R E S T R I C T E D RETURNI TO REPORTS DESK R e p o r t No. TO-188a WITHIN IECP ONE WEEK We This report was prepared for use withinthe Bank. In making it available to others, the Bank assumes noresponsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT APPAISAL OF STRIP MILL PROJECT NIPPON KOKAN JAPAN September 4, 1958 Department of Technical Operations FILE COPY Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
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World Bank Documentdocuments.worldbank.org/curated/en/675821468752764622/...Analysis of Projections B. Operating Period 83 - 84 Conclusions 85 - 89-2-ANNEXES 1. Existing Facilities
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R E S T R I C T E DRETURNI TO
REPORTS DESK R e p o r t N o. TO-188a
WITHIN IECPONE WEEK We
This 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
APPAISAL OF STRIP MILL PROJECT
NIPPON KOKAN
JAPAN
September 4, 1958
Department of Technical Operations FILE COPY
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CURRENCY EQUIVALENTS
1 U.S. $ a U3601 million' Y $2,780
All tons are metric tons.
The company's fiscal terms run fromApril I to September 30 and October 1to March 31.
When the term 'fiscal year" is used,it means the year from April toMarch 31.
TABLE OF CONTENTS
Paragraths
Summary and Conclusions
I. Introduction 1- 3
II. The Company 4 - 31General 4 - 10Properties 11 - 12Modernization and Expansion1952/1955 13
Expansion, 1955-1956 to date,and its Financing 14 - 16
Present Situation 17 - 19Earnings Record and FinancialPosition 20 - 29
Mana-eruent 30labor 31
III. The Market 32 - 33
IV. The Construction Program 34 - 58Purpose and Description 34 - 37Raw Materials, Utilities, labor 38 - 43Construction Schedule and
VI. Assumptions for Future Demand and Prices 64 - 71
VII. Financing Plan and Financial Prospects 72 - 89A. Construction Period 74 - 82
Financing PlanAnalysis of Projections
B. Operating Period 83 - 84Conclusions 85 - 89
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ANNEXES
1. Existing Facilities
2. List of Subsidiaries
3. Balance Sheet
4. Market Prospects for Nippon SteelTube Company
5. Construction Schedule
6. Cost Estimates
7. Disbursement Schedule
8, Assumptions for Sales Forecast
9. Production and Capacity Figures
10. Income Statement Forecasts
11. Cash Flow Statement
12. Balance Sheet Forecasts
13. Assumptions for Financial Forecasts
1h. Consolidated Balance Sheet Forecasts
Map
Works Plan
APPRAISAL OF STRIP MILL PROJECT
NIPPON KOKAN
SM4diARY AND CONCLUSIONS
The JaDanese Goverment has asked the Bank to lend the JapanDevelopment &Lanrk ki2 million equivalent to be relent to Nippon KokanKabushiki Kaii ha `Tlppon Kokan) to cover the cost of imported goods forpart of the company s construction program, which started in 1957 andshould be completed by the end of 1960 and is designed to expand its ironand steelmaking fa3ilities, located in the Yokohama district.
Nippon Kokan, third largest Japanese steelmaker, produces platesand sheets, shapes and bars, and tubular products. It also has a large ship-building division.
The company is well organized and staffed; it is aggressivelymanaged. Its financial posit_on has strongly improved recently, and ithas a good earnings record in recent years. The appraisal is based upondata submitted by the comprny, a field investigation during February andMarch 1958, and discussions with representatives of the company in Washingtonduring July and August.
In 1956, the Bank financed part of the construction of a newMannesmann seamless tube mill; the $2.6 million which was lent through theJapan Development Bank was part of loan 136-JA for four industrial projects.The construction of this tube mill was successfully carried out, and it hasbeen working satisfactorily since January 1958.
Although the company has modernized several of its facilities, itstill is operating obsolete equipment in the production of light plates andsheets. It has therefore embarked on the construction of a modern, semi-continuous hot strip mill and of a reversing cold strip mill. The programalso includes new steelmaking and blooming facilities, and an expansion ofthe existing pig iron facilities. The construction plan contemplates theaddition of equipment designed to widen the range of saleable products.The program is sound technically. It has been engineered by Nippon Kokan'sstaff.
The new hot and cold strip mills will enable Nippon Kokan to pro-duce a higher quality product at a lower cost. Although the installationof these new facilities, at a time when other Japanese companies are alsoinstalling modern facilities, may mean some overcapacity for flat productsfor a few years, the operating rate should be high enough to permit profit-able operation. There is no problem in connection with demand for otherfinished steel products manufactured by Nippon Kokan. Some decline in salesmay be expected for the shipbuilding division, because of the existing surplusin world tankers.
The cost of the four year construction program is estimated conser-vatively at about X46.5 billion ($129 million equivalent). This includesexpected investments of about $12 million equivalent in renewals and repairs,but does not include interest during construction.
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The company's financial requirements for the four-year periodending March 31, 1961 are estimated at about ;77.7 bil7ion ($216 millionequivalent). This includes some E12 billion for working capital and some*15 billion for repayment of existing debt.
The financing plan to meet these needs is sound. Retained earningsand the proceeds of a share issue should provide more than 934 billion; long-term borrowings (including bond issues of about 95 billion and the proposedBank loan of about ;8 billion equivalent) would total ;;29.8 'oillion; and short-term borrowings would increase by some '-14 billion.
Arrangements to raise most of the necessary long-term borrowingsother than the proposed Bank loan have been made in Japan. The IndustrialBank of Japan, the Long-Term Credit Bank and the Daiiehi Hutual Life Insur-ance Company have agreed to lend X8.6 billion. The Fuji Bank has agreed toarrange loans for Z1.6 billion and have given assurances concerning the under-writing of bonds for 94.1 billion. About 95X0 billion of long-term borrow-ings have been already contracted. Nippon Kokan has not yet made firm ar-rangements for the rest amounting to 42.5 billion.
Abott Y9.3 billion of the total increase in short-term borrowingshas already been contracted. The rest is expected to be available throughthe Fuji Bank.
Conservative financial projections indicate that the company'sdebt/equity ratio should not rise above 56:44 during the construction pericd,and should fall rapidly thereafter. Long-term debt service should be coveredby an adequate margin (not falling below 2.7) during the first four years'operations, even assuming that contrary to normal practice no bond issuesare refunded. The current ratio would reach a low point of 1.1:1 during theconstruction period. In order to guard against the risk of a working capitalshortage during that period, the company should obtain an undertaking fromthe Fuji Bank, covering the total amount of its short-term loans. This wouldfund short-term loans until after the end of the construction period andraise the current ratio during that period to a minimum of 1.86:1.
The part of the construction program for which a loan has beenrequested - the inported goods for the new strip mill and all other facili-ties at the Mizue Plant, and additional equipment for the seamless tube mill-is a suitable basis for a Bank loan of $22 million equivalent with a term of15 years (including two years' grace), provided that satisfactory arrange-ments are made for security, for the limitation on additional debt, and forfinancing from Japanese sources, as suggested in Paras. 85 - 88. The totalcost of these facilities is estimated at about I24.5 billion ($68.2 millionequivalent).
I. INTRODUCTTON
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 economicdevelopment. A stdy made by Bank staff co-tfirmed that this development ofthe steel induLstry, together with that of electric power and transportation,were suitable fiolds, on account of their high economic priority, for Banklending.
2. In September 1957, the Japanese Goveranment asked the Bank to con-sider, among other nrojects, four projects in the steel induLstry: for theexpansion of the facilities of Kawasaki Steal Corporat.on, Sumitomo MetalIrndustries, Limited, Kobe Steel Works, Limited and Nippon Steel Tube. TheBank has already made loans for the Kawasaki project (188 JA for $8.0 mil-lion equivalent), the Sumitomo project (201 JA for $33 million equivalent),and the Kobe project (?QiJA for $10 million equivalent). The report whichfollows appraises the last of the four, that of Nippon. Steel Tube, which hasbeen submitted as the basis for a proposed Bank loan of @22 million equiva-lent to the Japan Development Bank, to be re-lent to the company. This com-pany recently completed the. construction of a new seamless tube mill, theforeign exchange cost of which ($2.6 million equivalent) was finance. withpart of the proceeds of a Bank loan (136 JA) to the Japan Development Bank.
3. The project which the Bank has now been asked to finance is thefacilities to be constructed in the new Žkiizue plant of the company's workssituated at Kawasaki near Tokyo. The company's construction program, whichincludes other facilities at Kawasaki and at its other works, is an integratedwhole. The following appraisal therefore covers the whole construction pro-gram of the company, which is designed to increase its output of pig ironfrom about 1,130,000 tons to about 1,500,000 tons and of ingot steel fromabout 1,700,000 tons to about 2,300,000 tons, with corresponding expansionand modernization of finishing facilities.
II. THE COMPANY
General
4. The Nippon Steel Tube Company, Ltd. (Nippon Kokan) was establishedin 1912 as the first company in Japan to produce seamless steel tubes. By1939, it had become an integrated steel company (the first non-governmentalintegrated steel company in Japan). It broadened the range of its activitiesfurther in 1940, as the result of a merger wTith the Tsurumi Steel and Ship-building Company, a leading producer of steel plates and shipbuilder.
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5. The company is today the third largest integrated steel companyand the largest producer of seamless and welded steel tubes in Japan. Itproduces a full line of finished products, including sections, plates andsheets, as well as tubes and pipes. Its two principal works, the Kawasakiand Tsurumi works, are fully integrated (see map). It owns two ferro-alloyplants, at Toyama and Niigata, a fertilizer plant, at Koyasu, three refrac-tories works, at Kawasaki, Tsurumi and Okayama, two shipyards, at Tsurumi.and Shimnizu, and one dockyard at Asano. Except for the 3himizu shipyard,and the two ferro-alloy plants, the works are located in the Yokohama area,the main ones on the water front.
6. The steel division's prod-action capacity and output have increasedsharply in recent years; the figures for 1957 are as follows:
Pig iron 1.,132,000 2,024,000Ingot steel 1,702,000 ',335,000
Shapes and bars 720,000 295,COO 27%Tubular goods 317,500 191,000 18%Plates and sheets 621,000 469,000 42%Semi-finished products for sale - 1314000 12%
Total saleable products 1prod6uq
7. The average annual increase in output during the last five yearshas been 9%. Lately the proportion of sheets has been decreasing and amoun-ted only to 5% of total saleable products in 1957 (included in the 42% forflat products). In that year, about 20% of total plates produced were usedin Nippon Kokan's own shipbuilding division.
8. The value of sales has nearly doubled in recent years:
L m.llion
1954 46,4231955 63,1501956 87,7711957 86,101
9. The share of the company's sales accounted for by the shipbuildingdivision increased from roughly 20% in 1954/1956 to about 28% in 1957: shipshave a longer delivery time than steel products, and the backlog of ordersfor the shipbuilding division will last through 1959, but demand for rolledsteel products began to decline in the spring of 1957.
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10. In the 1956 fiscal year, bars and shapes accounted for 31% of thetotal sales of the steel division, plates and sheets 30%, pipes 22%, ferro-alloys and pig iron 11%, and chemical products 6%.
Properties
11. The major installations at the four existing steel works are listedin Annex 1.
12. As at liarch 31, 1958 Nippon Kokan had investments totalling 9784million in seven s'ibsidiaries to which it se;ls, or from which it purchases,raw materials, goods in process or semi-finished materials. A list of thesesubsidiaries is given in Annex 2. Special mention should be made of thefully owned Kokan Chemical Industry Company, Ltd., recently incorporated,which produces chemical by-products from Nippon Kokan's coke plants. Thiscompany has a capital of '4300 million. It plans to invest about Y3,100 mil-lion in fixed assets during the next four years, of which x900 million areexpected to come from capital increases, about Y560 n:2 on from retained earn-ings, and the rest, plus the necessary working capital, from loans still tobe contracted.
ModQrization and 'Sansior 1952/1955
13. The company's two main works were badly damaged during the war,and production did not recover to prewar levels until 1952-1953. The com-pany embarked on a major construction program in 1950, but until the begin-nling of the fiscal year 1952, the program was concentrated on rehabilitation.In that year, work on the modernization phase of the program began. AtKawasaki, a new blooming mill and a new butt-weld pipe mill replaced olderinstallations, and a new hoop mill was installed to supply hoops for thebutt-weld pipe mill. At the Tsurumi works, an older plate mill was replacedby a new 4-high reversing plate mill. At the beginning of the 1954 fiscalyear, work began on replacing five 50-ton open hearth furnaces at the Kawasakiworks by three 120-ton furnaces.
Expansion. 1255-1956 to date, and its Financing
14. In February 1956, the Bank provided financing for a new aMnnesmannseamless tube mill to replace two old mills at Kawasaki as part of a loan(136 JA) to the Japan Development Bank for four industrial projects. Theold mills had a total annual capacity of 114,000 tons, and the new mill hasan ultiratc annual capacity of 120,000 tons. The amount to be reloaned to thecompany was 42.6 million equivalent (!936 million). This represented the for-eign exchange cost of the new mill. The total cost of the project was esti-mated at $11.3 million equivalent (x4.1 billion).
15. The loan became effective in May 1956. In November 1956, the com-pany asked the Bank to approve an expansion of the project. The originalplan had been to operate the new mill at an annual rate of 84,000 tons. Inview of the rapid rise in the domestic demand for steel, the company wishedto expand average annual production to 94,000 tons. This necessitated thepurchase of additional finishing facilities, including two large and two small
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cut-off machines, a large threading machine, and an X-ray measuring apparatus,and the construction of a warehouse. The cost of the revised project was es-timated at $15.3 million equivalent, an increase of $4 million equivalentover the original estimate. Of the increase, $1.4 million eouivalent repre-sented the cost of the additional equipment, and $2.6 million equivalentincreases in local construction costs. No increase in Bank financing wrasrequested; the company expected to meet the additional cost out of its ownfunds. The Bank approved the company's request.
16. The construction of the seamless tube mill has been successfullycompleted. The mill started operations in January 1958, some two months be-hind the original schedule, and is now working satisfactorily.
Present Situation
17. Nippon Kokan now has large up-to-date tubemaking facilities and amodern mill for producing heavy plates. However, it has been finding it dif-ficult to sell light plate and sheet, because the products turned out by itsold pullover miLls are much lower in quality than those produced in moderncontinuous or semi-continuous strip mills. Its sheet sales decreased by 30%obetween 1951 and 1957, and would have fallen even further except for NipponKokan's willingness to sell at cost in order to remain in the business.
18. One of Kokan's main competitors for flat products, Kawasaki, hascompleted a modern hot strip mill and two others, Yawata and Fuji, are con-structing such mills; these companies and nine other minor producers are in-stalling cold strip mills. Nippon Kokan has therefore also undertaken tliaconstruction of hot and cold strip mills in a new plant of the Kawasaki works,the Mizue plant.
19. The company also proposes to make a major change in its steelmakingfacilities. It now produces about 40% of its ingot steel by the basic con-verter process. The process produces steel at a lower cost than the openhearth process, but is difficult to use in Japan because of the type of ironore available. The company plans to shift to the oxygen top-blowing conver-ter process, which produces higher quality steel at a lower cost.
Earnings Record and Financial Po9ition
20. Total sales, net profits (after ta_es, interest, and_ordinary de-preciation but before special depreciation Zsee Para. 22 belo-/ and all re-serve allocations) and dividend payments of Yippon Kokan in recent fiscalyears have been as follows (summary income statements are shown in Annex 3):
Total Sales 46,423 63,150 87,771 86,101Net Profits 1,171 2,395 5,253 4,980Dividends ) 750 750 1,275 1,739Annual Rate on par)value of share ) 15% 15% 13% 13%
Net return on equit- 5.5% 11% 19.8% 14.7%
Percentage of net profitsretained 36% 68% 76% 65%
Times total interest covered 1.4 1.7 3.1 3.3
The company has maintained a policy of distributing an even and reasonabledividend. A large proportion of profits (after ordinzry depreciation butbefore all pre-profit reserve allocations) has been ratained in recent years.
21. The company's balance sheets at the end of the last four years,also shown in Annex 3, are summarized below:
March 31, March 31, March 31, March 31,_1955 1956 .1(57 19A8
- - - million - -- - - - - -
Current Assets 32,922 33,576 36,o96 48,ho4Net Fixed Assets 26,717 26,323 27,741 33,757Investments and Others 2,4111 .25L ,4946 L,931
Capital Stock 5,000 5,000 10,000 15,000Surplus and Reserves 16,07i 17,564 20,361 22,238
6L.Z~. tjal ± 6Z8j7 87,092
Note:As detailed in Annex 3, loans secured by means of letters of credit pledgedto the Export-Import Bank of Japan, and the corresponding Accounts Receivable,have both been deducted in this adjusted Balance Sheet, and shown in a foot-note as a contingent liability.
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22. Nippon Kokan is reasonably conservative In its valuation of inven-tories. The company takes the full normal depreciation authorized by taxlaw and the full special accelerated depreciation aLowed for half of itsinvestment in new machinery. Special depreciation accruals between April 1,1955 and i4arch 31, 1958 auounted to X2,890 million. The company's accountsare audited by an independent auditor under Japanese regulations.
23. Its net fixed assets correspond to an investment of about $45 perton of annual capacity. This is a very low figure when compared to the costof steel plants recently built, which amounts to about $250 per ton. It re-flects both the obsolescence of part of the equipment and the low valuationof assets.
24. Financial ratios for the last few years are shown below:
March 31, March 31, March 31, %rch 31,_i955 1956 _ 132-_ 1958
Current Assets/Currentliabilities 0.96:1 1.10:1 1. 14: 1.24:1
25. These ratios show a considerable improvement over the period, whichis the result of higher earnings due to boom conditions and of two shareissues, amounting to a total 10 billion. Part of tnese funds, however, a:-eearmarked for further modernization and expansion programs.
26. As at iMarch 1957, the company had more than 114,000 shareholders.The 10 main shareholders, which were financial or insurance institutions,held 15.5% of the total.
27. The price of the shares (g50 par value) has moved with those ofother steel companies in recent years. It reached a peak of over Y100 inMarch 1957, at the top of the boom, and has now come down to about 270.
28. From April 1, 1954 to iAarch 31, 1957, the company's requirementsfor new funds were as foUowa:
$ millionY million eauivalent
Investments in improvements 14,125 39.2Increase in working capital 9,997 27.8Investment in shares, long-term
receivables, etc. 4,254 U1.8Repayment of long-term loans 20Z,620 527,
48,996 136.1
29. The requirements were met from the following sources:
Note: Nearly half of the investments are in long-termreceivables, which are for sales of ships.
30. The company's management is capable, and has distinguished itselfby its aggressiveness in recent years. Nipoon IKokan has modernized and ex.-panded its equipment to maintain or improve its competitive position. Thishas often resulted in a heavy strain on the company's finances. Its presentconstruction program is a continuation of that policy, and it will giveNippon Kokan one of the finest steel plants in Japan. The company's .raBsga-ment and staff are particularly competent on the technical side. Mentionshould be made of their outstanding performance in blast fuirnace operationand their progressiveness in adopting new steelmaking techniques. They alethe general Japanese licensees for oygen top-blowing converters.
Iabor
31. The company employs about 26,000 workers. Employment has remainedconstant since 1950, although production has increased by more than 70%,thus showing a remarkable improvement in productivity. Workers are organizedin 10 labor unions, one for each of the works. There have been severalstrikes in recent years, but each strike has been settled within a few weekswithout any serious difficulty.
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III. THE MARKET
32. A general study of the Japanese steel market (T.O. 178) has al-ready been circulated (attached to R58/73). That study concludes that pro-posed expansions of pig iron and crude steel capacity which are now firm,would be justified by the prospective increase in demand.
33. A study of the market prospects for the finished products producedby Nippon Kokan is attached in Annex 4. It concludes that no marketing prob-lem should arise in vonnection with shapes and bars and tubular goods. Inthe case of plates a:ad sheets, the producers should be able to break even in1959 and 1960, in spite of the great expansion- of capacity and by 1961, theyshould be earning a profit. The shipbuilding division1 however, is likelyto be affected by a nrobable decline in shipbuilding activity.
IV. THE CONSTRUCTION FROGRAM
PpenDescrition
34. The company's construction program for the four years ending March1961 has two major aims:
a) to modernize faeilities, particularly for the productionof flat products; this will enable it to meet the compe-tition of other steel producers most of whom are alsoengaged in major modernization projects, and
b) to increase production capacity as follows:
1957 1962- - '000 tons - -
Pig iron 1,132 1,492Ingot steel 1,702 2,302Plates) 622 l,iOOSheets)621,0Tubular goods 318 376Shapes and bars 720 848
35. In order to achieve these aims, Nippon Kokan proposes to carry outthe following improvements at its steel plants:
a) At the Mizue plant of the Kawasaki works, Nippon Kokanwill build the first stage of what is intended eventuallyto be a completely integrated steel mill. This firststage includes two 60-ton oxygen top blowing converters,a 46" blooming-slabbing mill with soaking pits, a 6811wide semi-continuous hot strip mill and a 66" reversing4-high cold strip mill with attached facilities (contin-uous pickling equipment, annealing furnaces and shearingline). After the completion of the first stage, theMizue plant would obtain its pig iron from the Kawasakiworks. In a later stage, blast furnaces would be erectedat Mizue.
b) At other plants in the Kaasaki. works, Nippon Kokan willexpand its existing sintering facilitie!a, remodel blastfurnace #2, and build a fifth coke oven plant, whilemodernizing the by-product plant. Two 42-ton oxygen topblowing converters will replace the existing conventionalbasic converters.
The soaking pits will be expanded; the finishing facilitiesof the large section mill will be remodeled.
The finishing capacity of the new seamless tube mill(covered by Loan 136-JA) will be ex.panded through theinstallation of a gauge-measuring device and an upsetter.A large diameter welded pipe mill will be erected.
Cold forming facilities will be added.
36. Nippon Kokan will also modernize its refractories plants and itsferro alloy facilities at and improve transportation within the works. Itwill begin constructing a complete harbor (Ogishima) just outside of theKawasaki works to serve as a storage depot for raw materials for all plantsat Kawasaki. Although some work on the harbor, which will be entirely re-claimed land, has already been done, to take advantage of the availabfi ityof fill from the current dredging operations on the Tokyo-Yokahama Canal.the harbor will not be needed until construction of the blast furnace atMizue begins on a site that is currently being used as a raw material yard.
37. The company is requesting a Bank loan to finance the cost of theimported materials for the first stage of the iAlizue plant and for the ex-pansion of the seamless tube mill.
Raw 1iaterials, Utilities, Labor
38. To produce 1,024,000 tons of pig iron in fiscal 1957, the companyimported 1,222,000 tons of iron ore; the rest of the burden consisted of do-mestic raw materials. In fiscal year 1960, when all the new facilities willbe in operation, it expects to produce 1,490,000 tons of pig iron, and willrequire about 1,800,000 tons of imported ore. Imports will come mainly fromthe Philippines, kilalaya, India, Goa, Canada and the United States. The in-crease in its ore import requirements is only part of the expected increasein the ore import requirements of the entire Japanese industry. The industryis taking steps to assure that these increased requirements will be met. AJapanese mission recently concluded an agreement with the Indian Governmentwhich will secure two million tons per annum of Rourkela ore for Japan.
39. Nippon Kokants blast furnaces operate with a blend of 55% of low-grade coking coal (from domestic sources) and 45% of high-grade coking coal(imported mainly from the United States). Its requirements for importedcoking coal in 1960 when it expects to produce 1,490,000 tons of pig iron,will be 850,000 tons. The company should have no difficulty in importingthat quantity of high-grade coking coal.
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40. The company's purchased scrap requirements will rise from 336,000tons per annum in 1956 to about 530,000 tons per annum in 1960, in spite ofthe fact that its already high pig iron/scrap ratio (64:36), is expected torise to 74:26, as a result of a partial shift from open-hearth to convertersteel. The maximur pig iron/scrap ratio for open-hearth furnaces is 65:35,while converters -sually work with a ratio of 90:10. As at present, thescrap needs will be met mainly by imports from the United States. Finallylmestone reqmiremerts will increase but this raw material is readily avail-able in Japan.
41. Adequate facilities are planned to meet the water needs for each ofthe plants.
42. The new hlizue plant will obtain its Dower (129000,000 Kwh/month)from the Tokyo Electric Power Company, whose nearby plant can meet all thecompany's additional requirements for power. Requirements for steam in theMizue area will be met by heat economizer boilers which atilize the wasteheat of converter flames.
43. The total labor force required for the Nizue plant will be about1,000 workers, including staff. These will be taken from the existing pull-over mills at Tsurumi. It is planned to send several engineers abroad toreceive training in operating and maintaining modern strip mills. The otherexpansion projects will not require any additional labor.
Construction Schedule and Enaineerin
44. The construction schedule for the iron and steel Droaram is givenin Annex 5. Construction of the Mizue plant is already well under w-ray. Themain foundations have been completed, and most of the equipment has beenordered. There is every reason to expect that the plant can go into opera-tion by the end of 1959.
45. At Kawasaki the construction of blast furnace #2 is also under way,but the work is going forward slowly, because of the present slump in thesteel industry. The construction of coke plant #5 has been postponed untilSeptember 1958.
46. The two 42-ton oxygen top blowing converters began operations inearly 1958. The seamless tube mill has been in operation since January 1958,and the additional facilities should be completed by the end of 1959. Con-struction of the new large-diameter electric resistance-weld pipe mill andof cold forming facilities has been postponed until the second half of 1958.The expansion of the sintering plant may be delayed if the market remainsbad.
47. Except for the sintering plant, all other facilities should becompleted during the first half of 1960.
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48. The engineering work for the expansion project has been done by theNippon Kokan staff, and seems to have been carried out with care and skill.Nippon Kokan is in close contact with the firms supplying equipment and withthe licensor (Osterreichische Alpine Montangesellschaft) in the case of thenew top blowing converters.
49. The general layout of the plants is satisfactory. The Mizue plantsite is bordered on three sides by canals, which allows for an easy flow ofmaterials. The designers have the additional advantage of building it fromscratch. It will have only one flaw; because of lack of space, raw materialswill have to be stored on the other side of the main Tokyo-Yokohama Canal,at the Ogishima Harbor. This will mean additional handling costs, after thefinal stage has been completed. The Mizue plant will then have three 1,200tons/day blast furnaces and corresponding coke plants and sintering facilities;one 60-ton converter will be added to the two to be built in the first stage;a continuous 5-stand co'd rolling mill will supply sheets for an electrolytictinplate line and for a galvanizing line, thus making the Nizue plant one ofthe finest in japan for flat products.
50. Except for the Ikegami plant at the Kawasaki works where the hoopmill, butt-weld and seamless tube mills are located, all of Mippon Kokan'splants are the result of many expansion and remodelings, and have complicatedlayouts. This is not unique to Nippon Kokan, however; almost all old plantshave similarly complicated layouts. Nippon Kokan's staff has dealt withthese rather difficult problems ingeniously.
Cost Estimates
51. A breakdown of the cost estimates for the entire Y46,512 millionprogram (e129.2 million equivalent) from April 1957 to March 1961 is givenin Annex 6. The main figures are as follows:
Rest of Expansion Program:Iron and Steel Departnaents 6,191Rolling Department 3,351Seamless Tube Mill -completion of 1st stage 3,846
Improvements in ferro-alloys,refractories, transportationand harbor 1,107
Contingency Reserve 3.50017,995
Renewals and Repairs during the4-year construction period 4,356
46,Sl2 (k129.2 million equivalent)
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52. These estimates are the result of a revision in 1957 when materialprices were at their highest. They include allowances for transportation,insurance, customs duty and erection. A reasonable allowance for spare partshas been included with all contracts for imported goods. Estimates for civilworks and structures were made on the basis of mid-1957 unit prices duringboom conditions and appear to be reasonable.
53. The maximum escalation provided for in contracts which include es-calation is X675 million; the amounts required would be taken from the con-tingency reserve which totals Y4,256 million. Orders amounting to 5O% ofthe total expenditures expected to be made in the four years ending March1961have already been placed, and the contingency reserve appears ample to coverany difference between the estimates and the actual costs on orders whichare still to be placed, which amount to abcut *18.5 billion. These exclude re-newals and repairs.
54. Interest during construction is not included in construction costs,but will be charged against operations.
55. Of the estimated total cost of the program, about 20% ($28 millionequivalent) will be for imported equipment. This includes the $22 millionrequired for the project submitted as the basis of a proposed Bank loan.
56. Nippon Kokan asks for bids on an international basis in caseswhere imported equipment might be as cheap as or of a higher quality thanJapanese equipment. For flat product rolling mills, tenders were limitedto American suppliers, on account of their experience and superiority inthis field. Tenders for the blooming-slabbing mill, which were invited inJuly 1956, were also confined to American suppliers, after informal en-quiries had indicated that deliveries from other sources were likely to beconsiderably slower. Domestic equipment is purchased on a competitivebasis.
Proposed IBRD Loan
57. The Bank has been asked to make a $22 million (Y7,920 millionequivalent) loan, which would be sufficient to cover the cost in variouscurrencies of imported equipment for the Mizue plant and for the secondstage of the seamless tube mill.
58. The proposed loan represents about 33% of the cost of the project,and about 18' of the total cost of the company's four-year expansion program.Annex 7 gives an estimate of the currencies likely to be required, and de-tails of the disbursement schedule which is summarized below:
Year ending March 1959 March 1960 March 1961 Total- - - - - - $ million equivalent - - - - - -
Total disbursements 19.9 1.4 0.7 22.0
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V. BENEFITS RESULTING FROAi THE EXPANSION
59. Nippon Kokants new hot and cold strip mills at Mizue are only oneof a number of modern flat products plants expected to be in operation bythe end of 1959. These include Kawasakis Chiba plant, Yawata's Tobata plant,and Fuji's iMuroran and Firohata plants. IMost of these plants are designed forfurther expansion through the installation of auxiliaiy equipment, which wouldincrease their capacity at a relatively low investment cost per additional tonof capacity, and much of this expansion is likely to be carried through before1962. The adJtion of so many new plants at one time is likely to result inovercapacity for the production of flat products for several years after 1959.However, by 1961 the operating rates should be high enough to permit profitableoperation unless cornetition on world markets in flat products and productsmanufactured from taem (ships, machinery, etc.) should 2orce a sharp reductionin prices and profit margins. Earnings would increase steadily thereafter asrising demand permitted fuller utilization of capacity.
60. The installation of modern flat products mills is essential to en-able Japan to maintain its position as an exporter of galvanized sheet andmanufactured products using large quantities of p'late and sheet (ships, dur-able consumer goods). The modern mills produce a higher quality product ata lower cost. The expected temporary overcapacity might have been avoided byspreading the expansion of capacity over a longer period of time. However,this would have placed producers whose plants were delayed at a competitivedisadvantage. Temporary overcapacity thus appears to be a natural coaaequenceof the need for modernization in a competitive economy.
61. Nippon Kokan will achieve very substantial cost reductions as a re-sult of the installation of the new strip mills and the shift to convertersteel. This is indicated by the following comparison of the cost of producinghot-rolled sheet in 1957 and 1960. The reduction in the cost per ton of rawmaterials is attributable in part to the fact that whereas in 1957, only openhearth steel was used, in 1960 a sizeable proportion will consist of convertersteel which is much cheaper to produce.
1957 1960Existing Semi-continuous
Pullover Mill Hot StriD M11i(kg.) (yen) (kg.) (yen)
Major raw materials 1,197 44,520 1,106 34,054Operating cost 14,470 4,495Depreciation 230 976
59,220 39,525Less : By-products 1,702
,37.805
62. These reductions in cost will be reflected in a higher return onsales. This, together with the expected increase in the volume of sales,would result in an increase of over 75% in operating profits (before interestand taxes).
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1957 1961-- 9 million - -
Sales 86,101 114,370Less: Total Operating Cost 73,892 92,620
Ordinary Depreciation 2,642 4,744Operating Profit beforeInterest and Taxes 9,567 17,006
Return on Sales U1.1% 14.9%
63. The increase in profits from 1957 to 1961 would be X7,439 million,a 15% return on the 448 billion investment. Profits and returns on saleswould increase further when demand rose enough to permit fuller operation ofthe new capacity.
VI. ASSUk'PTIONS FOR FUTURE DFMAND AND PRICES
64. All forecasts have been made on the basis of reasonably conserva-tive assumptions as to future demand, which have been agreed, after exhaus-tive discussion, with the company. A detailed list is given in Annex 8. Thebasic assumption is that total demand (domestic and export) for all steel pro-ducts in fiscal year 1962 would correspond to an ingot steel production ofaround 17 million tons. This would represent an increase of about 7.5% peryear from calendar 1956. (See report on the Japanese steel market T.0. .718).
65. In view of the current recession in Japan, however, it seems reascn-able to expect that in 1958 and 1959, demand will fall below a straightlineprojection from 1956 to 1962. It has been assumed therefore that in fiscal1958 production will be equal to actual production in fiscal 1957; an increaseof 15% has been assumed for 1959. For 1960 and the years following, it hasbeen assumed that production will return to the straightline projection from1956 to 1962.
66. The basic assumptions have been modified to take account of thefact that companies with new facilities producing at low cost are likely toincrease their share of the market, with obsolete high cost equipment becom-ing idle.
67. Operating rates for different facilities based on these assumptionsare given in Annex 9.
68. The present level of domestic prices is very low, because of thedepression on the steel market, and it does not seem unduly optimistic toassume that most prices will recover to a more normal level (the one assumedfor Sumitomo and Kobe) in 1959. With respect to those steel products forwhich there is still substantial demand and whose prices are still relativelyhigh, however, it has been assumed that future prices will be those of June1956, just before the beginning of the boom on the steel market. In view of
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the weakness oftke international steel market at present, it seems sufficientlyconservative to assume a slight increase in export prices for Japanese productsin the next few years.
69. It has been assumed that prices for plates would decline by 5% in1960, when most of the new plate mills and hot strip mills will come intooperation, and by a further 5% in 1962. For similar reasons, it has been as-sumed that sheet prices will decline by 3% in 1960 and by a further 3% in 1962.
70. Shipbuilding activity is expected to decline (see Annex 4), and as-sumptions with respect to sales of the shipbuilding division have also beenconservative. It has been assumed that in 1958 when the company will still beworking on its large backlog of orders, sales will be the sane as in 1957. In1959, however, it has been assumed that sales will fall by 4% from the 1958leveljit is assumed that sales will fall by another 7% in 1960 and remain atthat level thereafter.
71. These seem to be reasonably conservative assumptions. Because ofthe weakness in the world steel market today, however, the liquidity rros-pects of the company during and immediately after the construction periodhave been reviewcd with special care to ensure that, so far as is foreseeable,the company's resources will be adequate, even if the market for steel ispoorer than has been assumed.
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VII. FINANCING PLAN AND FLNANCIAL FROSPECTS
72. Financial projections are attached showing the expected earningsof the company (Inrnex 10), its cash flow (Annex 11), and its financial situa-tion (Annex 12), Curing the construction period and the first four operatingyears. The assuiLptions on which the calculations are based are listed inAnnex 13.
73. The projactions indicate that the financing plan is sound and thatthe company's earnings should be adequate to enable it to pay dlvidends at areasonable rate af';;er rmeeving all financial obligations. The prospectivefinancial structure of the company is satisfactory. Further details aregiven in the following paragraphs.
A. Construction Pericd
Financing Plan
74. The company's financial requirements for the construction pericd(the four years from April 1957 to March 1961) are as follows:
$ millionX million equi alent
Construction program, IBRD project,other improvements 46,512 129.2
Investments in shares and long-termreceivables 3,995 11.1
Working capital increase 12,110 33.6Repayment of IBRD first loan 169 0.5Repayment of IBRD second loan 215 0.6Repayment of other long-term loans 10,922 30.3Repayment of bonds 30773 10.$
77.696 215.8
75. Most of the expenditure is planned to take place in 1958 and 1959,and the part of the program which is covered by the Bankts loan is scheduledto be completed by the end of 1959. That explains 'wty repayment of the IBRDloan is assumed to start in 1960. The increase in working capital is neededmainly to finance increases in inventories. It is assumed that total receiv-ables would increase from X13,673 million at March 31, 1957 to X26,740 millionat March 31, 1961 because of the difficult market situation, but that finan-cing by discounting notes receivable or similar procedures would increase fromX4,837 mlllion to X13,520 million (more than I6 billion of the latter areassumed to be in form of guaranteed letters of credit pledged to the Export-Import Bank of Japan for five year credits on ship sales).
76. Nippon Kokan proposes to meet these requirements from the followingsources:
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$ millionY million quivalent %
Retained earnings after taxes,interest and dividends 29,212 81.1 37.4Share issue 5,000 13.9 6.5Long-term debt:IBRD first loan 278 0.8 0.3IBERD second loan 7,920 22.0 10.1Bonds 5,022 14.0 6.4Other long-term loans 16,586 46.1 21.3
Increase in short-termborrowings L4,030 38.9 18.0
78,048 216.8 100.0
77. The figure of Y29,212 million for retained earnings during the four-year construction period is based on the assumptions discussed in paragraplhs64-71 above, namely!
a) that the difficult market for the steel industry wouldcontinue until Miarch 1959.
b) that a very substantial recovery would take place in 1959and that from then onwards prices and demand for steelproducts vwould be at the same levels as previously assumedfor Sumitomo and Kobe.
78. The share issue of Y5,000 million was successfully sold last year.
7°. During 1957, Nippon Kokan issued a total amount of '922 million inbonds. The Fuji Bank, which is the largest commercial bank in Japan, and thecompany's main banker, has given assurances concerning the underwriting ofbond issues in the next two years for h4,100 million.
80. Of the total YJ16,586 million of new long-term loans from Japanesesources, Y3,816 million have already been contracted in 1957. The IndustrialBank of Japan, the Long Term Credit Bank and the Daiichi Mutual Life InsuranceCompany Limited (acting as leader of a syndicate of life insurance companies),have agreed to lend a further X8,600 million. The Fuji Bank has agreed tolend or arrange loans for 2l,580 million. The balance of X2,590 million hasnot yet been contracted.
81. Most of the necessary short-term credits have already been arranged,and the comparn has received informal assurances that the balance of someY5 billion will be obtainable from the Fuji Bank.
Analysis of Projections
82. The projections show that during the four years in question:
a) Earnings after depreciation, interest, taxes, pre-profit reserveallocations and accrued dividends of 13% would amount to Y6,922million. Total retained earnings (including Y14,675 millionordinary depreciation and Y7,615 million free reserve allocations)would amount to Y29,212 million (see Annex 11).
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b) The company could complete its construction program and meet allits financial obligations with a net cash accrual of about X352million.
c) Interest on all debt would be covered by margins ranging from 1.9to 3.3 times.
d) The current ratio would reach a low level of 1.13:1 by March 31,1960, and would improve only slightly during the following year.It would remain precariously low until the year ending M4arch 31,1962. To protect the company's liquidity during this period,it appears necessary to arrange a renewable credit line with theFuji Bank for the amount of short-term debt contemplated (withthe exception of the X3.5 billion which would come from the Export-Import Bank for shipbuilding). If this were done, the currentratio would not fall below 1.86:1 during the period, which wouldbe satisfactory.
e) The ratio of long-term debt to equity would rise from 18:82 atMarch 31. 1957 to 41:59 at March 31, 1960. Total debt to equityratio wo.ld reach its highest value at the same time, 56:44.These ratios would be acceptable.
B. Onerating Period
83. During the four years after the completion of construction (April 1,1961 - March 31, 1965), cash generated from the company's operations (afterpayment of taxes, interest and cash dividends at the rate of 13% per annum)would amount to About X55.6 billion, and would enable the company.
- to repay about X15.8 billion of long-term debt;- to invest about Y4,0 billion in fixed assets (i.e. to spend
X1 billion per year on normal renewals and repairs);- to increase net working capital by f16.9 billion (increase
of current assets X11.1 billion; decrease of currentliabilities X5.8 billion);
- to invest X2.4 billion in shares (an estimated I600 millionper year, of which Y400 million for shares in subsidiaries,and Y200 million to meet increases in capital of banks, etc.,in which the company holds shares);
- to decrease short-term loans by X16.4 billion.
84. By the end of this period, the ratio of its total debt to equitywould fall to 19:81 and its current ratio would rise to 2.6:1. Service onlong-term debt would be covered by margins ranging from 2.7 to 4.7 times.This cover has been calculated on the assumption that after the end of theconstruction period no further refunding issue of bonds would be made. Inpractice, the company would follow the normal procedure of issuing new bondsevery year to cover all or part of the issues maturing in that year, so thatthe debt service cover would effectively be higher. Net cash accruals wouldbe only about X145 million, since the projections assume that spare cashwould be used to reduce short-term loans.
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Conclusions
85. The Japan Development Bank, which would relend the proposed Bankloan to the company, has the primary interest in security arrangements. Thecompany's long-term loans and bonds are secured by mortgages, and the JapanDevelopment Bank -hould be satisfied that the arrangements proposed are inaccordance with its usual requirements.
86. It i3 retommended that the companyts freedom to incur debt shouldbe limited; so as -;o provide that the ratio between consolidated total debtand equity should not rise above 60:40 during the construction period andabove 50:50 therealter.
87. It is recommended that the expansion of the sintering plant, andthe construction of any other proposed major facility not ircluded in thepresent program, should not start until Nippon Kokan can satisfy the JapanDevelopment Bank and the Bank that the cost of such facilities can be fin-anced without jeopardizing the company's liquidity.
88. Before the subsidiary loan agreement is made effective, the pro-posed arrangements for raising long-term loans in Japan, and the proposedfinancial undertakings of the Fuji Bank (to supply and arrange for short-term loans and to backstop short-term loans until March 31, 1962, to under-write future issues of bonds and to arrange for part of long-term l-;~ns)and other banks or financial institutions (to supply long-term loan;j shouldhave been evidenced in form satisfactory to the Japan Development Bank andto the Bank.
89. The project (the first stage of the Mizue plant and the secondstage of the seamless tube mill at Kawasaki) is suitable for a Bank loanof $22 million equivalent, with a term of 15 years, including two years ofgrace. The borrower would be the Japan Development Bank which would relendthe proceeds of the loan to the company. The loan would be guaranteed bythe Japanese Government.
ANNEX 1
NIPPON KOAN
EXISTING FACILITIES
Annual Capacity([tons)
Kawasaki Works
3 blast furnaces 972,0002 sintering plants 656,0oo4 coke oven plants 787,0007 open hearth furnaces 609,0005 converters 600,0001 2-high and 1 3-high blooming mill 660,0002 3-high large eecticn mills 288,0002 3-high and 1 2-high medium section mill 227,0002 small section mills 205,0001 hoop mill 30,o0Q03 seamless tube mills 186,0002 electric resistance-weld pipe mills 11,5001 continuous butt-weld pipe mill 120,000
Tsurumi Works
1 blast furnace 160,0005 open hearth furnaces 493,0001 plate mill 414h0004 plate and sheet mills 208,000
Toyama and Niigata Works: ferro alloy equipment
Kawasaki, Tsurumi and Okayama: Refractory Division
Kawasaki and Koyasu: Chemicals and Fertilizer Plants
Tsurumi, Asano and Shimizu Shipyards: Shipbuilding Division
Net Profit after depreciation andIncome Taxes, before Interest andReserves '4,171 5,953 7,766 7,127
Times Total Interest covered 1.4 1.7 3.1 3.3
Net Profit after depreciation,Interest and Income Taxes,before Reserves 1,171 2,395 5,253 4,980
Net return on equity 5.5% 11% 19.8% 14.7%
* Unconsolidated
ANNEX 3Page 3
NOTES
Nippon Kokan's formal balance sheet has been adjusted in accordancewith conservative practice in steel companies in the United States:
- Reserve for repairs and maintenance is added to depreciation.
- Long-term debt maturing within 12 months has been deductedfrom fixed liabilities and added to current liabilities.
- Dividends and officerst bonus as vwell as estimated taxes tobe paid on ending period's earnings, currently carried in equityin Japanese practice, have been transferred to current liabili-ties.
- Reserve for bad debts is deducted from Accounts and NotesReceivable.
- "Money received in advance from customers" is deducted fromcurrent liabilities and from inventories.
- Receivables due in more than 12 months are included in "Invest-ments" and are not in current assets.
Spare parts are accounted with the corresponding fixed assets, anddepreciated accordingly.
- Long-term loans from the Export-Import Bank of Japan obtained bypledging guaranteed letters of credit received in payment of shipexports, are deducted from long-term loans and from Accounts Re-ceivable and shown as a footnote.
- One year loans for working capital of the shipbuilding divisien areincluded in "short-term loans".
ANNEX LPage 1
NIPPON KOKAN
NARKET PROSPECTS FOR NIPPON STEFL TUBE CO.
1. The Nippon Steel Tube Co. (Nippon Kokan) is the third largest inte-grated steel company and one of the leading shipbuilders in Japan. It manu-factures virtually all steel products - bars, shapes, plates, sheets, andseamless and welded tubes. About 20% of its plates are used by itsshipbuilding division, which has accounted for roughly 20% of company salesin recent years. An assessment of its market prospects thus requires ananalysis of the market prospects of all Japanese-produced finished steelproducts and of the Japanese shipbuilding industry.
2. The Japanese steel industry is engaged in a major expansion program(the so-called Second Miodernization Program) intended: (a) to increase steel-making capacity so as to make possible a production of 20.15 m41,llion tons ofcrude steel in 1962, compared with 11.68 million tons in 19561I; (b) to in-crease blast furnace capacity to an even greater degree in order to reduceJapanese dependence upon imported scrap; and (c) to continue the moderniza*tion of finishing facilities, mainly through the installation of continuousand semi-continuous strip mills to replace existing hand mills, with a result-ing expansion of capacity. This program was developed last year by the Min-istry of Industry and Trade (MITI) on the basis of the actual plans of thesteel companies, and in the light of MITIT's estimates of future demand. Someof the projects have already been completed and most of the rest are underway, but there are projects, particularly for crude steel and pig iron,which are not yet firm and which may well be postponed if demand increasesmore slowly than MITI has assumed. The market prospects of the industrydepend upon whether the increase of capacity from such projects as are nowunder way or are reasonably certain to be completed in the next few yearswill be in balance with or run ahead of the growth in demand.
3. The relationships between probable demand and potential capacityfor crude steel and pig iron are discussed in T.0. 178. That paper concludesthat although demand for crude steel may amount to only 16-17 million tonsin 1962, instead of a little over 20 million tons, as forecast by MITI, thereis unlikely to be any serious problem of overcapacity, since enough of theproposed additional capacity in these fields is postponable to keep potentialsupply from outrunning demand even at the lower level.
4. The following assessments of the market prospects for finishedproducts are based on the assumption that demand for all finished productsmay be in line with a demand for crude steel in 1962 of about 17 milliontons rather than 20 million tons, and that some expansion projects may bepostponable. In the case of finishing facilities, however, the possibilityof postponement is rather limited. Most of the projects are already underway and scheduled for completion next year; the additions scheduled for1960-62 are also likely to come in because they would result for the mostpart from the installation of auxiliary facilities at existing mills at arelatively low investment cost per ton of additional capacity.
1/ The years referred to are Japanese fiscal years which run from kpril 1of the indicated year to the following March 31.
ANNEX 4Page 2
Bars and Shapes
5. In comparing prospective capacity and demand, shapes, bars and wirerods must be considered as a group because of the overlap in the productionof the section, bar and wire rod mills where they are manufactured. Capacityfor the production of these items exceeds demand considerably at present andseems likely to continue so through 1962, even though planned additions tocapacity are modest. However, this potential overcapacity is and would betheoretical rather than actual. A large fraction of the existing capacityis obsolete and uneconomic. It is maintained mainly as a reserve for periodsof high demand; at other times, it provides a useful flexibility. Althoughbar prices are subjeet to pressure from the competition of re-rollers whenbusiness is slack, the existence of excess capacity has not resulted in anyweakness in prices in periods of normal business activity. Well-establishedproducers like Kokan should be able to expand their sales as total demandrises.
Pipes and Tubes
6. Japanese pipemaking capacity is considerably in excess of demandat present. Production of seamless pipe amounted to only 250,000 tons in1957 compared with a capaclty estimated at 535,000 tons per year, welded pipeproduction to 335,000 tons compared with a capacity estimated at 960,000 tonsper year. The bulk of the seamless pipe capacity is up to date: the T2odernfacilities include Kokan's new efficient 120,000-ton mill completed lastyear to replace obsolete facilities, and Sumitomo's recently remodeled millsat Amagasaki and Wakayama which have a combined annual capacity of 270,000tons. In the case of the weld-pipe mills, over half the capacity consistsof out-of-date facilities to produce gas-weld pipes which are everywherebeing replaced by butt-weld and electric-resistance weld pipes. During thenext few years, the four leading pipe producers plan to install new electric-resistance weld pipe mills with a total capacity of close to 400,000 tons.These additions would be offset by the retirement of an equal amount ofobsolete gas-weld pipe capacity.
7. Although no further expansion of seamless pipe capacity is plannedand total weld-pipe capacity would remain unchanged, there would continueto be considerable overcapacity for both products through 1962 if the risein demand is in line with a demand for all finished products in 1962 equiv-alent to about 17 million tons of crude steel. The operating rate for seam-less pipe facilities would not reach 70% until 1962, and the rate for weldedpipe facilities would reach that figure only if two proposed electric-re-sistance weld pipe mills that are not yet entirely firm were postponed. If,as seems more likely, these mills are completed as now planned, the weldedpipe facilities would operate at a rate of only a little over 65% in 1962.The burden of overcapacity might fall somewhat more heavily on seamlesspipe mills than these figures suggest, if electric-resistance weld pipestake over a larger share of the pipe market. These pipes cost less to pro-duce than seamless pipe and can be substituted for it in a number of uses.In any event capacity for pipemaking would continue to exceed demand sig-nificantly over the next five years, if demand for all steel products amonastdto the equivalent of 17 million tons of crude steel in 1962.
ANNEX LPage 3
8. It should be noted, however, that the proposed investment in weldedpipemaking facilities is relatively small. The cost of a proposed 60,000 tonper year mill to produce pipes of from 8 to 20 inches in diameter is estimatedat only $7 million. What is more important, it is unlikely that temporaryovercapacity would have any serious effect on prices or profit margins in thepipe and tube industry. The number of producers in the industry is small,and they tend to respect each other's markets and to reduce output ratherthan cut prices when demand falls off. The effectiveness of this close, ifinformal, relationship is indicated by the fact that profit margins on pipesamount to about 30%, compared with about 10% on bars. There is no indicationthat there will be any change in this situation in the near future.
Flat Steel Products
9. Flat steel Droducts range in thickness from a small fraction of aninch to about two inches. In general, the heavier products are made in platemills and the lighter in sheet mills. There is, however, a range of thick-nesses, say from 0.1 to 0.5 inches, which can be produced in either type onmill. Since these thicknesses represent a large proportion of all flat stcelproducts, it is necessary to compare total plate and sheetmaking capacitywith tcta'2 demand for these products to arrive at a meaningful judgment asto their merket prospects. In the case of sheet, both capacity and demandfigures are expressed in terms of hot rolled products. In practice, wellover half of the hot rolled sheets are further processed in cold rollingmills.
10. Japanese capacity for platemaking has been considerably expandedwithin the last few years, mainly in response to demand from the shipbuild-ing industry. Of the 2.2 million tons per year of plate mill capacity inoperation in 1957, about 900,000 tons per year was in three mills completedvery recently. The planned additions to capacity in the next few years arenot great. One mill (Fuji's Hirohata mill) is expected to come into oper-ation this fall and there would be expansions at that mill and two othermills in 1959-61. All the proposed expansions involve relatively small ex-penditures and are likely to be carried through, but even including them,the total increase in capacity would amount to only 700,000 tons, to 2.87million tons in 1962.
11. There will, however, be a very great expansion in capacity forflat products as a whole over the next few years as a result of the instal-lation of semi-continuous strip mills to replace existing hand mills. Thisis a changeover which has already taken place in the US and Europe. Becauseproducts made in modern mills are higher in quality and lower in cost thanthose made in hand mills, the Japanese have had to follow suit to maintaintheir competitive position on the international market. Each of the largesteel producers in Japan similarly has found it necessary to install amodern mill to maintain its competitive position vis a vis other Japaneseproducers.
ANNEX 4Page 4
12. The result will be a very great addition to capacity for flat prod-ucts. Four modern hot strip mills are already in operation (including onecompleted last year). Three more are under construction and should be fin-ished by 1959. An eighth mill is included in NITI's expansion program butno account is taken of it in the following analysis because it is not yetfirm. Operating under optimum conditions, the seven modern hot strip millswould have a total annual capacity in 1959 of 5.16 million tons compared with2.2 million tors at the beginning of 1957. By 1962, their capacity shouldrise to 5.86 million tons. The additional expansion is almost certain tooccur since it would be achieved through the installation of a-xiliary facil-ities at a low investment cost per additional ton of capacity. Even takingaccount of the probable retirement of about half a million tons of pull-overmill capacity,-the capacity of"continuous and semi-continuous strip mills&nd the remaining hand mills would amount to over 6 million tonsoby 1962, ormore-than twice^--as muth as at the beginning of 1957.
13. Demand for the various types of flat products is likely to riseat differing rates. In the case of plates, the increase should be relative-ly small because of an expected decline in shipbuilding (discussed more full-ybelow), which has accounted for about 40% of the total demand for plates inthe last few years. This decline in demand for ship plates will probablylargely offrst the rise in demand for plates for machineryr, etc. Demand forsheets, on the other hand, is likely to rise relatively rapidly. The exject-ed steady rise in per capita income ihould lead in Japan, as it has in othercountries, to a relatively rapid rise in demand for automobiles and otherconsumer durables. Taking account of these divergent tendencies, it seemslikely that demand for all flat products should increase at about the samerate as demand for all finished steel products.
14. If the demand for all finished steel products rises to the equiv-alent of 17 million tons of crude steel by 1962, the demand for flat prod-ucts would be such as to permit the operation of plate and hot strip millsat a rate of about 60% in 1959 and 1960, close to 65% in 1961 and close to70% in 1962. In the United States, continuous and semi-continuous stripmills (and they would represent the bulk of the capacity for flat productsin Japan) can break even at a rate of 55% to 60% of optimum capacity. Fig-ures provided by Japanese producers suggest that this would also be thecase in Japan. Thus, the new strip mills should be able to operate profit-ably by 1961, provided there is no significant change in profit margins.
15. The small number of producers in the industry and their tendencyto follow price leadership make it unlikely that there would be any pressureon profit margins as a result of competition within Japan itself. However,competition in the world market in steel and steel manufactures (galvanizedsheet, ships, machinery, etc.) might make necessary price cuts and imperilJapanese strip mill profit margins. The risk is difficult to assess. Inany case, the failure of any steel producer to install a modern strip millwould impose so grave a competitive handicap upon it as to constitute atleast an equal risk.
ANEXLPage 5
Cold Rolled Sheet
16. The cold strip mill picture resembles the hot strip mill picturevery closely. The installation of new and expansion of existing cold stripmills should increase cold rolling capacity from a little over one milliontons in 1957 to over 2.5 million tons by 1959. Demand for cold rolled sheetsshould rise rather 5.apidly, both because of the expected increase in demandfor all sheets and because of the likelihood that increased cold rollingcapacity will encoru&ge Japanese consumers tn use a higher proportion of coldsheets. (At present. the Japanese consume a: equal tonnage of hot rolled andcold rolled sheet; ir, the United States, in contrast, tha ratio is 40:60.)In spite of the probable rapid rise in demand, the greatly expanded coldrolling facilities would operate at a rate of less than 60% in 1959. However,the operating rate should rise steadily thereafter to over 70% by 1962. BothAmerican and Japanese experience suggest that a cold strip mill can operateprofitably at over 60% at present cost-price relationships. Unless there isstrong pressure on prices and profit margins, therefore, the cold strip millsshould be able to earn a profit after 1960.
ah§Di1bui,ding
17. Kokan's shipbuilding division builds and repairs ships and fabri-cates steel structures. Its major activity, however, has in recent yr-~7sbeen the construction of large vessels, mainly for export. It has sh:.rzd inthe prooperity of the Japanese shipbuilding irdustry, indAcated by th- in-crease in the tonnage of merchant vessels under construction in Japan from377,000 gross tons at the end of 1954 to 1,589,000 gross tons at the end of1957.
18. Present indications are that the Japanese shipbuilding boom is atan end. The Japanese shipbuilding industry has concentrated on tankers.The great volume of tanker construction in the last few years has alreadyled to a considerable surplus - over 6 million tons of tankers, or about 11%of the total fleet are laid up at present and spot tanker charter rates areat very low levels - and this surplus will increase further in 1958 and 1959as the large number of tankers now building or still on order are completed.By 1960, therefore, when the present order books thin out, the level oftanker building activity should begin to decline. There is every indicationthat it will remain low for several years thereafter until the retirementof old ships and rising demand again bring supply and demand into balance.One of the leading reporters of tanker trends, the British shipping brokersJohn I. Jacobs, estimate that world deliveries of tankers will fall from7 million tons in 1958 and 1959 to 6 million tons in 1960, and 5, 4 and3.4 million tons respectively in the following three years. Although tech-nical innovations and low labor costs have enabled the Japanese to competesuccessfully against other shipbuilders, their competitive advantage wouldnot be so great as to significantly increase their share of a smaller worldmarket.
ANNEX 4Page 6
19. In the case of Kokan, the decline in shipbuilding activity begin-ning in 1960 may be offset to some extent by an increase in ship repairwork and in structural steel work. Shipbuilding bulks so large in the ac-tivities of its shipbuilding division, however, that the sales and earningsof that division are almost certain to be lower in 1960-62 than they havebeen in the past few years.
20. A survey of the Japanese market for finished steel products sug-gests that although capacity for all products will probably be in excess ofdemand through 1962, producers should have no difficulty in selling shapes,bars and tubular goods at a profit. Overcapacity in shapes and bars isattributable to obsolete facilities maintained mainly for periods of highdemand; it has not affected prices in the past and is unlikely to do so inthe future in perieds of normal business activity. Profit margins on pipes,which are relatively high at present, are also unlikely to be affected sig-nificantly by overcapacity. In the case of flat rolled products, Americanand Japanese experience suggest that unless strong pressure on world marketscuts profit margins significantly, the Japanese producers should be able toearn a profit by 1961 even at the low operating rates that seem probeble.The risk that world competition might force prices down to a level whichwould make impossible profitable operation at a rate of 60-70% is one thatthe Japanese must take. The expansion of capacity is tied in with theinstallation of modern facilities. A failure to install these facilitieswould impose so grave a competitive handicap upon Japanese steel producersas to constitute at least as serious a risk as that stemming from over-capacity. In the case of the shipbuilding division, which accounted for20% of Kokants sales in 1953-56 and something over 30% in 1957, sales andprofits are almost certain to decline beginning in 1960 when the bulk ofthe vessels now building or on order will have been completed.
ANNEX 5Page 2
NIPPON KOKA.N
CONSTRUCTION SCHEWDUE
A) Kawasaki Works Construction PeriodStarted Com=leted
Ironmaking
Construction of a new No. 2 blast furnaca January, 1957 September, 1958Construction of coke oven battery No. 5
with 42 ovens September, 1958 February, 1960*Expansicn of sintering faci'lities September, 1958 March, 1960
Modernization of chemical departmentfacilities October, 1958 September, 1959
Steelmaking
Construction of 2 L-D Converters withoxygen generating plant January, 1956 January, 1958
Rolling Mills
Expansion of soaking pits December, 1956 September, 1958Remodelling of finishing facilities ofLarge Section Mill June, 1956 March, 1958
Construction of a seamless tube mill December, 1955 January, 1958Construction of large diameter welded
pipe mill December, 1958 May, 1960Construction of cold forming facilities December, 1958 May, 1960Other facilities September, 1955 June, 1958
B) Mizue Works
Steelmaking
Construction of 2 60-ton L.D. top blowingconverters March, 1957 September, 1959
Rolling Mills
Construction of a blooming mill andsoaking pits March, 1957 September, 1959
Construction of a complete hot stripmill, 68" wide March, 1957 September, 1959
Construction of a complete cold stripmill, 66" wide March, 1957 September, 1959
Auxiliary equipment to the above rollingfacilities
A1NEX 5Page 2
Construction PeriodStarted Completed
C) Tyvama Works
Modernization of ferro-alloy manufacturingfacilities October, 1956 August, 1957
D) In addition, transportation facilitiesin all plants are intended to beimproved. June, 1957 September, 1959
* It is proposed that these facilities should not be constructed until NipponKokan can satisfy the JDB and the Bank that their cost can be financed with-out jeopardizing the Company's liquidity.
NIFPON ItOKk ANNEX6
COST ESTIMATES
April 1957 - March 1961
ExpendituresAmount spent from April 1,
before 1957 to March m millionUnder I.B.R.D. LDan Tot,oal CsLt r 31. 157 II. 961 aggi-lent
(i million) (Y h. ion) (} mil1lon)
Mizue 1maa 2 Converters and facilities 3,600 - 3,600 10.01 Slabbing Mill 4,800 M 4,652 12.91 Hot Rolled Strip Mill 9,500 70 9,430 26.21 Cold Rolled Reversing Mill 3,500 197 3,303 9.2Facilities for Milue Plant 1.600 _i6o- LL
Iron Making Reconstruction of Blast Furnace #2 2,500 56 2,444 6.8Construction of Coke Oven #5 1,340 - 1,340 3.7Expansion of sintering facilities 570 - 570 1.6Modernization of chemical dept. facilities 900 - 900 2.5
Steel Construction of 2 L-D Converters 1,600 663 937 2.6
Rolling Expansion of soaking pits 480 6 474 1.3Rmodeling of Large Section Mill 250 23 227 .6Construction of large diameter welded pipe 2,400 - 2,400 6.7Construction of cold forming facilities 250 - 250 .7
Others Modernization of ferro-alloy 510 262 248 0.7Modernization of refractories 130 26 104 .3Improvement of transportation facilities 1,000 562 438 1.2Fort facilities (1959/1961) Ogishim(lst stage) 317 - 317 0.9
Construction of 1st tem seamless 1m(IBRD loan 136-JA) 2S05 43S 3 ib
On 2nd stage of SeamlessTube Mill - - 640 180 - 820
Contingency Fund -506 250 - L656
415 3,543 11,705 8,663 250 24,576
Foreign expenditures byexpected currencies:
D. Iarks (thousands) 7,700 7,700
U.S.$ (thousands) 18,077 1,400 699
Total U.S.$ equivalent 19,901 1,400 699 22,000
(Y million equivalent) 7,164 506 250 7,920
Note: About $1,150,o00 of the total $19,901,000 scheduled to be withdrawnin 1958 is for reimbursement of foreign expenditures made beforeAugust 31, 1957.
ANhm 8
NIPPON KOKAN
ASSUMPTIONS FOR SALES FORECAST
The companyts earrnings will be based on the following assumptions:
1956 1961Production Capacity Rate Production Ca acity Rate
(thousand tons) (thousand tons)
Pig iron 996 1,132 88% 1,490 1,1492 100%
Ingot steel 1,359 1,702 80% 1,955 2,302 85%
Bars 133) 185)Shapes 161) 720 140% 193) 8148 45%
Tubes and pipes 182 317.5 57% 285 376 76%
Sheets 4) 621 78% 578) 1,100 64%
Semi-finished pro-ducts Lor sale 153 180
1,112 1,552
ANNEX 10
NIPPON KOKAN
INO3ME STATEMNT FORFGASTS(Y million)
Apr. '57- Apr. '58- Apr. t59- Apr. '60- Construction Apr. '61- Apr. '62- Apr. '63- Apr. '64- OperatingI t e a Mar. '58 Mar. '59 Mar. '60 Mar. '61 Period Mar. '62 Mar. '63 Mar. '61 Mar. 165 Period(actual)
Apr. '57- Apr. '58- Apr. '59- A,. '60o_ Construction Apr. '61- Apr. '62- Apr. '63- Apr. '64- Operatir,Mar. '58 Mar. '609 Mar. '60 Mar. '61 Poria! Mar '62 Mar. '63 r. '61_4 Mar. '65 PeriodSources of Funds TWctua17
Profit for the year. before taxes, interestdividends and bors 7,893* 8,310 10.996 ,17,014 39,213 11,571 10,840 10,013 9,112 41,536
Cash srplus (shortage) for the year 1,208 (920) 104 (40) 352 (lh4) (122) 176 236 14.6Available at beginning of year 4,958 6,166 5,246 5,350 4,958 5,310 5,166 5,044 5,220 5,310Availabl, at end of year 6,166 5,246 5,350 5,310 5,310 5,166 5,044 5,220 5,456 5,456
*This figure includes Proceeds of sale of disused fixed assets
ANNEX 1
NIPPON KOKAN
BALANCE SHEET FORECASTS**(* million)
March 31 March 31 March 31 March 31 March 31 March 31 March 31 March 311958 1959 1960 1961 1962 1963 -196 1965(actual)
Assets
Cash and Bank Deposits 6,166 5,246 5,350 5,310 5,166 5,044 5,220 5,456
*Total receivables include these four items."'Unconsolidated.
ANNEX 13Page 1
NIPPON KOKAN
ASSt4PTIONS FOR FINANCIAL FORECAS[S
The company's financial forecasts are based on the followingassumptions:
1) Earnings would be based on production and prices shown in Annex 8.
2) Ordinary depreciation would be, as in past years, the maximum amountpermitted by law.
3) Special depreciation would amount to S2 billion each year for 1959and thereafter.
4) The increase in Reserve for Retirement Allowance and in Reserve forPrice Fluctuation would be the maximum allowed by law.
5) The increase in Reserve for Bad Debt would be proportional to theincrease in receivables.
6) The increase or decrease in Reserve for Repairs and Maintenancecorresponds to the estimated cost and timing of relining and majorrepairs of the blast furnaces.
7) The company would be able to secure new long-term loans as follows:
a) IBRD loan - $22 million (Y7,920 million equivalent) for 15years, including a two-year grace period, at an interest of5.675% (5.375% for IBRD plus 0.3% for JDB).
b) New long-term loans - X16,586 million for five years (includingtwo-year grace period) at 9.4% interest.
c) New bonds - Y5,022 million for five years (including two-yeargrace period) at an interest of 7.5%.
8) The company would be able to increase short-term borrowings by Y14,030million during the construction period.
9) These loans would be available through the Fuji Bank at 8%.
10) Investments in fixed assets after the end of the expansion programwould be limited to normal renewals and repairs. Estimated amountis Y1,000 million annually through 1964.
11) Investment in shares and securities - subsidiary companies included -would amount to '700 million annually through 1960, and to Y600 millionannually afterwards.
ANNEX 13Page 2
12) Taxes would be due at the rate of about 45% on the net profitafter depreciation and interest.
13) Dividends would continue to be paid in cash at the rate of 13%of the face value on the outstanding shares.
14) The collection period for notes and accounts receivable would be2,6 months for the steel division; terms for sales of the ship-building division for export would be 50% against delivery and50% in five equal annual installmients; notes receivable would bediscounted to about 50% of the total amount.
15) The payment period for notes and accounts payable - mainly forraw materials - would be 2.7 months until 1960, and 2.6 monthsafterwards,
16) Ships for export would be sold on credit terms, taking advantageof the credit facilities available from the Export-import Bank ofJapan. Payments would be by guaranteed letters of credit whichwould be pledged to the Export-Import Bank: the amount assumed fortVe forecasts was about .3.4 billion annually after 1959 payeblein five-year equal installments.
17) One year loans for worXing capital for the shiobuilding divisionwould be available through the Export-Import Bank and commercialbanks; the amount assumed was about Y3,5 billion which would berenewed, In the financial statemXents these loans are included in"Short-term Loans".
ANNEX 14
NIPPON KOKAN
CONSOLIDATED BALANCE SHEET FORFCASTS(Y million)
(Japan Steel & Tube Corp. and Subsidiaries)
As at March 31 129 1493 1960 1621 125_ 1j6. 1926 12k5(actual)
Assets
Cash and Bank Deposits 8,218 7,331 7,490 7,580 7,450 7,373 8,140 9,364