequity in Japanese practice, have been transferred to cur-rent liabilities.

- Reserve for bad debts is deducted from Accounts and NotesReceivable.

- "lioney received in advance from customers" is deducted fromcurrent liabilities and from inventories.

- Receivables due in more than 12 months are included in "In-vestrents" and are not in current assets.

- Spare parts are accounted with the corresponding fixed as-sets, and depreciated accordingly.

- The company finds no need to set aside a reserve for SpecialRepairs, but charges them to operation.

ANTN,'1_Page 4

YAWATA IRON & STEEL CO.-.LTD.

Comments on Financial Records

Inventories

Last in-first out method of valuation of inventories is used forraw materials, finished products and goods in process. About half of theoperating supplies, amounting to 13% of total inventories are carried onthe first in-first out method. For the other half, mainly representing rollsand molds, the moving average metlod is used. At September 1958, the bookvalue of inventories was at about 97% of the market value of the same date.This proportion had been consistently lower before.

Total inventories amounted to Y44,205 million on March 31, 1959about 38% of sales during the preceding year. This proportion was higherthan for past years. At its lowest, on March 31, 1957 inventories repre-sented about 23% of annual sales. These proportions are much higher thanwhat is customary for the steel industry in the United States, where theyvary from 15% to 18%. About 31%o were raw materials, 13% goods in process,25% finished products and 33% operating supplies.

Receivables

Total receivables decreased sharply three years ago, and have re-mained low since then. Year-end receivables represented 30% of past year'ssales on March 1955, 24% on March 1956, and only 10% on March 1957 and 7%on March 1958. For reference, tihe figure in the United States is about 8%o.This decrease in Yawata's receivables which was pursued through the "tightmoney policy years" of 1957-1958, is a proof of the financial strength ofits wholesalers. Yawata has been able to discount a substantial portionof its total receivables.

WorkijgC_apital

Net working capital excluding short-term debt is low compared toother Japanese steel companies. On M1arch 31, 1959 it was 25.3% of the 1958-1959 sales, but it had represented 16.3% of tle year's sales on MIarch 31,i958, and 14.2% on March 31, 1957. It ran up to over 42%, for some otherJapanese steel companies, who do not enjoy Yawata's financially strongwholesalers. For reference the figure has been around 22%o of sales in theUnited States.

Short-Term Loans

Dur-ng the last two years Yawata has relied on short-term loansexclusively to finance its working capital increased requirements, totallingabout W11.4 billion. In addition, short-term loans have increased by a fur-ther M112 billion, wihich were needed for fixed investments.

Fixed Liabilities

Fixed liabilities also have increased threefold in the last twoyears, from T'r15.6 billion on March 31, 1957 to 945.7 billion on March 31,1959. This increase was required because of the very heavy constructlionprogram that Yawata is carrying on.

ANLEYXPage 1

MAPPKET PROSPECTS OF THE JAPATESE STEEL INDUSTRY

Development of the Japanese Steel Industr

The Japanese steel industry dates back to the beginning of thecentury, and expanded considerably during the first world war, but as lateas 1924, produced only one million tons of crude steel. By 1930, however,production had increased to 2.3 million tons, and the more rapid expan-sion of the 1930's and early 1940's, when armament and war demand provideda growing market, carried it to a peak of 7.65 million tons in 1943.

At the close of the second world war, the industry was virtuallyprostrate. W4ar damage and a lack of imported iron ore, coking coal, andscrap, on which the industry depends heavily, reduced production to alittle over half a million tons in 1946. Although damaged facilities wererepaired promptly, and foreign aid and -Korean war demand made possiblea steady and rapid expansion, it was not until 1953 that production re-covered to the previous high level. In the next four years, however, out-put shot upward, and by 1957 had reached 12.6 million tons. The firstbreak in the hitherto uninterrupted post-war rise came in 1958. The re-cession was relatively mild, with production falling by only half a mil-lion tons, and was followed by a sharp recovery in 1959. On the basisof figures for the first half of the year, it seems likely that productionwill exceed 15 million tons in 1959. Production in the fiscal year 1959(April 1, 1959-1March 31, 1960) is estimated at 16.2 million tons. (SeeTable 1.) In 1958, Japan ranked sixth in the world as a steel producer,following France, which had a production of 14.6 million tons.

The 65% increase in output between 1953 and 1957 and the 25%increase in 1959 alone were made possible by a massive expansion prograr(the first Modernization Program, initiated in 1951 and completed in 1955)accompanied by improvements in facilities that narrowed the technologicalgap between Japan and other leading steel producers and improved theccmpetitive position of the Japanese industry both in costs and qualitycf Product.

The Second Modernization Program

The rapid increase in demand for Japanese steel in the middle1950's encouraged the industry to continue expansion and modernization.A so-called Second I,iodernization Program was iniitiated in 1956. Schedulednor completion by fiscal 1962, the program is aimed at (1) expandingbteelmaking capacity to 20.5 million tons; (2) expanding pig iron capac-tyto 12 million tons, to make possible the planned increase in steel pro-duction without a corresponding increase in the industry's requirementsfor scrap, a large fraction of which must be imported, mainly from theUS; and (3) completing the industry's program to modernize rolling mills,particularly for flat products. By the close of fiscal 1962, hot s-tripmill capacity is expected to rise to 5 million tons, compared with 850,000tons on March 31, 1953 and 1.5 million tons at the end of 1955, and coldstrip mill capacity to 3 million tons, compared with 160,000 tons onMarch 31, 1953 and 1.2 million tons at the end of 1955.

,ANIIX 1

Page 2

Stcel Demand Prospects

WThether demand for Japanese steel will continue to grow rapidlyenough to permit operation of the industry's greatly expanded facilities ata relatively high rate depends, of course, upon growth prospects both athome and in Japan's principal export markets. The rapid increase in derandfor steel in the 1950's was one aspect of the rapid expansion of the Japaneseeconomy in this period; between 1951 and 1958 T ranese gross national productincreased at an average annual rate of 7.5%. 1,

All the indications are that growth prospects are still good. Al-though there is likely to be some slowing down in economic growth comparedwith the mid 1950's, over the next few years, the average annual increasein the gross national product is not 1lkely to fall below 5%. An increaseof this magnitude should be accompanied by a substantial increase in domes-tic demand for steel. Export prospects are more difficult to estimte.However, the successful promotion of exports by Japanese steel producers inthe two recession years 1954 and 1958, when declining domestic demand pro-vided both incentive and capacity for increased exports, indicates the in-dustry'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 averageannual increase of 5% over the period fiscal 1956--fiscal 1962, that domesticdemand Cor carbon steel rolled products (w4hich accounts for about 80% oftotal demand for crude steel) will show a related increase of 7% per year,that domestic demand for special steel rolled products and cast and forgedsteel will increase proportionately, and, finally, that exports of carbonsteel rolled products will rise to 1.4 million tons, as against 1.3 milliontons in fiscal 1958, it is estimated that total demand for crude steel willamounit to 17.8 million tons by fiscal 1962. The estimates of domestic andexport demand for carbon steel rolled products and of domestic demand forspecial steel rolled products and cast and forged steel and their crude steelequi-valents are given in Table 2 and the underlying assumptions are set forthin detail in the notes to that table In view of the probable results in1959, the estimiates seem reasonably conservative.

2. Demand for Individual Carbon Steel Rolled Products, 1962

The estimate of domestic demand for carbon steel rolled productsill fiscal year 1962, given in Table 2, was based on an estimate preparedby the Japanese Ministry of Industry and Trade (iITI), adjusted in thelight of Bank assumptions as to future Japanese economic growth which are

PBased on a least squares line fitted to velues for gross nationalprodct at constant prices (preliminary estimate for 1958).

Page 3

somewhat more conservative than the assumptions adopted by liITI. MITI'sestimate of total demand for carbon steel rolled products was supportedby an alternative estimate built up from estimates of demand for indi-vidual products by major end use, which corresponds very closely to itsfirst estimate.

MITI's estimates of demand for individual carbon steel rolledproducts in fiscal 1962 show a distribution of total demand very similarto the actual distribution in recent years. Such changes as appear inthe proportion of total demand accounted for by individual products seemreasonable: e.g. a decline in the proportion of total demand for carbonsteel rolled products accounted for by plates, expected to result from adecline in shipbuilding activity, and increases in the proportion of totaldemand accounted for by thin flat products (sheets, tinplate and siliconLelectricaf sheets) expected to result from respectively: greater thanaverage increases in the output of such heavy sheet-using products asautomobiles and other consumer durables, the output of canned foods fordomestic use and export, and the output of electrical machinery.

MITI's estimates of demand for individual carbon steel rolledproducts were therefore used to determine the distribution of total demandamong products, and the resulting percentages were applied to the Bank1sestimate 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 productsin fiscal 1959-61, it was assumed arbitrarily that demand for each productwould increase at a constant rate from the actual level in 1958 to theestimated level in 1962. The estimatetfor 1959 is, of course, well belowthe probable actual level for that year, and the estimates for 1960-62are probably on the conservative side. These estimates are compared inTable 3 with actual demand for the products in 1953-58.

Oierating Rates. 1959-62

A comparison of estimated demand with estimated capacity in1959-62 indicates that even on our conservative assumptions as to demandthe industry should be able to operate at rates comparing favorably withthe operating rates in the prosperous years 1953-57.

Prices

Prices of raw materials rose steadily and substantially from1954 to 1957 but declined shbarply in 1958. The 1958 declines were at-tributable in large measure to a decline of as much as 50% in ocean freig-Ltswhich account for a large fraction of the delivered cost of Japanese rawmaterials. However, there were also declines in the fob prices of domesticore, imported and domestic coking coal and imported and domestic scrap.It seems prudent to assume that ocean freights may return to their earlierlevel and that there will also be a recovery in the fob prices of raw

Page 4

materials. However, average raw material costs should be lower than in1954-58 as a result of the expected replacement of some of the higherpriced imported iron ore and coking coal by materials from lower costsources and a reduction in the cost of transporting ore to Japan by thesubstitution of Japanese industry-owned vessels for chartered vessels.

In estimating future prices of finished products, however, itseems prudent to assume that competition will oblige producers to passon to their customers at least part of their savings on raw materials,and that, on the average, the margin between costs and prices will notexceed the margin earned in 1954-58.

Estimates of Demand for Steel After 1962

As a basis for financial forecasts for the years beyond 1962, ithas been assumed roughly that crude steel production will increase at arate of 5% per year after 1962. This estimate seems reasonably conservativewhen compared with the actual increase of 13% per year from 1953-55 to1956-58 and the estimated increase of 8% per year from 1956-58 to 1962.

ANNEX 4Page 5

TABLE 1

Japan: Production, Imports, Exports, and Apparent Home Supply of Steelin 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 4,1141951 6,502 33 1,269 5,2661952 6,988 31 1,988 5,0311953 7,662 124 1,035 6,7511954 7,750 106 1,465 6,3911955 9,L408 82 2,305 7,1841956 11,106 283 1,570 9,8201957 12,570 1,584 1,219 12,9351958 12,118 200 2,116 10,202

1957 Jan-Mar. 3,103 363 282 3,184Apr-June 3,366 529 244 3,651July-Sep. 3,252 595 282 3,565Oct-Dec. 2,819 97 411 2,505

1958 Jan-Mar. 2,872 60 430 2,502Apr-June 2,987 40 508 2,519July-Sep. 3,040 63 491 2,612Oct.-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 Statistica

Exports and Imports: Prorated on the basis of data fromMonthly Statistics on exports of semi-finished steel,finished products and secondary products.

1958 - Annual and quarterly data from monthly data given in Monthly Statistics onproduction of crude steel and exports and imports of semi-finished steel,finished products and secondgcy products. Exports and imports converted intocrude steel equivalent on basis of relationship between Monthly Statisticsand Annual Statistics data for earlier years.

1939. 1943, 1946, 1950-57 (Annual Data)Exports and imports cover semi-finished and finished steel and secondary productsconverted into crude steel according to the U.N. method.

ANNEX 4

JAPAN - Demand for Steel. FY 1962 Page 6

(thousand tons)

Carbon Steel Rolled Products: Domestic Demand 11,500Exports l.L00

12,900Less Rerolled 46

Total (finished basis) 12,440

Carbon Steel Rolled Products (hot rolled basis) 12,750Special Steel Rolled Products 824Cast and Forged Steel 530

Crude Steel: For Carbon Steel Rolled Products 15,680For Special Steel Rolled Products 1,270For Castings and Forgings 870

Total 17,820

Notes

Domestic Demand for Carbon Steel Rolled Products

Domestic demand for carbon steel rolled products in fiscal year1962 was estimated by the Japanese MIinistry of Industry and Trade (MITI) ina study prepared for the Bank in December, 1958, and 12.3 million tons. Theunderlying assumptions were as follows: (1) an annual average increase ingross national product over the six-year period fiscal 1956-fiscal 1962 of5.85%; (2) an associated average annual increase in industrial productionover the same period of 8.2%; (3) an average annual increase in domesticdemand for carbon steel rolled products over the same period equal to theincrease in industrial production.

The assumed rates of growth in gross national product and indus-trial production were estimates by the Japanese Economic Planning Agency,embodied in its Long Range Plan (1956-62). The assumption that domesticdemand for carbon steel rolled products would increase at the same rate asirndustrial production was based on past relationships shown between thesetwo factors in Japan and other leading industrial countries.

Because the wide swings that characterize demand for steel makeit difficult to select an appropriate base year for projections, the estimateof domestic demand for carbon steel rolled products in fiscal 1962 wascalculated by correlating the index of mining and manufacturing productionand domestic demand for carbon steel rolled products for the fiscal years1951-58 and applying the resulting regression equation to the estimated1962 value for the index of mining and manufacturing production (calculatedby assuming an increase of 8.2% per year from the actual value in fiscal1956) to derive an estimate of domestic demand for carbon steel rolledproducts in fiscal 1962. In effect, however, this was equivalent to assumingan increase of 8.2% per year in domestic demand for carbon steel rolledproducts starting from the "normal" value for fiscal 1956.

ANPl'EX 4Page 7

MITI's assumption that domestic demand for carbon steel roiledproducts should increase at a rate eqaal to the rate of increase in irdus-trial production seems reasonable for a country at Japan's current stageof economric development. The implied relationship between the assumearate of growth in gross national product and the estimated rate of growthin domestic demand for carbon steel rolled products of 1:1.4 (5.85:8.2)seems reasonably consservative; between fiscal 1951 and fiscal 1958, theratio between these two rates of growth was 1:1.671/. However, the assumedrate of growth for gross nati-onal product (5.85% per year from fiscal 1956to fiscal 1962) is higher than the estiLmate used for purpose tif this report(roughly-5% pe'r year).

The estimate of domestic demand for carbon steel rolled productsin fiscal 1962 shown in Table 2 (11.5 million tons) was arrived at, there-fore, on the assutmption of an increase of 7% per year from the "normal"value for demand in fiscal 1936, that is of an average annual increase1.4 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 1902was estimated by .•TIT at 870,000 tons. This estimate was arrived at byapplying to hITI's estimate of domestic demanad for carbon steel rolledproducts for fiscal 1962 a regression equation arrived at by correlatingactual values for domestic deMand for carbon steel rolled products andfor special steel rolled products for the years 1951-58. In view of thehigh correlation shown between these two series, the method seemed accept-,able. However, the Bank redt.ced MITI's estimate proportionately to the re-duction made in its estimate of domestic demand for carbon steel rolledproducts, to 824,GOC tons.

Domeestic Deraa,nd for Cast and Forged Products

M-TIT's estimate of dbmestic demand for cast and forged products infiscal 1962 of 560,000 tons was similarly calculated by applying to itsestimate of domestic demand for carbon steel rolled products for fiscal 1962a regression equation derived by correlating actual values for the latterin fiscal 1951-58 with actual values of demand for cast and forged steel.ks a result of an adjustment similar to the adjustment made for domesticdemand for special steel rolled products, MITIts estimate was reduced to530,000 tons.

Exh_rts of Carbon Steel Rolled Products

On the basis of an analysis of past exports by product and mark3tand of prospects for the next few years, i-ITI estimated exports of carbonsteel rolled products in fiscal 1962 at 1.4 million tons. The estimates

1/ Based on Least squares trend lines fitted to each of these series.

AN1NE" 4Page 8

allow for a prospective decline in exports to India, one of Japan's leadingmarkets, on tbe completion of its current expansion progran, and on thewhole seem reasonably conservative, in view of the fact that they imply anoqerall increase of only 100,000 tons from the actual level of exports inin fiscal 1958^

Rerolled Steel

The estimate of production of rerolled steel is MlTI's estimate.Tt compares with an actual (estimated) consumption of rerolled steel infiscal 1958 of 450,000 tons (domestic - 360,000, imports - 90,000).

Crude Steel

Total demand for carbon steel rolled products (domestic plusexport minus rerolled) was converted to a hot-rolled basis, using conversionfactors supplied by MITI. Conversion factors supplied by MITI were usedin convJerting estimated demand for carbon steel rolled products (on a htst-rolled basis), for special steel rolled products and for cast and forgedsteel to their crude steel equivalents.

TABLEi 3

,pan_ Domestic Demand and Exports o.f Oabon Steel 'olled _Poctts, ct-ual, Fiscal Years, 1953-8, Estimated 1959-621/(-tll. -to--T

Rails Shapes Bars Wire Rods Hoop/ Plates St.eets Tin Plate Silicon Sheets Steel Tubes Others Total(Tires)

1953 Total 298 629 1 106 512 172 L2.6 5 83° 123 76 442 27 5 589Domestic 275 ~ 1,051 7 1X6 1,193 797 112 74 27 ,C27Export 23 14 55 5 6 172 L2 11 2 57 - 382

1954 Total 299 514 1 287 613 118 1,226 211.I 152 65 425 l&; 5 957Domestic w39 1 ,05 X9 1,121 13T 7 TITExport 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 253Domlestic 139 79 705 T7 1,705 1,166 T72 7 77 e E8Export 124 35 260 35 34 154 135 35 5 83 - 900

1956 Total 385 1 027 1 672 747 163 2 504 1328 321 117 637 75 8 956Domestic it ¶ 1 729 37 2,322 1,296 327 73 Export 111 62 99 18 16 182 30 34 2 69 _ 623

1957 Total 476 1 139 1 813 757 119 2_-,j53 1 479 276 135 561 85 9 622Domestic 327 1,063 31, m v 2,603 ,70 232 313 337 XX3Export 149 76 127 18 4 150 75 I54 9 34 - 686

1958 Total 487 1 009 1 801 9°0 113 2,109 1 827 280 96 562 80 9,264Domestic 237 7 8237 8 X 1,7h9 1t,73 238 78 788 M0 7,9-4-Export 230 60 275 92 23 340 154 44 18 82 - 1,318

1959 Total 494 1,078 1,936 953 132 2,333 1,960 323 117 643 85 10,098

1960 Total 500 1,153 2,081 988 154 2,580 2,103 373 15 3 737 91 10,903

1961 Total 507 1,232 2,237 1,034 179 2,853 2,257 431 174 8815 97 11,845

1962 Total 514 13, 1 7 2 416 1 084 209 3s155 2,525 497 214 966 103 12,900Domestic 33 1,23 928I8 Igr ;23 2,8 3 2,175 T37 m 18 8 ¶03 1 1 ,j00Export 158 75 300 95 25 292 250 60 30 115 - 1,400

Sources: 1953-57 - ITDl Report, Dec. 19581958 - Iuji Submission to Bank, April 1959 (i.Iz1 figures)1958-62 - Domaestic, Th2@ estimates; Lxports, ISTI estiontes, Dec. 1958.

9/ Estimates for 1959-62 computed as follows:1) Total domestic desand in 1962 estimated by assuming a 7$v per year rise fron the "normal" level of demanad in fiscal 1956, as estimated by 1T1 (see fable 3); this is

consistent Aith 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 sane proportions as shown in l111's estirmates.3) Total demand (domestic plus e.xport) for individual products in 1959-61 estimated on the a-s.u,etion 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.

ANYSE 5Page .

YAWATA LRON & STEEL CO., LTD.

Raw M4aterials, Utilities. Labor

In 1958, for a production of 2,278,000 tons of pig iron,Yawata imported 2,638,000 tons of iron oree Blast furnaces operatedwith h444% sintered ore. In 1962, for an expected production of39h81,000 tons of pig iron, consumption of imported ore will be4,596,OOO tons, about 86% of Yawata's totnl requirements. Blast fur-naces will operate with 55% sintered ore. Imports will come mainlyfrom India (15%), Mlalaya (32%), Goa (16%), Philippines (13%) and mis-cellaneous small suppliers (24%). The increase in Yawata's ore importrequirements is only part of the expected increase in the ore importrequirements of the entire Japanese industry. The industry is takingsteps to assure that these increased requirements will be met. Lastyear a Japanese mission concluded an agreement wTith the Indian Govern-ment which will secure two million tons per anrnam of Rourkela ore forJapan. The steel industry is trying to secure another four milliontons from the Bailadila mines.

Yawata's blast furnaces operate with a blend of 55% of do-mestic coking coal (mainly low grade) and 45$ imported coking coal (highgrade coal imported mainly from the United States). Its requirementsfor imported coking coal in 1962, when it expects to produce 3,J481,000tons of pig iron, will be 1,616,000 tons, The company should have nod:Lfficulty in importing that quantity of coking coal. Like other Japan-ese steel companies, Yawata is p'anning to meet part of the importedcoal requirements with Australian coal, cheaper than the ,^[est Virginiacoal.

The coixpany's purchased scrap requirements will rise from303,OOO tons in 1958 to about 709,000 tons in 1962, the total pig iron/scrap ratio for the company remaining around 67:33. Of these require-ments, L4% will come from domestic sources, and 56% from imported sources,mainly the United States.

Limestone annual requireaents will increase from the present823,000 tons to 1,197,oOO tons in 1962. The company should have no dif-ficulty in securing that amount frora domestic sources.

Adequate facilities are planned to meet the water needs foreach of the plants.

Yawata will increase its installed power plant from the 1958figure of 110,000 kw up to 165,000 kw in 1962-Zle uate to meet about45% of its total power requirements. Total purchased power will increasefrom the 1958 figure of 5,600 million Kwh up to 9,500 million Kwh in1962, and it will continue to be supplied by the Kyushu Power Company.

ANNEX 5Page 2

Transportation facilities will be strengthened at both Yawata andTobata. A complete new harbor capable of receiving ore carriers up to 45,000tons will be installed at Tobata. Tracks will be laid out and rolling stockadded at Tobata.

Additional labor requirements will amount to about 4,000 new workers.There is no difficulty in hiring this additional labor force and Yawata istaking steps to train them during the construction period. At the same timeYawata is hiring 50 to 60 engineers each year which should be adeqaate totake care of all new facilities.

ANifEX 6YAWIATA IRON & STEE.L CO., LTD.

Construction Schedule

Commencement CompletionWorks Date

Under IBRD Loanito be completed by Dec. 1960)

Tobata WorksBlast furnace No. 1 December 1956 September 1959Blast furnace No. 2 April 1959 December 1960Coke oven No. 1 April 1957 January 1960Coke oven No. 2 April 1959 December 1960Sintering plant February 1959 August 1960Oxygen converters Nos. 1 and 2 iAarch 1956 September 1959Oxygen converter No. 3 Febraary 19¢59 December 1960Slabbing mill February 1957 September 1959Expansion of soaking pits, hot

scarf'er May 1959 December 1960

Rest of Program

Tobata WorksExpansion of hot strip mill No. 1 April 1956 April 1958Hot strip mill No. 2 January 1957 Decemlber 1960Expansion of cold strip mill No. 1 April 1956 September 1958Cold strip mill No. 3 April 1957 July 1960Expansion of galvanizing line No. 3 April 1959 September 1960Electrolytic tinning line No. 2 January 1957 September 1959Bondering line No, 2 October 1959 September 1960New wharf March 1957 September 1960Services: power and transportation October 1956 i4Iarch 1962

Yawata W-orksRemodeling of blast furnace

"Kukioka"l No. h October 1959 June 1960Remodeling of blast furnace

"Higashida"f No. 6 April 1959 December 1959Remodeling of coke plant "Kukiokal' October 1956 Piay 1959Expansion of sintering plant "Kukioka' t April 1956 August ]957Construction of slabbing mill October 1956 September 1958Expansion of plate mill Decem;ber 1956 January 1961Expansion of' silicon steel strip mill December 1956 September 1962Remodeling of rail mill September 1957 November 1958Remodeling of medium and small sec-

tiorn mills April 1960 Aarch )962Services: Power plant and other April 1957 December J.960

Hikari Works September 1957 December 1960

ANNEX 7

YAWATA IPON 0& STaEL CO. LTD. Page 1

Cost Estimates

Amt.spent Expenditures Expendi-Total before Apr. 1, '59 - tures afterCost Mar.31 t9 Mar.31. '62 Mar.131.62

Project covered by Proposed ( mil.) ( 7 il.7( mia)( mi. (1 mil.I3RD Loan equiv.)

Tobata Works

Construction of 2 blast furnaces 15,075 3,120 11,955 33.2 -

Construction of 2 coke plants 6,148 1,197 4,951 13.8 _Construction of a sintering plant 3)369 - 3,369 9.4 -

Construction of three 60 tonsoxygen converters 8,943 1,953 6,990 19.4 -

Construction of a 48" slabbing mill 6,657 2,041 4,616 12.8 -

Contingency Reserve 2,15- 2,159 6.0 -

42,351 8,311 34,040 94.6 -

Rest of the ProZram

Tobata Works

Expansion of hot strip mill No. 1 2,007 1,903 104 0.3 -* Construction of a 80" hot strip mill

(No. 2) 11,928 9,500 2,428 6.8 -

* Expansion of cold strip mill No.1 4,582 3,704 878 2.4 -

* Construction of cold strip millNo. 3 3,395 1,690 1,705 4.7 -

* Construction of galvanizing lineNo. 3 813 - 813 2.2 -

* Construction of an electrolytictinning line (No. 2) 4,313 2,601 1,712 4.8 -

* Construction of a bonderizing line(No. 2) 526 - 511 1.3 15

Construction of port 4,086 1,543 2,543 7.1 -* Civil engineering, services, power

and transportation 10.129 2,615 7 20.8 -

41,779 23,556 18,208 50.4 15

Total (Tobata Works) 84,130 -l1,867 52,248 145.0 15

*7 Ljuipmrent financed by the U.S. Export-Impo.t Bank loan.

ANNEX 7Page 2

Amt.spent Expenditures Expendi-Total before Apr. 1, '59 - tures afterCost Mar.31,'59 Mar.31, t62 Mar.31. '62

Yalwata Works ( mil.) (X mil.)(ymil.)($ mii. (V mil.)equiv.)

Remodelling of Kukioka blastfurnace No. 4 467 _ 467 1.3 -

Remodelling of Higashida blastfurnace No. 6 500 - 500 1.4 -

Remodelling of Kukioka coke ovenplant No. 4 1,410 958 452 1.3 -

Construction of Kuakioka sinteringplant 543 543 - -

Construction ofj a 48" slabbing mill 4,022 3,773 249 0.7 -

Expansion of the 1601t plate mill 2,305 617 1,688 4.7 -* Construction of 2 silicon steel

Sendzimir mills & auxiliary faci-lities 7,705 3,866 3,739 10.6 100

Remodelling of the rail mill 462 279 183 0.5 -Re.modelling of the small and mediumsection mill 1,300 - 1,300 3.6 _

Auxiliary equipment for power plant 666 113 _553 _1.5 -

Total (Yawata Works) 19,380 10,149 9,131 25.6 100

flikari Works

* Construction of electric furnaces,continuous casting equipment,not extrusion press 6.619 586 _6,033 _16.8 _

Total Second ModernizationProgram 110,129 42,602 67,412 187.4 115

Renewals and Repairs 51,605 23,884 15,721 43.6 12,000

Contingency Reserve 3,641 - 3.6L4 10.1 -

Total 165,375 66,X86 86,774 241,1 12 ,l5Investments in fixed assets chargedto operation 1,132 - 1,132 3.2 1,0j9

Total investments in fixed assets 166,507 66,486 87,906 2h4.2 13,164

*Equipment financed by the U.S. Export-Import Bank loan.

A'NNEX 8

YAIATA EPON & STEEL C0O LTD.

Estimated Disbursement Schedule

Million $

Fiscal year 1959 1960 1961 Total Equivalentmillon yen-------

Total expenditures on Project(from March 31, 1959):

Foreign oxchange 1.,157 908 - 2,065 5.7Local expenditures 16,031 12,908 3,036 31,975 88.8

17,188 13,816 3,036 34,0s0 94.5

Estirnated disbursement schedulefor the Bank Loan:

Foreign exchange part 12157 908 - 2,065 5.7Local expenditure part 2,574 2,073 488 5,135 14,l3

3,731 2,981 488 7,200 20.0

(million $ equivalent)Foreign exchange 3.2 2.5 - 5.7Local expenditure part 7,1 5.8 1.4 21j.3

10.3 8.3 1.4 20.0

NOTE: t is assumed that loccl expenditures would be reimbursed at a rate16-00 ef actual local e:.eriditurcs rade by Yawata after I/larch 31, 1959.

Currencies likely to be required forthe foreign eXclinnge part of the loan

1959 1960 1961 Total…000 equivalent…

U. S. dollars 1.4 1.3 - 2e7D. Marks 1.8 1.2 - 3,0Siriss francs 0.,03 - - 0.03

3.23 2.5 - 5,73

YA'WATA IRON & STEEL CO.. LTD.

Return on Sales. on Investment and on Equity

_ - - - - - - - - - - -A c t u a 1 - - - - - - - - - - - - - - - - - - - - - - - - - - f o r e c a s t - - - - - - - - - - - - -1295 195 1956 1759 1960 1961 1962 1963 1964

Return on Sales(z million)

Sales 71,687 90,495 127,636 138,677 117,228 153,351 157,638 174,743 189,791 199,694 209,594

Net Operating Income 5,420 7,783 14,634 13,795 11,362 21,474 20,510 26,132 27,944 29,007 30,326

Return on Sales 7.6% 8.6% 11.5% 9.9% 9.7% 14.0% 13.0% 15.0% 14.7% 14.5% 14.5%

Return on average depreciated investment in operation(Y million)

Net operating income 5,420 7,783 14,634 13,795 11,362 21,474 20,510 26,132 27,944 29,007 30,326

Net fixed assets in operation 42,375 44,567 44,284 53,373 86,401 118,329 145,436 141,617 133,487 124,538 117,739Net working capital excludingshort-term loans fromcurrent liabilities 21.970 188734 .12866 28.645 27.701 28.786 27,910 33,972 37.656 41,912

Depreciated investment inoperation 64,345 63,301 62,411 76,739 115,046 146,030 174,222 169,527 167,459 162,194 159,651

Average depreciated invest-ment in operation 64,345 63,823 62,856 69,575 95,893 130,538 160,126 171,875 168,493 164,827 160,923

Return on average deprecia-ted investment in opera-tion 8.4% 12.2% 23.3% 19.8% 11.8% 16.5% 12.8% 15.2% 16.6% 17.6% 18.8%

tion ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~eur nFu&

mYillion)Net profit before taxes 1,401 3,408 8,428 8,822 6,227 13,268 11,073 15,635 17,825 19,597 21,715

Total equity 42,403 47,659 56,901 58,914 66,990 85,369 97.053 100,574 105,464 111,601 119,780

Average equity 42,403 45,031 52,280 57,907 62.952 76,179 91,211 98,814 103,019 108,532 115,690

Return on equity beforetaxes 3.3% 7.6% 16.1% 15,2% 9.94 17.4% 12.1% 15.8% 17.3% 18.1% 18.8%

I!

YAWATA IRDN & STEFL CO., LTD.

Sales (domestic and export) and share of Japanese market

Actual ForecastsFiscal Year: 1954 1955 1956 1957 1958 _ 1959 1960 1961 1962

% Tons % Tons % Tons % Tons % Tons % Tons % Tons % Tons % Tons

Bars 9.2 118 6.2 84 5.9 98 4.7 86 3.9 71 - 83 4.6 93 5.3 115 6.7 156

Shapes L/ 25.4 131 24.8 180 23.6 242 21.5 237 25.0 251 - 242 23.0 245 24.0 273 25.0 304

Rails 73.4 219 61.2 195 57.7 230 50.6 241 40.0 195 - 263 64.0 290 65.0 299 66.o 307

Wire Rod 2/ 14.4 88 13.2 98 114.9 112 17.0 129 23.2 209 - 287 25.7 246 25.7 257 26.0 273

Plate 10.3 191 14.0 261 12.5 313 14.5 392 15.5 348 - 455 20.0 362 20.0 511 20.0 564

Sheet 24.7 300 21.8 404 19.2 479 19.9 549 30.2 665 - 974 24.3 994 24.3 1,109 24.3 1,174

Tin Plate 54.6 83 53.1 110 46.6 1149 45.0 134 49.4 138 - 166 50.o 187 50.0 216 50.0 249

Silicon Steel Sheet 52.4 34 55.5 35 47.9 56 44.4 60 64.6 62 - 97 60.0 85 60.0 103 60.0 127

Off-gzade and Rejects - 109 - 131 - 150 - 120 - 128 - 158 - 160 - 177 - 191

Sami-finished products - 268 - 356 - 305 - 247 _ 211 - 214 - 202 - 261 - 276

Sub-Total 25.8 1,541 25.6 1,854 23.8 2,134 22.8 2,197 24.6 2,279 - 2,939 27.2 2,963 28.0 3,321 28.0 3,621

Pig Iron 124 157 195 197 123 88 163 182 194

Total 1,665 2,011 2.329 2 394 2,402 3,027 3 503 3,815

7WTreRod" irscludes secondary products processed from vire rod such as nail, screem and wire products.2 "Plates includes special steel plate such as stainless steel and tool steel.

"Sheet" includes galvanized iron sheet ard coil (both hot rofled and cold rolled)."Shape" includes mdnirg beam and its accessories.

YAWATA IRON & STEEL CO., LTD.

Sales Prices

- - - - - - - - - - Domestic - - - - - - - - - - - - - - Domestic -- - - - - - - -Export - - - -March 31, March 31, March 31, March 31, March 31, Current 1963 and Current 1960 and1955 1956 9 98 1959 Prices 1960 1961 1962 after Prices after

-- - - - - - --- pron-n - - - - - - - ---- - - -$ per ton - -

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 44,0ne 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 4-+,0uC 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/rn 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 Z4,000 25,500 30,000 29,000 25,500 25,500 26,500 26,500 26,500 26,n00 - -

Foundry pig iron 25,000 26,500 32,500 31,500 28,000 28,000 29,000 29,000 29,000 Ly,uuu - -

Average price during Current 1963 and Current 1960 andfiscal years 1954 1255 1956 19S 1958 Prices 1960 1961 1962 after Prices after

Imported iron ore 5,142 6,341 7,682 8,696 6,455 5,893 6,264 6,016 5,944 5,789 - -

Imported coal (n.a.) (n.a.) (n.a.) (n.a.) (n.a.) 6,173 7,895 8,060 8,068 8,075 - -

Domestic iron ore 4,114 4,658 4,812 5,517 5,452 4,935 4,935 4,935 4,935 4,935 - -

Domestic coal (n.a.) (n.a.) (n.a.) (n.a.) (n.a.) 6,312 6,447 6,443 6,435 6,421 - -

Scrap: Imported 20,362 21,638 29,610 30,492 21,633 21,600 23,400 23,400 23,400 23,400 - -

Domestic 15,174 22,195 26,461 23,636 17,933 20,000 21,000 21,000 21,000 21,000 - -

YAWATA IRON & STEEL CO., LTD.

Income Statements Forecasts(Y Ei`lion)

Apr. 1958 Apr. 1959 Apr. 1960 Apr. 1961 Apr. 1962 Apr. 1963 Apr. 1964Mar. 1959 mar. 1960 Mar. 1961 Mar. 1962 Mar. 1963 Mar. 1964 Mar. 1965

(actual)

Net Sales 117,228 153,351 157,638 174,743 189,791 199,694 209,594

Operating Expenses:Cost of Sales excluding Depreciation 93,805 114,265 115,591 125,728 138,527 147,291 155,687Nonsal Depreciation 6,210 10,221 13,780 14,1140 13,633 12,925 12,273General Administrative and Selling Expenses 5 851 7 391 7 757 8 743 9,68 10 471 11 308

Operating Income 11,362 21,474 20,510 26,132 27,944 29,007 30,326Non-operating Income 1 897 793 893 99 1 093 1,193 1,293

Gross InoDme 122,267 -21- 23 30,2c 31,619

Non-operating Expens es:Interest 5,421 7,035 8,367 8,917 8,364 7,409 6,302Otbaer Expenses 1,363 1 697 1 556 2 445 2 3157 3 57936,78 87329 9231 6 --,79§__-~~~~9, 2 0,13 0,566 ,8

Net Income before Taxes 6,7475 13,535 114, 763 18,1314 19,631 -2i,73

Income Taxes 2,120 4,043 4,382 6,380 7,281 8,1433 9,993

Net Income after Taxes 4,355 9,492 7,098 9,383 10,853 11,201 11,7L45Surplus and Reserves at begiming of year 43,914 43,990 47,369 47,053 50,574 55,464 61,601

Available for Appropriation 48,269 53,482 54,467 56,436 61,427 66,665 73,346

Surplus Appropriation:Dividends 2,440 2,760 4,560 5,000 5,000 5,000 5,000Offic ers' Bonus 20 20 20 20 20 20 20Additional Depreciation 444 1,293 914 842 943 44 (1,454)Miscellaneous adjustments (changes in revaluation

and capital surplus reserves) 1,375 2 040 1 920 - - ___

Surplus and Reserves at end of year 43,990 50,57a 55,461,60 69,780

Net Income before Taxes and Interest 11,896 20,570 20,117 24,680 26,498 27,543 28,040Times total interest is covered 2.2 2.9 2.4 2.8 3.2 3.7 4.4

Net Income after Taxes, before Depreciation and Interest 15,986 26,748 29,245 32,440 32,850 31,535 30,320Times debt service is covered 1.6 2.3 1.7 1.5 1.3 1.5 1.7

Earnings per share (after taxes) Y 9.5 12.5 7.1 9.4 10.9 11.2 11.7Dividends per share Y 6.0 6.o 6.0 5.0 5.0 5.0 5.0

Total retained eamnings and depreciation 8,105 11,484 16,298 18,503 19,466 19,106 18,998

ANNEX 13

YAX'ATA I1V)J & STEEL CO., LTD.

Caeh Elow Forecastsll ~ion )

TotalThree-YearApr. 159 - Apr. '60- Apr. 161 )btal Apr. 162- Apr. 163- Arr. 164- Operating

Mar. 'O Mlar. '61 Mar. 162 Construction M5ar. '63 Mar. 164 Mar. 165 PeriodSources of Fuands

Net incone, before interest,taxes and dividends 16,410 18,526 23,710 58,646 25,246 26,962 29,471 81,679

Ordinary Depreciation 8,176 11,024 11,312 30,512 10,906 10,340 9,818 31,064Special Depreciation 3,338 3,670 3,670 10,678 3,670 2,629 1,001 7,300Reserves 2,961 400 189 3,550 368 71 59 498Write-offs and Misc. losses

from, initial operation 380 380 380 1,1LO 380 380 380 1,liP

Ibtal cash gent<rated from oper. 31,265 3,,000 39,261 104,526 40,570 40,382 40,729 la,681

Capital Increase 12,960 10,080 - 23,040 - - -

Long-term Debt 30,847 28.367 8,901 68,175 3789 2,220 2,928 8,937Proposed IBi,D loan 3,731 2,981 480 7,200 _ - - -Export-Import Bank loan 1,983 89 - 2,072 - - - -Other Long-term loans 18,133 17,297 4,473 39,903 789 720 928 2,437Bonds 7,000 8,000 4,000 19,00') 3,000 1,500 2,000 6,500

Increase in Short-term Loans - - 2,000 2,000 2,000 - - 2,000Decrease in Curr,r-', ~ssets Increase in Current Liabilities - 1 2,4L, 3,455 1,585 1,220 1,476 4,281

Tbtal 75,072 73,458 52,666 201,196 47,944 43,822 45,133 136,899

Application of Funds

Investment in Fixed Assets 38 432 36 006 13 468 87,906 L,445 4,330 4.389 13,164Project related to IB.D loan 1647 12, 5 31,81 - - - -Other projects in expansion

program 17,665 13,040 2,667 33,372 115 - 115Contingenicy reserve 2,100 3,100 600 5,BOO -Renewals, repairs amd initial

operation expenses 2,240 7,213 7,)400 16,853 4,330 4,330 L,389 13,049

Investments 2,350 2,000 2,000 6,350 2,000 2,000 2,000 6,000

Interest 7 035 8 367 8 917 2) 319 8 36b4 7 409 6302 22,075Short-tern loans 1 1,76 iX7 40 27 1176 ?76bLong-terni loans 5,229 7,191 7,880 20,300 7,188 6,164 5,057 18,409

Repayment of long-term debt 4,612 9,075 12 26 109 16 008 13 140 '1 692 41 040IBRO (Loan 133-JA) 118 1231 2 1+29 ~ 76 ~ 5 ~'T ;"-~ t~Proposed ID?E loan -- 177 1-77 370 392 416 1,178Export-Import Bank loan - 393 778 1,171 778 778 778 2,334Other long-term loans 3,)421 7,585 11,023 22,029 13,941 10,747 8,578 33,266Bonds 1,073 974 315 2,362 984 1,082 1,772 3,838

Income Taxes 3,121 4,213 5,381 12,715 6,830 7,857 9,213 23,900

Dividends and Bonus 2,780 3,680 4,800 11,260 5,020 5,020 5,020 15,060

Decrease in short-tern loans 12,169 6,000 - 18,169 - - - -

Increase in current assets 1,585 3,124 5,099 9,808 3,542 2,729 3,099 9,370

Decrease in current liabilities _2634 - - 1634

Total 73,718 72,465 5.087 198,270 i 130.10

Cash surplus (shortage) fortnE year 1,354 993 579 2,926 1,535 1,337 3,418 6,290

Available at beginning of year 8,980 10,334 11,327 8,980 11,833 13,21I 14,450 11,833Available at end of year 10,334 11,327 11,833 11,833 13,2414 14,450 17,731 17,731

ANNEX 14

YAWATA IFDN & STEEL CO., LTD.

Balance Sheet Forecasts(T million)

ASSETS March 31, March 31, March 31, March 31, March 31, March 31, March 31,1959 1960 1961 1962 1963 1964 1965

Current Assets (actual)

Cash are Bank Deposits 8,980 10,334 11,327 11,906 13,441 14,778 18,196

Notes and Accounts Receivable 7,1L7 7,154 7,524 8,417 9,207 9,692 10,171Less: Reserve for Bad Debt 921 1 015 1 008 1 069 1 128 1 162 1 198

6,226 61 tI3 9 73 9

Inventories 4I44 48,176 50,658 54,491 56,850 58,132 60,513

Other Current Assets 6.051 b,588 _6,860 7,233 7,626 8288 8,827Total Current Assets 65,701 71,237 75,361 80,978 85,996 90,023 96,509

Fixed Assets 136,294 174,103 207,341 219,473 223,526 227,476 231,061Less: Depreciation 31,768 43,282 57,976 72,958 87,534 100,503 111,322

Net Fixed Assets 104,52b 130,821 149,365 146,515 135,992 126,973 119,739

Other Assets (including investnmnts) 9,040 11,390 13,390 15,390 17,390 19,390 21,390

Total Assets 179,267 213,448 238,116 2422 2.78 226.291 =L638

LIABILITIES AND EUITY

Current Liabilities

Curr_nt Liabilities other thanshort-term loans 37,o56 53,536 46,575 53,068 52,D24 52,372 54,597

Short-term Loans 29,169 17 o0 IJ°°O 13,000 015,000 15,000 15,000Total Current Liabilities 66,225 57,5'75 66,68 67,024 67,372 69,597

IBRD Loan 133-JA 1,680 1,562 1,439 1,310 1,175 1,035 886Proposed IKM loan - 3,731 6,712 7,023 6,653 6,261 5,845Export-Inport Bank Loan 6,895 8,878 8,574 7,796 7,018 6,250 5,462Other Long-term Loans 33,467 47,807 57,599 51,049 37,897 27,5370 20,221Bonds 8,633 14,560 21,586 25,271 27,287 27,7J5 27,932Less: Maturing w-ith 12 months 4,623 9,075 12 16.28 ,4 11,622 12,285

Total Fixed Liabilities 46,052 67,543 83,488 76,241 66,890 57,419 48,261

Total Liabilities 112,277 127,989 141,063 .42,309 133,914 124,790 117,858

SR.are Capital 23,000 38,000 50,000 50,000 50,000 50,000 50,000Surplus and Reserves 43,990 47,369 47,053 50,574 5'-,164 61,bol 69,780

Total Equity 66,990 85,369 97,053 100,574 105,464 111,o0l 119,780

Total Liabilities & Equity 179,267 213,358 238,116 242883 239,378 236,391 237,638

Notes Receivable Discounted (3,335) (2,307) (2,573) (2,880) (3,150) (3,315) (3,179)Guarantees on Loans (11,157) (16,510) (21,177) (21,134) (21,884) (19,259) (16,936)

Ratios:Current Assets/Current Liabilities 0.99:1 1.18:1 1.31:1 1.23:1 1.28:1 1.34:1 1.39:1Current Assets/Current Liabilities

(excluding short-term loans) 1.78:1, 1.64:1 1.62:1 1.53:1 1.65:1 1.72sl 1.77:1

Total Debt/Equity 55:46 52:48 52:48 51:49 47:53 43:57 39:61Total Debt (including guaranteesYEquity 58:42 56:44 57:43 56:44 53:47 48:52 44t56

Page 1

YAWATA IRON & STEEL CO. LTD.

Assumptions for Financial Forecasts

The company's financial forecasts are based on the followingassumptions:

1) Earnings would be based on production and prices shown in Annexes10 and 11. Employment cost per ton of product and per plant wouldremain constant, increased labor wages being offset by increasedproductivity.

2) Ordinary depreciation would be, as in past years, the maximumamount permitted by law.

3) The maximum amount of special depreciation permitted by law onequipment coming into ,roduction during the construction period,totalling 13,150 million has been evenly distributed over afive-year period after completion of each item of equipment. Asa result, total ordinary and special depreciation (permitted bylaw) is substantially higher for each year than is considered byYawata to be an adequate rate of depreciation (10% on a decliningbalance method). The latter figure, called "normal depreciation"is shown in the Income Statement Forecasts.

4) The increase in Reserve for Retirement Allowance and in Reservefor Bad Debt would be the maximum allowed by law.

5) The company would be able to secure new long-term loans beforeMarch 31, 1962 as follows:

a) IBRD loan - $20 million ({7,200 million equivalent) for 15years, including a two-year grace period, at an interest of6.3% (6% for IBRD plus 0.3% for JDB).

b) New long-term loans - W39,903 for five or seven years(including a two-year grace period) at an interest rateof 9-1/8%.

c) New bonds - 419,000 million for nine years (including atwo-year grace period) at an interest rate of 7.5%.

6) Interest on short-term loans would be at a rate of 6.9%.

7) Investments in fixed assets after the end of the expansion programwould be limited to normal renewals and repairs. Estimated amountis E4,000 million annually through 1965.

8) Annual investments in shares, securities or loans to other com-panies -- subsidiary companies included -- is estimated at Y2,350million for 1959, and assumed to be W2,000 million thereafter.

AFNEX 15Page 2

9) Taxes would continue to be at a rate of about 43% on the net profitafter ordinary and special depreciation, interest and reserve alloca-tion permitted by law.

10) Dividends would continue to be paid in cash at the rate of 12% ofthe face value of the shares through the term ending March 31, 1960and at a rate of 10% thereafter.

11) As at present, 80%1 of domestic sales would be paid in cash and 20%in notes receivable having an average life of 60 days. As invoicesare sent on the 20th of each month, accounts receivable at the endof the month are assumed to amount to 50% of monthly sales -- asat -resent 73% of notes receivable would be discounted. Exportsales would be fully paid for in cash.

12) Raw materials inventories would amount to three months supply forimported iron ore and scrap, to two months supply for imported coal,to 4.3 months for domestic iron ore and one month for domestic coal.Finished products and goods in process would remain about one monthsales, as at present, and manufacturing supplies would increase inproportion to S0% of the steel ingot output.

13) As at present, domestic raw materials would be paid in cash, exceptcoal which would be paid in three-month notes. Accounts payablefor total imported raw materials would average 2.7 months, afterwhich notes payable would be issued having an average life of 0.9months. As usual terms are five-month notes for U.S. coal, four-month for imported iron ore, three-month for other imported coalsand two-month for imported scrap, Yawata could substantially in-crease the amount of its notes payable if necessary.

YAWATA IRON & STEEL CO.. LTD.

Capital Structure from Forecast Consolidated Balance Sheet(Y Million)

1959 1260 1961 1262 1963 1964

Fixed Liabilities 91,731 114,623 110,359 94,484 79,933 68,883

Less: Loans from Yawata 1,448 1,184 1,183 1,182 1,181 1,181

Short-term Loans 19,680 13,588 15,714 17,891 17,891 17,771

Guarantees for loans to companieswhich are not subsidipries 6,335 6.835 6836835 _6tU5 __62.83 6,835

Total Debt 116i2t 133.862L 82725 118.028 lO3.47) ___

Capital 80,045 93,514 98,442 104,494 112,062 121,420

Less: Shares owned by Yawata 2,547 3,691 3,892 4,384 4,603 4 ,603

Reserves 10.830 ,J 11.445 11.825 11.922 11,980

Total Equity __8 _28 101.143 105.995 iiLU. 119.381 72972

Total Debt/Equity 57:43 57:43 55:45 51:49 46:54 42:58

I,'

L>\HOKKAIDOJAPAN

LOCATION OF PLANTSYAWATA IRON & STEEL CO. LTD.

1. Yawata Works

2. Tobata Works

3. Hikari Works

,5 e

-< 5 TOKYO

H O g oNAGOYA

OC TOBER 1959 IBRD-619

I6 I

JAPAN

TOBATA WORKSGAtr4NIZIAG ~& LIAE =!= == .= .YAWATA IRON a STEEL CO., LTD.

_ANK - FINANCED PROJECT SHOWN IN RED

- D , lE -- Existing facilities

t \ tL7 *" # ' ' ii/ //- ! r Rest of construction Program

OCTOBER 1959 IBRD-620