In the first half of fiscal 1998, ended September 30, 1998, the Japanese economy remained stagnant as personal consumption and private-sector capital investment declined further amid growing concerns about Japan's financial system and mounting deflationary pressures. The world economy underwent considerable turmoil with Asia remaining mired in a slump and Russia and Latin America buffeted by currency crises.
Reflecting the harsh economic climate, Kobe Steel's non-consolidated interim net sales declined 16.1% from the first half of the previous fiscal year, to 473.3 billion yen, and operating income fell 51.3%, to 20.2 billion yen. The Company posted an interim net loss of 3.3 billion yen.
In the second half of the fiscal year, the business environment is expected to become severer, as the benefits from the government's comprehensive economic stimulus package will have not yet exerted their full impact. A recovery in private-sector capital investment thus seems unlikely, and the prospects for stabilizing Japan's financial system remain unclear. The outlook is further clouded by the ongoing slump in Asia and concerns about slower growth in the United States and Europe.
In view of the difficult operating environment, management has decided to forego interim dividends. We sincerely regret having to take this measure and ask our stockholders for their understanding of the current situation

Performance by Sector
Iron and Steel Sector
Domestic steel demand fell sharply due to a slump in the construction and manufacturing industries. In contrast, despite sluggish exports to Asian countries, total steel exports expanded, owing to the depreciation of the yen and growth in exports to the United States and Europe. Under these conditions, the sales volume of steel decreased because of low domestic demand.
The sales volume of welding consumables slipped, also a result of decreased domestic demand.
Consequently, sector sales fell 9.6% from the first half of the previous fiscal year, to 238.8 billion yen.

Aluminum and Copper Sector
The sales volume of rolled aluminum products was down, mirroring lower demand for aluminum can stock for beverage containers caused by an unusually cool summer and competition from plastic bottles. Another factor undermining sales was weaker demand from the automobile, electric machinery, and construction industries.
The sales volume of rolled copper products declined due to a drop in shipments of copper sheets for semiconductor and automotive applications and copper tubing for air conditioners in Japan.
As a result, sales in the Aluminum and Copper Sector declined 14.6% from the same period a year earlier, to 121.6 billion yen.

Machinery and Information Sector
Domestic orders plunged 40.2%, to 74.2 billion yen, due to shrinking orders for construction and industrial machinery along with cutbacks in private-sector capital investment. Another factor causing the drop in domestic orders was the postponement of large-scale urban infrastructure and other engineering projects. Overseas orders contracted 35.1%, to 23.9 billion yen, underscoring the severe economic slump in Southeast Asia.
As a result, total new orders in this sector dropped 39.1%, to 98.2 billion yen. The backlog of orders at the end of the first half of the fiscal year amounted to 192.1 billion yen.
Sales in this sector declined 28.4% from the same period of the previous fiscal year, to 113.0 billion yen, due to decreased sales of construction machinery and electronic and information-related products.

Looking Ahead
We are implementing the KOBELCO-21 management plan in efforts to strengthen profitability in existing businesses as well as develop and commercialize new products for the 21st century. However, in response to recent abrupt changes in the economic environment, we have formulated additional measures to rapidly rebuild and strengthen our business foundation.
To strengthen our competitiveness in each business field, we have decided to adopt management systems that are optimally suited to particular industries. Thus, we will introduce a company structure that encourages each division to operate independently as a business unit. Also, we will drastically reorganize the five divisions of the profit-squeezed Machinery and Information Sector by adjusting product lineups, consolidating production, creating new companies, and rationalizing staff. Taking these steps, we aim to more effectively utilize management resources and bolster the profitability of each business unit.
We plan to allocate management resources toward promising new businesses that will serve as future pillars of growth and aim to become a research-oriented company that develops innovative, advanced technologies ahead of the competition. One such business being targeted is the electric power generation business. While placing top consideration on maintaining harmonious relationships with the surrounding communities, we are maximizing the use of our existing infrastructure and technologies to steadily develop an electric power generation business that will be a stable source of income over the long term.
To improve the profitability of KTI Semiconductor Ltd., a subsidiary that manufactures semiconductor products, we dissolved our business affiliation with Texas Instruments Incorporated, of the United States, in September 1998. Taking that company's place in the joint venture is the U.S. company Micron Technology, Inc., which boasts world-class semiconductor technologies. Drawing on this affiliation with Micron Technology, we aim to strengthen our semiconductor business.
Guided by KOBELCO-21 and the new corporate measures, Kobe Steel aims to improve its profitability and build a strong management foundation for the 21st century.
We ask our stockholders for their continued support.

December 1998

Masahiro Kumamoto
President and
Chief Executive Officer