During the first half of fiscal 1997, ended September 30, 1997, the Japanese economy showed signs of a modest recovery in private-sector capital investment backed by low interest rates. However, the economy lacked vigor, and apprehension regarding business conditions persisted due to restrained public works investment and sluggish consumer spending in the wake of the consumption tax rate increase in April.
Amid this environment, Kobe Steel, Ltd., concentrated on maximizing profits and enhancing its domestic and international competitiveness as it vigorously implemented KOBELCO-21, a new management plan adopted in April 1997. The plan's goals are to strengthen the profitability of existing businesses and develop and commercialize new products for the 21st century.
As a result of these efforts and increases in production and sales in the Iron and Steel Sector, net sales for the period under review were 564.4 billion yen, up 2.4% from the first half of fiscal 1996. Operating income totaled 41.4 billion yen, up 9.5%. Net income after taxes plunged 48.5%, to 7.0 billion yen, due to an increase in income taxes.
In the second half of fiscal 1997, the modest recovery in private-sector capital investment is expected to continue. However, the domestic economy is anticipated to remain lackluster as a result of stagnant consumer spending and sluggish demand. In addition, the slowdown in the economies of Southeast Asia, sparked by the currency crisis in Thailand, clouds the future outlook.
In view of the preceding factors and following an evaluation of our financial position, management has decided to forgo the payment of an interim dividend. We regret having to take this measure and hope that our stockholders will understand our decision.
To meet the diversifying needs of customers for advanced wire rod products, we continued to refurbish the No. 7 wire rod mill at Kobe Works and, in May, began refurbishing the No. 8 wire rod mill at Kakogawa Works. Always endeavoring to enhance the range and quality of our products, we intend to maintain our position as the top producer of specialty wire rod in Japan.
In January 1997, we concluded a contract to supply electricity to The Kansai Electric Power Co., Inc. Accordingly, we will construct a 700,000kW coal-fired power plant at our Kobe Works and use recycled heat from coke dry quenching equipment to be installed at our Kakogawa Works to generate another 58,000kW. In August, we submitted a second tender to supply Kansai Electric Power with an additional 700,000kW of electricity and were selected as a potential supplier in November. As part of our continuing efforts to contribute to the revitalization and development of the Kobe area, these power plants will be constructed in harmony with the surrounding region, giving top priority to environmental protection and safety.

Performance by Sector
Iron and Steel Sector
Despite a slump in the construction industry following the hike in the national consumption tax rate, overall domestic demand for steel was firm due to strong demand from the automotive and shipbuilding industries. In addition, exports were steady.
Amid this environment, we stepped up our marketing efforts and registered a higher sales volume of steel products than in the first half of the previous fiscal year, both domestically and overseas. We also recorded increased orders for titanium products due to favorable demand. Moreover, we secured a larger sales volume of welding materials than that of the first half of fiscal 1996, due to a rise in exports.
As a result, sales in the Iron and Steel Sector rose 7.9% from the first half of the previous fiscal year, to 264.1 billion yen.

Aluminum and Copper Sector
Shipments of rolled aluminum products held at about the same level as the first half of the previous fiscal year. While demand for aluminum can stock was flat, decreased demand for hot coils from KSL Alcoa Aluminum Company, Ltd., was offset by growth in demand for extrusions for automotive applications.
On the other hand, despite a drop in sales of copper tubing for air conditioners due to unseasonable weather, the sales volume of rolled copper products rose from the first half of the previous fiscal year, reflecting increased demand for copper strip for semiconductors.
Consequently, sales in the Aluminum and Copper Sector rose 6.3% from the first half of the previous fiscal year, to 142.4 billion yen.

Machinery and Information Sector
Domestic orders grew 8.0% from the first half of fiscal 1996, to 124.2 billion yen, as a rise in such large-scale projects as a new transportation system offset a drop in demand for construction machinery due to fewer public works projects and the higher consumption tax. Orders from overseas dropped 31.3% from the first half of the previous fiscal year, to 36.9 billion yen, as a decline in plant engineering orders eclipsed a rise in orders for construction machinery and chemical- and energy-related equipment, particularly in Southeast Asia.
As a result, orders in the Machinery and Information Sector edged down 4.5% from the first half of the previous year, to 161.1 billion yen. The backlog of orders at the end of the first half of fiscal 1997 stood at 215.2 billion yen.
Despite an increase in sales of semiconductor-related products, overall sector sales dropped 8.5%, to 157.8 billion yen, due to a decline in sales of construction machinery and large-scale plants.

Looking Ahead
Under the KOBELCO-21 management plan, we intend to bolster our competitiveness and secure stable, long-term profitability. To do this, we will continually work to enhance the superior quality and originality of products in our established businesses while further reducing costs, pursuing optimal production systems at home and abroad, and rationalizing distribution systems. Furthermore, we are vigorously working to establish and cultivate promising new businesses by efficiently committing management resources to fields in which we excel.
Poised to meet the challenges of the 21st century, we are implementing our new management plan and working to respond to stockholders' expectations by building a strong management foundation.
As we pursue these objectives, we sincerely thank you, our stockholders, for your continued support and encouragement.

December 1997

Masahiro Kumamoto
President and
Chief Executive Officer