The following items are factors, such as the Group’s business circumstances and financial status, that could have a substantial impact on investors’ assessments.
Moving forward, the Group recognizes the possibility that these risks could occur and will consistently make every effort to mitigate and prevent their occurrence, as well as ensure a swift response if these risks do occur.
Forward-looking statements and details concerning future events included in this document are based on judgments made as of the submission date for our Annual Securities Report (June 29, 2020).
- Relationship with Nippon Steel Corporation
As of June 26, 2020, Nippon Steel owned 25.8% of the outstanding shares of Kyoei Steel (26.7% of voting rights) and is the Company’s largest shareholder. Kyoei Steel is an equity-method affiliate of Nippon Steel.The Company operates autonomously, conducts business independently, and intends to continue doing so in the future. However, as the top shareholder in the Company, Nippon Steel is positioned to influence our operations by exercising its voting rights, and its interests may not necessarily coincide with those of our other shareholders.
- Downward Trend in Construction Demand
With the mature Japanese economy now facing a decline in population, we believe that neither domestic public- nor private-sector demand is likely to grow significantly over the long term. Accordingly, we judge that demand for the Group’s mainstay product, steel rebar, is likely to decrease. If the Group’s efforts to supplement this declining demand are unsuccessful, our results could be affected.
The Group is striving to expand overseas, where construction demand is expected to grow due to population increases and economic development.We have already expanded into Vietnam, the United States, and Canada, and are developing regional strategies that will extend our business locations throughout the world to enable us to supplement declining demand in some countries and regions with performance in other countries and regions.
- Selling Price Declines and Shipment Volume Reductions Caused by Competition
The Group’s core domestic steel operations face competition from many steel minimill companies as well as the structural issue of excess production capacity.Consequently, the Group’s results could be impacted if trends in steel demand cause a rise in competition aimed at securing sales volume, with resulting lower selling prices and shipped volumes.
To preserve our ability to compete with rival manufacturers, the Group is boosting sales capacity, cutting manufacturing costs, improving product quality, and developing value-added products.
- Rises in Raw and Secondary Material Prices and Purchasing Limitations
The Group uses raw materials (steel scrap) with prices that fluctuate based on global demand, and passing on increases for these materials to product selling prices is difficult. Further, the Company could become unable to procure the necessary volume of secondary materials (electrodes, alloy iron, etc.) due to price increases or supply shortages. These factors could potentially cause manufacturing cost increases or operational stoppages that could consequently impact the Group’s results.
To ensure favorable and stable purchasing of raw and secondary materials, the Group makes appropriate judgments, while gathering information, by considering factors such as purchase prices and timing. At the same time, we are working to secure trustworthy suppliers.
- Rising Prices for Energy, including Electrical Power and Fuel
Electricity expense burdens are trending higher due in part to rising prices caused by nuclear power plants being shut down and the surcharge for renewable energy.
The Company could potentially face higher costs for transportation, electricity, and fuel used in manufacturing due to rising global energy prices (for petroleum, liquefied natural gas, etc.) or increases in energy prices caused by exchange rate fluctuations.
These factors could potentially impact the Group’s results.
Accordingly, the Group is striving to improve productivity primarily by reducing electric power consumption while working to reduce costs for energy and other commodities.
- Changes to External Environments Related to Logistics
The Group could potentially face higher transportation costs, as well as barriers to acquiring more shipping capacity, if logistics affect product shipments or raw and secondary material purchasing changes substantially due to factors such as personnel shortages in the transportation industry or tighter regulations. These factors could impact the Group’s results.
The Group is endeavoring to increase transportation efficiency and to secure more shipping capacity mainly by establishing shipping stop points and shuttle services, and by reducing loading and standby times, while converting some carriers into subsidiaries.
- Quality-Related Issues
The Group regulates product quality based primarily on Japanese Industrial Standards under the Industrial Standardization Act; other public standards such as the Building Standards Act; quality assessments; and agreements with business partners.
In recent years, quality standard violations, falsifications, and other quality-related issues in many industries have been gathering attention on a societal level. Under these circumstances, the Group offers many products that are related to buildings and structures that impact a large and unknown number of lives and amount of property. Accordingly, the Company acknowledges the strong social interest in the quality of our products.
As a result, product quality issues could potentially impact the Group’s results by causing revocations of public certifications, business loss, damage to our reputation, or other negative factors.
Through our Quality Control Section, the Company is conducting groupwide integrated quality management and systematically conducting quality audits. At the same time, we are building a quality control framework through actions such as improvement requests received in response to important quality management-related issues uncovered by quality audits conducted through our Central Quality Control Committee.
We are also implementing ways to mitigate quality control issues related to hardware and equipment that can occur during inspection and testing conducted at all production bases. These measures include installing automatic measuring equipment and communication systems designed to cut back on data falsifications or manual input errors.
- Environmental Issues
Due to their nature, the Group’s Steel and Material Recycling operations inevitably generate soot, smoke, ash, and residue. Accordingly, the Group adheres to all controls prescribed by environmental laws and regulations, acknowledging the high level of social interest in environmental conservation, including measures taken near our production bases.
As a result of these factors, the Company could need to make additional investments for regulatory adjustments and other changes, including installing equipment and personnel recruitment. Depending on our performance in response to these changes, there could be an impact on the Group’s results stemming from factors such as business suspensions associated with administrative actions or other disciplinary measures or damage to our reputation.
The Group regularly records environmental data based on laws and regulations, then checks that these measurements have been verified through environmental audits.
Additionally, the Company acquired ISO 14001 (environmental management) certifications at several bases and is constructing a system for environmental conservation.
Further, the Company is making improvements related to hardware and equipment that will contribute to environmental conservation, including maintenance and updates of exhaust gas dust collectors and other environmental equipment and the construction of closed systems for coolant water used during production.
Moving forward, we aim to achieve zero emissions as we conduct R&D focused on reducing by-products generated through steel production and waste recycling, and we will collaborate with companies that have useful related technologies.
- Delayed Response to Changing Customer Demand
Our customers are developing new construction methods to shorten construction periods and reduce on-site manpower, and their needs are changing as a result.
The Group is striving to respond to these needs, but results could be affected if product shipment volumes decrease because competitors release new products that fulfill customer needs at an earlier time.
With centralized support from our Project Planning & Development Section, the Group is developing high-strength rebar, fabricated products created using rebar, and other new fabricated products, while ensuring that we understand the needs of our customers.
Moving forward, we will also take a range of additional steps, including those aimed at strengthening relationships with several customers’ technology departments, while we consider joint development of new products.
- Risks Specifically Related to Overseas Business
The Company has subsidiaries in Vietnam, the United States, and Canada.Our overseas subsidiaries are subject to the impact of economic circumstances and steel market conditions in their respective countries, and their results could potentially be affected if these circumstances or conditions change.Our overseas subsidiaries’ operations can also be affected by restrictions imposed by laws and ordinances, regulations, and tax systems in their countries, and these restrictions could potentially impose unexpected burdens or other obstacles.
Also, operations at overseas subsidiaries could be suspended, or otherwise burdened due to factors such as sudden political instability, natural disasters, or occupational hazards in their countries. Restoring operations could also take longer than expected due to economic conditions, business practices, cultures, and labor-management relations that differ from those of Japan.These circumstances could also potentially impact the Group’s results.
While regularly requiring reports on local economic circumstances, steel market conditions, and business results from local management, the Group accepts guidance from external experts regarding changes in laws, ordinances, and tax systems in countries and regions where overseas subsidiaries operate.These overseas subsidiaries face certain restrictions to their decision-making and business operations when they are joint venture companies with overseas capital.Consequently, the Group’s results could potentially be affected.
The Group manages overseas joint ventures with an approach that mitigates disadvantageous circumstances. This approach involves clearly defining decision-making methods and business operational roles and responsibilities within agreements with joint venture partners. In addition to this approach, the Company routinely exchanges information on managing subsidiaries with joint venture partners.
- Risks Specifically Related to Material Recycling Business
Business activities within the Material Recycling business segment require licenses specified under the Waste Management and Public Cleansing Act. The Group’s results could potentially be affected if we are unable to maintain operations due to factors such as loss of licenses or business qualifications caused by violations of legal regulations or social demands.
The Group is working to strengthen the management of circumstances surrounding compliance with the Waste Management and Public Cleansing Act when disposing waste. At the same time, we are setting up ways to educate and train executives and employees concerning compliance with this act.
Since some customers are waste disposal contractors requiring advanced recycling methods, the Group needs to develop new recycling technologies and to install new equipment. The Group’s results could potentially be affected by factors such as cost increases associated with these needs or declines in the number of customers caused by delayed technological development or equipment installation.
As waste disposal contractors globally expand the areas where they operate, the Group is striving to secure customers by gathering information concerning environmental regulations (particularly those in Japan and Europe) and by providing prompt support.
- Shortfalls or Delays Affecting SDG Initiatives
In recent years, corporate management has shifted away from philosophies that exclusively prioritize shareholder interests and has turned attention to ESG (environmental, social, and governance) issues. Accordingly, the idea that companies should reevaluate their relationships with close stakeholders is spreading, and demand is strong for initiatives focused on achieving ESG-related targets as well as Sustainable Development Goals (SDGs).Shortfalls or delays in the Group’s initiatives may lead to weakened recruitment, a decrease in the number of customers, or damage to our reputation, all of which are factors that could potentially affect the Group’s results.
Moving forward, the Group will gather information on stakeholder expectations and demand with central support from the ESG Promotion Section. Also, we will implement concrete initiatives focused on achieving SDGs, while identifying materiality concerns by analyzing priorities from the standpoints of both society and the Group.
- Risks Related to Corporate Acquisitions, Capital Alliances, etc.
The Group recognizes that corporate acquisitions and capital alliances will be important and effective for business growth in the future. However, we cannot deny the possibility of losses resulting from contingent obligations incurred following acquisitions or the emergence of other unrecognized liabilities.
We make acquisitions under the precondition that the acquired company can consistently maintain earnings that will exceed any amortization of goodwill associated with the acquisition. Despite these precautions, the Group faces possible deficits, such as impairment loss related to goodwill associated with acquisitions, resulting from obstacles to initial business plans by post-acquisition changes in the business environment or from competitive circumstances.
The Group’s results could potentially be affected due to these circumstances.
When considering corporate acquisitions or capital alliances, the Group performs detailed due diligence on target companies looking into financial conditions, contractual relationships, and other factors. At the same time, we do our best to avoid risks by investigating and examining the appropriateness of acquisition prices from many different angles, employing valuation methods such as the cost approach and the income approach.
As of March 31, 2020, our consolidated balance sheets reflected ¥300 million in goodwill associated with corporate acquisitions.
- Risks Associated with Fixed Asset Impairment
The Group holds tangible fixed assets such as production equipment and land. If expected future cash flow from holding these assets drops due to ultimately ineffective capital investment or other factors, the Group’s results could potentially be affected from impairment losses associated with the application of the Accounting Standard for Impairment of Fixed Assets.
The Group makes capital investment that is necessary for business growth and works hard to mitigate risk in cases of large-scale capital investment by thoroughly evaluating the investment’s effectiveness and profitability.
Furthermore, we conduct constant budget control following the launch of operations.
- Acquisition of Diverse Human Resources
The Group strives to secure the human resources required to effectively manage and develop businesses. At the same time, effective business management requires acquiring human resources that have a variety of professional qualifications, skills, and expertise. Training and developing human resources like these require a considerable amount of time. Consequently, the Group’s medium- to long-term results could suffer if we are unable to secure human resources as planned due to factors such as tight demand and supply conditions in the labor market caused by circumstances including a declining birthrate and increased mobilization of human resources.
The Group is working to increase corporate appeal while strengthening conventional recruitment practices. Initiatives for achieving these goals include recruiting that targets diverse human resources, including professional, overseas, and disabled people, regardless of gender or nationality, as well as initiatives focused on establishing environments that are more receptive to active participation through reforms to personnel and benefit systems.
- Information System or Network Failure
The Group widely uses information technologies within business operations. Information systems or network failures and cyberattacks from external sources could potentially interrupt business or operations and could then impact the Group’s results.
With the goal of establishing systems that will allow ongoing business operations, the Group is striving to upgrade systems and networks to improve information security.
Also, we are building infrastructure and internal systems through methods such as adding network lines, upgrading hardware and equipment related to security, and enhancing our in-house training, while using the services of specialized external agencies, including data centers and security monitoring companies.
Moving forward, we will also construct and improve factory automation systems while closely collaborating with the Smart Factory Promotion Section and conservation departments at all production bases.
- Compliance Violations
The Group may not be able to completely avoid compliance-related risks during business operations due to wide-ranging legal regulations concerning factors such as product quality, business relations, the environment, labor, health and safety, accounting standards, and tax affairs, as well as a variety of social demands.
Consequently, the Group’s results could be susceptible to negative impact if violations of legal regulations or societal requirements cause the loss of licenses or business qualifications, generate a decline in social trust, or force the Group to respond to litigation.
The Group’s action guidelines advocate fair and honest behavior based on strong ethical values, the Group is establishing a compliance system through discussions by the Risk and Compliance Committee, as well as education and training for executives and employees. At the same time, we are promoting independent and voluntary compliance activities, including the formulation and implementation of compliance promotion plans at each of our business locations.
- Natural Disasters, Acts of War or Terrorism, etc.
The Group is expanding business operations by establishing production and sales bases in Japan, Vietnam, the United States, and Canada.
In the event of earthquakes, fires, typhoons, floods, acts of war, and terrorism, among other disasters, the Group’s results could be impacted by business activity delays and heavy costs associated with repairs for damaged equipment or property.
To prepare for risks related to these disasters and threats, the Group is establishing systems designed to ensure employee safety and stable product supply through the formulation of business continuity plans (BCPs), training and drills, earthquake-resistance countermeasures, securing inventory, and by transferring products, spare equipment parts, and other items between bases. At the same time, we are also striving to mitigate risk by purchasing non-life insurance and by other methods.
- Equipment Breakdowns, Accidents, etc.
The operation of electric arc furnaces that use high-voltage electric power is essential for manufacturing within the Group’s Steel Business. Electric arc furnace transformers are at the heart of this equipment and, if they break down, would pose major operational obstacles.
We conduct exhaustive equipment management at all production bases but still face possible defects or breakdowns caused by unavoidable circumstances.
Additionally, we strive to eliminate foreign materials in steel scrap that we acquire for high-temperature melting in electric arc furnaces by providing guidance to collection contractors and by performing thorough acceptance checks. However, the Group’s results are susceptible to impact from steam explosions caused by sealed containers containing moisture, with resulting equipment damage and operational stoppages.
The Group regularly maintains production equipment and systematically upgrades equipment that has aged. In addition, we are strengthening our checking system for accepting steel scrap to reduce the risk of explosions.
- Pandemics, including the Novel Coronavirus
The Group is expanding business operations by establishing production and sales bases in Japan, Vietnam, the United States, and Canada.
The outbreak and spread of infectious diseases or other illnesses in these countries and regions could cause a stagnation of business activities and impact the Group’s results.
To prepare for these risks, the Group has formulated a BCP and has established procedures for securing employee safety and stable product supply during emergencies.
Moving forward, we will continually examine and improve the effectiveness of our BCPs through routine training. At the same time, we will establish systems and environments that support flexible workstyles, including staggered work hours and teleworking even in normal times, with the goal of flexible operational response to the outbreak and spread of infectious diseases and other illnesses.
- Exchange Rate Fluctuations and Decline in the Value of Shareholdings
Local currency-denominated assets and liabilities of the Group’s overseas subsidiaries and some individual transactions denominated in foreign currencies in domestic business activities are subject to impact from exchange rate fluctuations. The Group’s results could potentially be affected by exchange rate fluctuations that exceed our projections.
The Group is mitigating risk associated with exchange rate fluctuations to a certain level by developing business models based on local production for local consumption in Japan, Vietnam, the United States, and Canada and by decentralizing business currencies.
We are also hedging exchange rate fluctuation risk related to individual domestic transactions denominated in foreign currencies by attaching conditions through exchange contracts and currency swap agreements.
The Group’s results are susceptible to the impact of declines in the listed share price and decreases in the value of investment securities resulting from poor business performance at companies in which we have invested.
The Group maintains a basic policy of reducing cross-shareholdings, but when these shares are kept, we make this assessment based on a rigorous examination of factors such as the advantages they will provide and associated capital cost.
As of March 31, 2020, the Company’s consolidated balance sheets reflected ¥2.1 billion in listed cross-shareholdings.