During fiscal 1996, ended March 31, 1997, the U.S. economy expanded modestly while Southeast Asia registered robust growth, although at a slightly lower rate than in previous years. On the other hand, despite a sluggish start at the beginning of the fiscal year, Europe headed toward recovery in the second half of the year.
The Japanese economy continued its modest recovery, owing to the government's economic stimulus measures throughout the first half of the period under review, an adjustment in the overvaluation of the yen, and record low interest rates. Despite these positive factors, however, a full-fledged economic recovery failed to materialize.
Under these conditions, despite a decline in sales in the Electronics and Information Sector, Kobe Steel's consolidated net sales increased 3.8%, to 1,533.5 billion yen, due to higher revenues in the Iron and Steel and the Machinery sectors. At the profit level, however, net income declined 80.6%, to 17.5 billion yen, reflecting both a significant drop in extraordinary income as the sale of assets diminished with recovery from the Great Hanshin Earthquake and a sharp decrease in income in the Electronics and Information Sector.

Performance by Sector
Despite sluggish demand in the first half of the fiscal year that resulted from inventory adjustments, sales in the Iron and Steel Sector advanced 7.3%, to 564.5 billion yen, due to robust domestic demand, primarily in the automobile and construction industries, from the second half of the fiscal year. Operating income declined 4.0% from the previous year, to 53.1 billion yen, attributable to a decline in prices both at home and abroad.
A noteworthy development during the year under review was the conclusion of a contract in January 1997 to supply electricity to The Kansai Electric Power Co., Inc. Accordingly, we will construct a 700,000kW coal-fired power plant at Kobe Works and use recycled heat from coke dry quenching equipment to be installed at Kakogawa Works to generate another 58,000kW.
In the Aluminum and Copper Sector, despite lackluster demand for rolled copper products for semiconductors, favorable demand for rolled aluminum products for automotive applications supported a 6.0% increase in sales, to 336.5 billion yen. On the other hand, operating income decreased 12.2%, to 20.4 billion yen, due to a decline in roll margins. Among principal developments in this sector during the year under review, we responded to anticipated strong demand for aluminum can stock in Asia by establishing production capabilities through KAAL Australia Pty. Ltd., a joint venture in Australia with the Aluminum Company of America.
In the Machinery Sector, higher sales of construction machinery in the domestic and overseas markets, coupled with sales of large-scale plants, underpinned a 12.3% increase in sales, to 520.7 billion yen. However, such factors as intensifying competition led to an overall decline in profitability, resulting in a 16.7% decrease in operating income, to 30.5 billion yen. During the fiscal year, we progressed with the establishment of production and marketing bases for construction machinery, which included the commencement of operations at a production facility in Thailand.
In the Electronics and Information Sector, worsening profitability in semiconductor-related products that accompanied the sharp fall in DRAM prices resulted in a 35.2% fall in sales, to 76.3 billion yen, and an operating loss of 10.0 billion yen.
In the Other Businesses Sector, net sales rose 4.7%, to 105.0 billion yen. However, operating income declined 23.5% from the previous year, to 6.7 billion yen, due to a decline in profitability.

Looking Ahead
From a global perspective, the rise in importance of China and Southeast Asia in the world market has produced an era of great competition, encompassing Japan as well as western nations. Within Japan, intensified price competition, the hollowing out of the industrial base, and market deregulation are leading to rapid changes in the nation's industrial structure. Over the coming year, the Japanese economy is expected to be stimulated by firm capital investment. However, weak personal spending following the April 1, 1997 consumption tax increase and the discontinuation of special tax reductions, combined with a shrinking public works budget, are hindering prospects for a full-scale recovery.
To respond to these dramatic changes in the operating environment, we implemented a new management plan in April called "KOBELCO-21", which incorporates the 1997-1999 Action Plan. Under this plan, we have selected 81 of our 160 consolidated companies to serve as strategic group companies. These companies will be organized and unified under their business units and planning will be conducted on a groupwide basis. Through this plan, we aim to produce products of superior quality and originality in all our established businesses. Also, through thorough cost reduction measures, rationalization ofdistribution systems, and the creation of highly efficient production systems, particularly overseas, we intend to strengthen our internationalcompetitiveness and secure stable profitability. We also place high priority on developing and fostering new businesses with promising potential through the effective application of management resources to fields in which we excel.
By applying the new management plan to all areas of our operations, the Kobe Steel Group is aiming to create a solid management base capable of facing the challenges of the coming century.
As always, we are extremely thankful for your cooperation and hope that you will continue providing your support.

August 1997

Masahiro Kumamoto
President and
Chief Executive Officer