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Business risks and other risks

日本語

Matters related to the status of the Group’s businesses and financial position that could have a significant impact on investors’ decisions are discussed below. Statements about the future are based on the judgment of Nippon Steel Corporation.

＜Risks regarding the business environment (steel market)＞

(1) Changes in economic circumstances in Japan and overseas
The Group’s core business is Steelmaking and Steel Fabrication, which accounts for approximately 90% of consolidated revenue. As with industries such as automobiles, construction, energy, industrial machinery, to which major consumers of steel belong, the Steelmaking and Steel Fabrication business is significantly affected by the Japanese and global economy as it highly correlates to domestic and overseas macroeconomic trends.
The Company holds many of its assets within Japan, the value of which may significantly fluctuate due to major changes in Japan’s political, economic and legal environments. Also, Japan is one of the most important geographical markets for the Group, accounting for approximately 60% of consolidated revenue for the year ended March 31, 2023. If Japan’s economy worsens, the Group’s business operations, financial performance, financial conditions and future growth may be negatively affected, though it is difficult to foresee the future.
In addition, the Group has positioned the deepening and expansion of its global strategy as one of its business strategies. Revenue of the Group’s overseas business accounts for approximately 40% of consolidated revenue. In the overseas market, unpredictable risks may arise from political uncertainty (including a war, civil war, conflict, riot and terrorism), worsening diplomatic relations with Japan, weakening economic conditions, business practices, labor relations and differences of culture. In addition to these risks, in the event that a business environment greatly changes in overseas countries with, for example, lower demand of steel, intensifying price competition, significant changes in the exchange rate, outbreak of natural disasters , spread of infectious diseases, the rise of protectionism, investment restrictions, import/export restrictions, exchange restrictions, nationalization of local industries, and significant changes in the taxation system or tax rates, the Group’s business operations, financial performance, financial conditions and future growth may be negatively affected. For the year ending March 31, 2025, the unprecedented severe situation concerning global steel demand is likely to continue for the foreseeable future. Recovery in actual demand is hard to predict at this point, and it is expected to take time for the market to recover. There is also a risk that the decoupling structure between raw materials and products will continue for the time being. Even in the situation where the business environment has become increasingly severe and is expected to remain so for the time being, we will continue to implement the existing profit structure measures. At the same time, we will steadily advance measures to evolve to a further vertically-integrated business structure to advance toward achieving the Group’s future vision of \1 trillion in business profit and build a foundation that enables us to record even higher profits regardless of the external environment. We will also make investments in forward-looking initiatives to secure talents and support their participation and career advancement. The results, however, may differ significantly depending on a variety of factors in the future.

(2) Changes in demand and supply of steel
Changes in international demand and supply of steel may affect the financial performance, etc. of the Group. Specifically, issues regarding China's excess steel production capacity have not been sufficiently solved. Fierce competition in the global market caused by this excess supply could cause downside pressure on the global price of steel and thus the Group’s business operations, financial performance and financial conditions may be negatively affected. Also, since changes in prices of crude oil, natural gas, etc. lead to changes in demand and supply of steel in the energy field, which is one of our customer segments, these could affect the Group’s financial performance, etc.
Many of the customers of the Group’s Steelmaking and Steel Fabrication business have purchased a large volume of steel over a long period. Therefore, in the event that a major customer makes significant changes to its business strategy or its purchase policy, or if credit risk of a trading company or a customer which purchases steel or other products from the Group materializes, the Group’s financial performance and financial conditions may be affected.

(3) Changes in price of raw materials and fuels
The Group imports most of its main materials necessary for the production of steel, such as iron ore and coal, from Australia, Brazil, Canada, the U.S. and other overseas countries. The Group strives to ensure stable procurement of raw materials and fuels including these main raw materials, alloys, scrap, and natural gas, by diversifying its procurement sources. However, the prices of these materials and fares for marine transportation fluctuate significantly due to international trends of demand and supply. In the event that the Group cannot reflect the market price increase in the sales price of steel, the Group’s business operations, financial performance and financial conditions may be negatively affected.Also, if production, shipment and trade volume of raw materials and fuels decrease due to a major natural disaster, occurrence of a strike or trouble, deterioration of political conditions, war or terrorism, or the spread of infectious diseases in a country of production of raw materials or fuels, the Group’s business operations, financial performance and financial conditions may be negatively affected.

(4) Changes in exchange rates
The Group conducts foreign currency transactions when exporting products or importing raw materials and fuels, and holds receivables and payables in foreign currencies. Though the Group eliminates most of the impact of fluctuations in exchange rates by using foreign currencies received from exporting products, etc. for the payment of imported raw materials and fuels, etc., and enters into forward exchange contracts based on the real demand principle, fluctuations in exchange rates may affect the financial performance, etc. of the Group. If the yen appreciates, the Group’s steel and other domestic products will lose its export competitiveness, while at the same time the automobiles, home appliances, energy, industrial machinery and other industries, which are the main customer segments of Steelmaking and Steel Fabrication business, will also lose their export competitiveness, leading to a decline in the domestic demand of steel. Thus, the Group’s financial performance and financial conditions may be negatively affected. In contrast, if the yen depreciates, the Group’s domestic products will become relatively price competitive in the export market. However, in a situation where raw materials and fuels prices are rising, the impact of a rapidly depreciating yen on costs may become greater than in the past.

(5) Competition with other materials
Steel products inevitably compete with other materials such as aluminum, carbon fibers, glass, resin and plastic, composite materials, concrete and wood. Recently, needs of automobile materials have become diversified particularly due to the spread of electric vehicles (EVs). The Group has responded to this trend by uniquely conducting research, development and manufacture of lighter steel and highly functional steel. However, in the event that customers decide to use other materials such as aluminum, resin, carbon fiber composite materials, resulting in lower demand of steel, the Group’s financial performance and financial conditions may be negatively affected.

＜Risks regarding execution of business strategy and plan＞

(1) Execution of Medium- to Long-term Management Plan
The Group has developed the NIPPON STEEL Group’s Medium-to Long-term Management Plan (hereinafter referred to as the “Medium-to Long-term Management Plan” in this section) in March 2021 and has promoted various specific measures set forth in the plan. Although the plan has been developed based on information and analysis that were deemed appropriate at that time, such information and analysis contain uncertainties. Going forward, the Group may not be able to achieve the expected results, and accordingly, may not be able to achieve the investment plans and financial targets set forth in the “Medium- to Long-term Management Plan” due to the deterioration of the business environment and other factors including all the items listed in this “Business Risks” section.

(2) Initiatives toward the realization of carbon neutrality
By formulating “Nippon Steel Carbon Neutral Vision 2050” in March 2021, toward 2050, the Company will take on the challenge of adopting ultra-innovative technologies such as mass production of high-grade steel in electric furnaces, drastic reduction of CO2 emissions through Super-COURSE50 and other developments in hydrogen reduction methods, and production of direct reduced iron using hydrogen, and will aim to achieve carbon neutrality by taking a multi-aspect approach, including measures to offset carbon through CCUS and other methods. These extremely high innovation hurdles will require R＆D expenses of approximately 500.0 billion yen and 4 to 5 trillion yen in investments in facilities for practical implementation and increasing operating costs. Moreover, it is expected that the production cost even in the best case scenario as of 2050, which factors in potential external conditions, will be significantly higher. To resolve these issues, the Company has requested the government and other related sectors to take long-term and continuous policy measures for research and development of discontinuous innovation, equipment implementation, and increasing operation costs and to establish a system that enormous costs will be borne by society as a whole. However, insufficient policy measures may negatively affect the Company’s financial performance and financial conditions. In addition, the expected results may not be achieved due to factors such as institutional changes disadvantageous to the steel industry and the failure to obtain research and development results.

(3) Initiatives for cost improvement
As set forth in the Medium- to Long-term Management Plan, the Group’s basic policies are “to realize a higher-level order mix through aggressive investment in strategic products,” “to renew and improve facilities to ensure technological strength leading to profit generation,” and “to make the production framework streamlined and more efficient by selective concentration on certain products and facilities.” Based on these overall basic policies, the Group intends to build an optimal production framework. With regard to making the production framework streamlined and more efficient, the Group expects to achieve structural improvement effects of 150.0 billion yen per year compared to fiscal 2019, through 2025, combined with the effect of the production facility structural measures that were decided in February 2020. However, in the event that the Group is unable to improve costs as planned due to various external or internal factors, such as delays in the planned streamlining and efficiency improvement in the upstream process and manufacturing process for the domestic steelmaking business, the Group’s financial performance and financial conditions may be negatively affected.

(4) Capital expenditure
The Steelmaking and Steel Fabrication business is capital intensive and continually requires a large amount of capital expenditure as well as facility repair and maintenance expenditure. The Group systematically makes capital expenditure necessary for installing the latest facilities and maintaining the soundness of facilities, including the refurbishment of blast furnaces and coke ovens, and for promoting production measures to capture demand in growth areas, including measures for high-grade non-oriented electrical steel sheet production capacity at Setouchi Works and Kyushu Works and the construction of a next-generation hot strip mill at Nagoya Works. However, in addition to depreciation increases, in the event that the initially expected effects are not sufficiently achieved, etc., the Group’s financial performance and financial conditions may be negatively affected. As set forth in the Medium- to Long-term Management Plan, the Group’s basic policies are “to realize a higher-level order mix through aggressive investment in strategic products,” “to renew and improve facilities to ensure technological strength leading to profit generation,” and “to make the production framework streamlined and more efficient by selective concentration on certain products and facilities.” Based on these overall basic policies, the Group plans to implement capital expenditures of approximately 2,400.0 billion yen over the next five years from fiscal 2021 to 2025 while working to maximize the effects of the investment.

(5) Reorganization and overseas investments
The Group has grown through reorganization and investment including conversion of Nisshin Steel Co., Ltd. into a subsidiary in March 2017 (absorbed and merged in April 2020), acquisition of Ovako AB in Sweden in June 2018, conversion of Sanyo Special Steel Co., Ltd. into a subsidiary in March 2019, joint acquisition of Essar Steel India Limited together with ArcelorMittal in December 2019, decision to establish a new electric arc furnace at AM/NS Calvert LLC in December 2020, the acquisition of G Steel Public Company Limited and G J Steel Public Company Limited in Thailand in February 2022, and the conversion of NIPPON STEEL TRADING CORPORATION into a consolidated subsidiary in April 2023, investment in Elk Valley Mining Limited Partnership, a Canadian coking coal business company, in November 2023, and decision to acquire United States Steel Corporation in December 2023. The Group may continue to conduct reorganization and investment, including mergers, acquisition and establishment of joint ventures in Japan and overseas. The Group makes investment decisions and implements investment after conducting careful business assessment, contract negotiation, internal deliberation and other processes. However, in the event that synergy effects are not generated as initially planned or an impairment loss is recognized on goodwill recorded on the consolidated statement of financial position, the Group’s financial performance and financial conditions. may be negatively affected. For overseas investment projects, in particular, the level of uncertainty will be higher due to various factors (including the possibility of not being able to find appropriate investment targets and relationships with partners in joint ventures).

(6) Review of business structure and production system
In response to lower domestic steel demand, intensifying competition in the overseas steel market and deterioration of main production facilities, in the domestic steel business, the Group is carring out production facility structural measures, which include suspending some domestic facilities and withdrawing from unprofitable product types for the purpose of thoroughly promoting the realization of a profitable structure, notably through concentrated production by selective concentration on certain products and facilities. However, the Group may take additional measures in consideration of changes in the future business environment, revenue trends and other factors. In the overseas market as well, the Group has been actively promoting the selection and concentration of existing businesses and has almost completed the withdrawal from businesses which would not be economically viable for it to continue. However, the Group may continue to reorganize or withdraw from unprofitable businesses for which revenue is unlikely to recover in the future and those for which investment purposes have weakened, due to deterioration of the business environment or other reasons. In the case of those further reorganization or withdrawal, the Group’s business operations, financial performance and financial conditions may be negatively affected due to production cutbacks, the occurrence of temporary losses, etc. For the year ended March 31, 2024, 90.9 billion yen was recorded as losses on reorganization.

(7) Measures for securing and training human resources, diversity ＆ inclusion, and labor savings
As future growth of the Group largely depends on securing and training talented personnel, the Group is making efforts to secure human resources in a stable manner and strengthen the competitiveness of human resources through establishing a healthy work environment by, for example, offering sufficient work-life balance and making the related systems sufficiently known to employees, as well as developing training systems. In addition, while working to secure and train talented personnel, in order to minimize the labor losses caused by employees’ life events and health problems that can arise over the course of their working lives, and realize a work style in which employees from diverse backgrounds facing a variety of personal circumstances can work productively with a sense of pride, we are striving to strengthen specific initiatives to realize a company in which diverse employees can play active roles with pride and fulfillment in their work through proactive initiatives for diversity and inclusion. Furthermore, the Group has made capital expenditure for labor-saving technologies to address the labor shortage resulting from population decline. The Group is making steady efforts to secure and train talented personnel and make capital expenditure for labor-saving technologies. However, in the event that these efforts are not achieved as planned, the Group’s business operations, financial performance and financial conditions may be negatively affected.

＜Risks regarding business operations＞

(1) Facility accidents and industrial accidents
The production process of the Steelmaking and Steel Fabrication business, which is the Group’s core business, depends on certain types of important facilities, such as blast furnaces, coke ovens, converters, continuous casters, rolling mills and power generation facilities. To ensure stable production, the Group has promoted measures to strengthen manufacturing capacity in terms of both facilities and human resources, centering on the basic management issue of strengthening and rebuilding steel works, etc. However, in case of occurrence of electrical or mechanical accidents, a fire or explosion, industrial accidents, etc. at these facilities, the operations could be partially suspended, leading to the incurrence of costs or compensation due to a delay in production and shipment. This may in turn negatively affect the Group’s financial performance and financial conditions. The Group has obtained certain insurance policies with respect to these types of accidents.

(2) Quality issues
The Group provides a wide variety of products and services including steel products to customers. Under its basic principle of manufacturing, that is, “quality is prior to production,” the Company has implemented various initiatives in line with the “Guidelines for Enhancing Quality Assurance Systems” established by the Japan Iron and Steel Federation. However, in the event that defects are found in a product or service, leading to quality issues, not only the delivery of substitutes or the payment of compensation may be requested by customers, but also it may become necessary to suspend or review manufacturing and quality control operations, or the trust in the Group or the Group’s products and services may be lost, resulting in a decrease in revenue. Thus, the Group’s financial performance and financial conditions may be negatively affected. The Group has obtained certain insurance policies with respect to these types of accidents.

(3) Infringement of intellectual property rights
The Group secures its competitive advantage in business ,with regard to intellectual property formed as a result of technological developments, by acquiring intellectual property rights, such as patents, or by keeping such intellectual property confidential as trade secrets. In the event that the intellectual property is infringed upon or used without permission by any third party, or the validity of the rights is challenged by any third party, the Group will promptly consider and implement legal actions, but necessary legal protection may not be assured and damages incurred may not be fully recovered. In such cases, the Group may lose its competitive advantage, and its financial performance and financial conditions may be negatively affected.
The Group operates its business in compliance with intellectual property laws in each country and region and respects the intellectual property of third parties. However, in the event that a third party files a lawsuit against the Group for infringement of intellectual property and a judgement unfavorable to the Group is rendered, the Group’s business operations, financial performance, and financial conditions may be negatively affected.

(4) Information system failure and information leakage
The Group’ business operations largely depend on use of information systems, which store trade secrets and personal information of the Company, customers and business partners, in addition to other confidential information. The Company recognizes measures against leakage of confidential information including technological information as a priority management issue and has taken measures including strengthening system security, developing operational rules and training employees. However, in case of occurrence of a cyberattack on the Group’s information system, including the spread of viruses by a malicious third party, which may cause system stoppage, external leakage, damage and falsification of confidential information or other incidents, the Group’s business operations, financial performance and financial conditions may be negatively affected due to suspension of production and business operations, loss of competitive advantage of intellectual property, litigation, decline in social trust and other factors.

＜Other risks＞

(1) Natural disasters, wars, terrorism, and infectious diseases
The Group operates its business globally, including manufacture, sale, research and development, and has its bases around the world. At each of its bases including steel works, certain measures have been taken from both tangible perspectives (facility measures) and intangible perspectives (development of business continuity plans) in preparation for typhoons, earthquakes, tsunamis, floods and other natural disasters as well as wars and terrorism. However, in case of occurrence of a major natural disaster, facilities and information systems at these bases may be damaged and operations could be partially suspended, leading to the incurrence of costs or compensation due to a delay in production and shipment, and infrastructure, such as means of transportation of raw materials, products, and fuel, may be suspended. This may in turn negatively affect the Group’s financial performance and financial conditions. In addition, regardless of whether the Group has business locations in a given geography, in the event of the occurrence of a major natural disaster or an act of war or terrorism, and in the event that an infectious disease such as a new and severe type of influenza spreads worldwide, the Group’s business activities may be constrained. Furthermore, associated with such circumstances, the rapid deterioration of the economy caused by lowered activity levels of consumers, disrupted supply chains, etc. may hinder the Group’s production and sales activities.

(2) Environmental regulations regarding business activities
The Company makes efforts to reduce environmental burden across the entire Group by promoting environmental risk management, which involves meticulously coping with environmental risks that vary depending on steel works and conducting environmental protection activities in each region. The Group is subject to a wide range of environment-related regulations regarding contamination of air, water and soil, use of chemical substances and treatment and recycling of wastes in Japan and overseas countries where the Group operates its business. In the future, in the event that stricter regulations are introduced or laws and regulations are more strictly enforced or interpreted, it may become difficult for the Group to continue its business activities or the cost for legal compliance may increase.
Also, to contribute to the resolution of the climate change issue, which is set as one of the sustainable development goals (SDGs), the Group produces steel with the world’s highest level of resource and energy efficiency. In addition, with a view to reducing CO2 emission volume in the mid to long term, the Group develops innovative technologies and actively transfers and spreads its technologies accumulated over many years to overseas countries. However, in the event that new regulations, etc. are introduced in relation to CO2 emissions and use of fossil fuel in the future, the Group’s business activities, mainly the Steelmaking and Steel Fabrication business, may be constrained or the cost of operation may increase.

(3) Impairment of non-financial assets and recoverability of deferred tax assets
The Group holds a large amount of non-financial assets including property, plant and equipment such as steel works facilities and intangible assets. In the event that profitability of these assets declines and the invested amount is no longer expected to be recovered due to changes in the business environment or other factors, the carrying amount of the non-financial assets will be reduced based on future recoverability and impairment losses will be recorded. This may in turn negatively affect the Group’s financial performance and financial conditions. The balances of property, plant and equipment and intangible assets as of March 31, 2024 were 3,380.4 billion yen and 177.8 billion yen, respectively.
In addition, the Group records deferred tax assets based on estimated future taxable profit. In the event that any revision to estimated future taxable profit is required or the taxation system including tax rates are revised due to changes in the business environment or other factors, a reversal of deferred tax assets will be required, and this may negatively affect the Group’s financial performance and financial conditions. The balance of deferred tax assets (before offsetting against deferred tax liabilities) as of March 31, 2024 was 316.9 billion yen.

(4) Changes in the value of securities and other assets held (including plan assets)
As of March 31, 2024, the Group holds a total of 2,131.8 billion yen of equity instruments, including shares, and investments in affiliates and joint ventures. Of these assets, the Group confirms the appropriateness of all strategic shareholdings with business partners and alliance partners by specifically examining whether the purpose of each shareholding is appropriate and whether the benefit and risk associated with each shareholding is commensurate with the cost of capital, among other issues. Of these shareholdings, those whose fair value exceeds a certain threshold are examined each year at the Board of Directors meetings. However, valuation losses may occur due to poor performance of the investee companies and deterioration of the securities market. In addition to the above, as the Group holds a total of 604.9 billion yen of plan assets (including retirement benefit trust assets) as of March 31, 2024, changes in the price of domestic or overseas shares and bonds, etc. which comprise these assets, or changes in the interest rate environment may affect the Group’s financial conditions, etc.

(5) Changes in the financial market and funding environment
As of March 31, 2024, the balance of consolidated interest-bearing debt of the Group was 2,711.6 billion yen, and changes in the interest rate environment and other financial markets may affect the Group’s financial performance, etc. In addition, the Group raises working capital mainly through borrowings from financial institutions and issuance of corporate bonds. The Group works to maintain a sound financial position with a target ratio of interest-bearing debt to total equity attributable to owners of the parent (D/E ratio after adjusting for equity credit attributes of subordinated loans and subordinated bonds) of 0.7 or less, as set out in the Medium-to Long-term Management Plan. However, in the event that the financial market becomes unstable or deteriorated and financial institutions reduce lending or rating agencies downgrade the credit rating of the Company, the Group may not be able to raise necessary funds under appropriate conditions in a timely manner, resulting in an increase in funding costs. Thus, the Group’s business operations, financial performance and financial conditions may be negatively affected. As a result, the Group may not be able to achieve the above targets set forth in the Medium to Long-term Management Plan.

(6) Increases in tariffs and imposition of import regulations in major markets overseas
The U.S. and Southeast Asian countries have imposed anti-dumping duties and other special tariffs on certain types of steel exported from the Group. The Group strives to take appropriate measures by, for example, conducting export transactions after having recognized that it may be subject to import restrictions. However, in the event that import restrictions are imposed in the major markets overseas, such as an increase in a tariffs, imposition of special tariffs and quantitative restrictions, export transactions will be restricted, so the Group’s financial performance and financial conditions may be affected.

(7) Major changes in accounting systems and taxation systems
In the event that significant changes are made to the accounting systems or taxation systems in countries where the Group operates its business or they are interpreted or applied unfavorably to the Group, the Group’s financial performance and financial conditions may be negatively affected. Meanwhile, the Company has voluntarily adopted International Financial Reporting Standards (IFRS) for its consolidated financial statements for the purpose of enhancing its corporate value through further global development and improving international comparability of financial information in the capital market.

(8) Response to international norms regarding human rights
Based on international norms regarding human rights, the Group has established the “Nippon Steel Group Human Rights Policy” to establish its commitment to respecting human rights, human rights due diligence, and remedial actions, etc., and to show its corporate stance on respecting human rights internally and externally. The policy shall be appliable to officers and employees of the Group, and also seeks ways that all stakeholders, including suppliers, to understand and support the policy. The Group is committed to conducting its business operations with high ethical standards while taking utmost care for respecting human rights. However, if any human rights issues arise within the Group or among its stakeholders, the Group’s business operations, financial performance, and financial conditions may be negatively affected due to a decline in social credibility, in addition to impacts on procurement, production, and sales.

(9) Various legal regulations and litigation
The Group operates its business globally in compliance with laws, regulations and rules in Japan and overseas countries and regions. Laws, regulations and rules include commercial transactions laws, competition laws, labor laws, securities-related laws, intellectual property rights laws, environmental laws, tax laws, import- and export-related laws, personal information protection-related laws, criminal laws as well as various permissions and licenses necessary for conducting business activities and investments, and economic security-related regulations. In the future, in the event that stricter regulations are introduced or the laws and regulations are more strictly enforced or interpreted, it may become difficult for the Group to continue its business activities or the cost of legal compliance may increase.
The Group recognizes that legal compliance is the foundation of its business activities and provides legal and compliance training in various forms to officers and employees in Japan and overseas. However, in the event that the Group is deemed to have violated any laws or regulations, the Group may be subject to administrative sanctions such as a surcharge or criminal sanctions such as a fine, and thus the Group’s financial performance and financial conditions may be negatively affected.
In addition, a wide range of the Group’s business activities may lead to lawsuits filed by a variety of third parties against the Group. In the event that a judgement unfavorable to the Group is rendered in an important lawsuit, the Group’s financial performance and financial conditions may be negatively affected due to suspension or restriction of business activities, payment of compensation, or other reasons.

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Business risks and other risks