The founder’s thoughts and our raison d’être

 

As a steel company, we aim to achieve harmony between social development and the global environment by recycling and effectively utilizing iron, which makes up one-third of the Earth’s weight. The steel recycling business will become increasingly important as we move toward a resource circulation society. We have three key phrases that we have developed over our 76-year history since our founding in 1947. The first is the corporate objective of Koichi Takashima, the de facto founder of the Company—“to contribute to the reconstruction and revitalization of Japan through steelmaking.” The second is a desire to “show Japan’s excellence to the world resent the world with the true image of the Japanese people,” which he had in his heart since the establishment of the business. There was an anguish in the young man at that time, who had experienced the war and lived through a 180-degree turnabout in values between pre-war and post-war eras. This desire was realized when the Company entered the EAF business in 1960 and quickly expanded overseas, focusing on technical leadership to show the world that the Japanese are naturally honest and hardworking. The third is “harmony with the global environment.” In the 1970s and 1980s, as pollution in Japan worsened, we reflected on whether we had become too complacent about the Earth’s abundant capacity to accommodate us, and we renewed our determination as a steel manufacturer using EAFs to apply the technologies we had mastered through steelmaking while maintaining a harmony with the global environment.
These three ideas held by our founder are the pillars that have supported our growth to date. In the Kyoei Steel Group in the 21st century, I believe that our path forward as well as our duty is to leverage these three pillars while aiming to become an essential company that contributes to the bringing about of a resource-circulation society, and to take individual concrete steps to realize that goal.

Declining domestic population and a greenflationary society

 

Two issues concern me right now. One is climate change, and the other demographic change in Japan.
I was shocked by the news in July 2015 that the temperature in the Iranian city of Bandar-e Mahshahr on the Persian Gulf reached an effective temperature of 74°C. Global temperatures are on the rise, with the effects of climate change being felt worldwide. Society’s expectations of companies to help realize a sustainable society further continue to rise, and regulations are expected to be tightened and rules changed.
Accordingly, companies must play their parts. Japanese society is in population decline. As this continues, real GDP growth will slow and steel demand is expected to decline further. On the other hand, the shortage of human resources at production sites will become ever more serious. As we all know, Japan’s population peaked in 2008 and then began a decline, but the number of workers has been maintained to a certain extent due to the active promotion of senior and female workers. However, the working-age population will decline dramatically after 2025, making it more difficult than ever to secure qualified personnel.
I believe that the formulation and materialization of management strategies to address these two major issues is essential.
In the current business environment, economic blocs are divided by US-China antagonism and Russia’s invasion of Ukraine, and we are confident that the era of these “bloc” economies will continue for the time being. In addition, in working toward the realization of a decarbonized society, there is advancing greenflation, and not only energy costs but also prices of secondary materials, ferroalloys, and other materials are rising. Further, the shift away from blast furnace production activities over to EAFs for some production is changing the supply/demand balance of steel scrap, the main raw material. Because of our expertise in manufacturing steel products from a wide variety of steel scrap, there is a lower risk of procurement shortages compared to manufacturers using blast furnaces, as these have many restrictions on the quality of the steel scrap used. Nevertheless, the impact of higher prices will be unavoidable.
The state of society is currently in flux. While we are emphasizing the importance of accepting diverse values and realizing a society free of discrimination, the gap between those who can fully enjoy the advantages of the latest technology and those who are left behind is further widening by the accelerating advances of information technology. While paying attention to these problems of modern capitalism, we must manage our business by viewing various changes not only as risks, but also as opportunities.

Evolving a global tripolar structure to generate stable profits

 

Rebar is the Group’s mainstay product, and is an essential item used in the foundations of buildings roads, and other works. It is expected to remain in constant demand, both in Japan and overseas. As is inevitable with commodity products, it is difficult to achieve dominant differentiation in terms of quality, so competition in terms of price and convenience is unavoidable. Nevertheless, the fact that these products are cheap and heavy makes it difficult for foreign manufacturers to enter the Japanese market. Furthermore, EAFs have relatively low CO¡ emissions per tonne of steel produced, giving them a business advantage.

Our strategy is, first of all, to have business bases in locations where there is demand and where it is easy to source raw materials, and to pursue a business based on the idea of local production for local consumption. Our second strategy is to master the art of making rebar. Our facilities should be stripped of excess, carefully designed to be simple and optimal in style, and constantly improved in manufacturing and operatingtechnologies to cope with various changes in the external environment. Third, since business practices and the supply and demand environment differ from region to region, the Company should follow a locally-oriented approach, with autonomous and decentralized management that delegates authority to local site operations so that swift decisions can be made. Based on this approach, we are working to diversify risks and stabilize management through a global tripolar structure, developing businesses for local production for local consumption in Japan, Vietnam, and North America.
However, the global tripolar structure is not yet producing adequate results. As I will explain later, we have yet to generate stable profits both in Japan and overseas, and we are keenly aware of the difficulty of expanding our business overseas while paying attention to steel scrap market conditions, steel demand in various countries, geopolitical risks, and country risks. In order to stabilize overseas earnings, I believe it is necessary to secure a certain scale and volume, and we are hoping to establish a system to ship a total of four million tonnes of products in Japan and overseas as soon as possible. This will enable us to become a company that can consistently record operating income of around 20 billion yen. If we assume operating income of 20 billion yen, we can allocate about 10 billion yen to strategic investments for the future, even after deducting dividends and investments in maintenance and upgrades. By increasing profits and raising the level of strategic investments, we will be able to raise employee salaries and bonuses, increase shareholder returns, and invest in intangible assets such as R&D and brand value creation, thereby creating a more virtuous cycle of management toward our goal of building a system for manufacturing five million tonnes worldwide.

Strengthening human resource recruitment and development through improvement of compensation and environment

 

In order to realize this strategy, we need to secure and develop the people to carry it out. We need to develop our internal human resources, and at the same time, we need to attract better personnel, including mid-career hires. To strengthen human capital, we will invest a total of 8-10 billion yen during the current and next medium-term business plans. I believe there are four key elements necessary to create a company that attracts talented people. The first is that the material advantages are well prepared. In addition to base salary increases and bonus increases, we are also improving the working environment through the construction and renovation of new offices and welfare facilities, and the automation and robotization of production equipment. Second, there are opportunities for the capability development and growth of workers. I believe that we need to create a workplace where people can feel that they can grow as long as they stay with us. We are enhancing our training system and introducing a mentoring system. Third is a workplace environment where people can feel a sense of teamwork and solidarity with those they work with. I believe that we, the management team, have a major role to play in this. Each department needs to devise ways to create such an internal atmosphere. Fourth, the Company’s raison d’être and business objectives must be clear. We want to communicate our Company's direction of contributing to society through steel manufacturing and material recycling business, and we want our employees to have a sense of pride and satisfaction in their work. I am taking advantage of various opportunities for dialogue, such as talks between management and employees, video messages, and morning meetings at each production site. I would also like to actively hold off-site meetings, which we could not do during the COVID-19 pandemic.

Record sales in FY2023

 

In FY2023, both sales and profits increased, and the business performed well, surpassing plans. The global inflationary trend increased the prices of steel scrap, secondary materials, and energy costs, but sales prices also increased, resulting in record-high sales and operating income of 14.8 billion yen in FY2023. However, diverging from the vision presented in the medium-term business plan, the domestic steel business and the material recycling business performed well, while the overseas steel business was in the red. In Vietnam, in particular, the government’s interest rate hikes and tighter restrictions on lending to the real estate industry have worsened the business’s performance. The business environment is expected to remain challenging for the foreseeable future. However, since the market is expected to grow in the future, we plan to reorganize our
strategy and this ensures a return to profitability as soon as possible. On the other hand, our North American business performed well, supported by strong demand. However, due to soaring construction costs, we have decided to revise our plan for investment in equipment capacity increases in Canada, which was originally scheduled for implementation in FY2023. We hope to implement that plan during the next medium-term business plan period.
In Japan, we transitioned to Project ONE, a sales operation reform initiative that had been underway for over four years, in October of last year as planned. The core sales operation system, including the Tetsukuru web-based ordering system, is now in operation. The standardization of internal operations has made it easier to promote a move to digital technologies and the use of AI in the future. Various efforts are underway to strengthen the “power for connections.” Last year, a fire at the Yamaguchi Division’s steelmaking mill forced a month-long shutdown, but domestic and overseas sites worked together to minimize the impact. Information exchange, dialogue, and cooperation with each site and Group company are more advanced than ever before.
In FY2024, the final year of NeXuS 2023, we will focus on rebuilding our Vietnam business and strengthening our North American business, in order to improve the quality of our global tripolar structure, thereby laying the foundation for the next medium-term business plan.

The way it should be, in the spirit of righteousness first, profit second

 

Milton Friedman, an American economist, once asserted that “the social responsibility of a corporation is to maximize profits,” and maximizing profits thus became the goal of corporations. Problems such as environmental destruction, poverty, and inequality are thought to have emerged in many parts of the world as a consequence. Naturally, corporate activities that are socially problematic or have an impact on the global environment are regulated by laws and regulations. However, in global competition, if a company takes social norms, business ethics, and global environmental conservation seriously in its corporate activities, it often conversely finds itself at a competitive disadvantage due to differences in local laws, regulations, rules, and values, making it difficult for the Company to survive.
So what should we do? I believe that the only way to achieve this is to manage the Company on the basis of our management principle, while controlling risk by carefully observing the local situation, reality, and actual products. Our Company’s origins lie in the three aspirations of our founder, which we aim to carry forward in order to contribute to the bringing about of a resource-recycling society. By making steel from scrap, we will provide valuable products and services desired by society and customers, provide satisfying employment, generate profits for investors, and actively contribute to local communities. We believe that true management is righteousness first, profit second, focusing on such corporate activities and earning commensurate profits as a result. Today, when the nature of capitalism is being questioned, there are many yardsticks regarding environmental and social issues that need to be realized. We also recognize that improving PBR is a management issue. While listening to requests from the outside, we will absorb opinions from the frontlines as a team, and develop our corporate activities toward our ideal vision, without being short-term oriented.

Enhancing corporate value while responding to social needs

 

Until the end of the Edo period, Japan’s demand for ironware was met by tatara furnace ironmaking centered around the Izumo region. The Kitakami Mountains in the northeastern Tohoku region of Japan are said to have the only iron ore seams in Japan, and although magnetite ore of higher purity than iron sand could be obtained, the Nanbu domain regulated ironmaking that used magnetite ore. I recently learned that this was to protect the people from agricultural damage caused by excessive iron production. I was reminded of the words of Shigeatsu Hatakeyama, who revived oyster farming in Kesennuma, which was devastated by the Great East Japan Earthquake. He said “Oysters from Sanriku taste better when the mineral-rich humus from broad-leaved forests in the Kitakami Mountains, which contains iron, flows into the sea.” I am greatly impressed by the fact that the wisdom of the people of the Edo period (1603-1867) for surviving in harmony with the environment in cold regions has led to the richness of the sea today.
Economic growth, coexistence with nature, and the preservation of biodiversity are challenges that must constantly be overcome, whatever the era. We have reaffirmed that what we can do as members of the Earth’s population is to carefully solve the problems that lie ahead of us, and that it is important to steadily continue to contribute to society by doing what we can. Such efforts that we are now working on include developing new applications for slag, planting olive trees, and other greening projects. We must continue to move forward while solving the multidimensional equation of harmony with the global environment, enhancement of corporate value, and the significance of our continued existence. To that end, we need the wisdom to solve problems one by one through discussion, rather than through zero-sum, all or nothing confrontations.