During the first half of fiscal 1999, ended September 30, 1999, the Japanese economy remained sluggish. Despite the effects of public works projects and increased housing investment, private-sector demand recovered weakly as personal consumption was lackluster, and the downtrend in corporate capital investment continued.
In this harsh operating environment, we vigorously implemented the cost-cutting measures outlined in the KOBELCO-21 management plan and strove to maximize profits. These efforts notwithstanding, Kobe Steel's non-consolidated interim net sales declined 10.9% compared with the first half of fiscal 1998, to 421.9 billion yen. Operating income declined 9.9% from the same period of the previous fiscal year, to 18.2 billion yen. The Company posted an interim net loss of 12.8 billion yen.
Looking to the second half of the fiscal year, the severe economic conditions are expected to persist and a full recovery in private-sector demand remains unlikely.
In view of this difficult operating environment, we have decided to forego the payment of interim dividends. We sincerely regret having to take this measure and ask you for your understanding of this situation.

Performance by Sector
Iron and Steel Sector
Despite increasing demand from the construction industry, overall domestic demand for steel remained weak due to continued sluggish demand from manufacturing industries. Exports were flat as shipments to Southeast Asia recovered but fell sharply in the United States because of antidumping charges. In this environment, although overall shipments of steel products increased compared with the first half of fiscal 1998, sales declined due to a worsening product mix and weak prices.
Sales of welding consumables dropped from the first half of fiscal 1998 due to falls in both domestic sales and exports.
As a result, sales in the Iron and Steel Sector declined 12.4%, to 209.3 billion yen.

Aluminum and Copper Sector
Although sales of aluminum can stock for beverage containers slumped because of growing demand for plastic (PET) bottles, the overall sales volume of rolled aluminum products increased from the same period of the previous fiscal year due to a rise in exports.
The sales volume of rolled copper products increased from the first half of the previous fiscal year thanks to higher sales of copper sheet for electronic applications and for automobile terminals and connectors.
As a result, although the sales volume increased, sales in the Aluminum and Copper Sector fell 17.5%, to 100.3 billion yen, due to low domestic aluminum ingot and copper cathode prices brought about by the appreciation of the yen.

Machinery and Information Sector
Domestic orders soared 31.5% from the same period of the previous fiscal year, to 97.6 billion yen, thanks to brisk orders for construction equipment and industrial machinery. Also supporting this increase were new orders for municipal waste treatment plants in our urban infrastructure engineering business. Overseas, although orders for construction equipment increased, a decrease in orders for industrial machinery and plant engineering caused overseas orders to decline 16.9% from the same period of the previous fiscal year, to 19.9 billion yen. As a result, total orders rose 19.7% from the end of the previous fiscal year, to 117.5 billion yen. The backlog of orders at the end of the interim period amounted to 168.7 billion yen.
Despite higher sales of construction equipment, sector sales slipped 0.6%, to 112.3 billion yen, due to a decline in sales of plant engineering.

Rebuilding for the Future
We are implementing the KOBELCO-21 management plan under a new management structure introduced in April 1999 that includes the formation of internal companies and a system of corporate officers. Moreover, in line with the additional measures to the management plan, we are focusing on "selective consolidation" to boldly and rapidly restructure our businesses and improve capital efficiency. In particular, we are prioritizing the allocation of management resources to strengthen core businesses while withdrawing from or selling unprofitable businesses and those that have no synergy with our core businesses.
In the Iron and Steel Sector, we began constructing electric power plants at Kobe Works in March 1999 as part of our efforts to become an independent power producer. Also, after completing refurbishment of the No. 7 wire rod mill at Kobe Works in January 1999, we completed refurbishment of the No. 8 wire rod mill at Kakogawa Works in May, thus strengthening our position as a leading supplier of quality wire and bar products. Overseas, the bar business of USS/KOBE Steel Company, a joint venture in the United States with USX Corporation, was merged with Republic Engineered Steels, Inc., and Bar Technologies, Inc., in August 1999 to further strengthen its competitiveness in the U.S. market.
In the Aluminum and Copper Sector, we reached an agreement with Mitsubishi Materials Corporation and Mitsubishi Shindoh Co., Ltd., to seek mutual opportunities for lowering production and distribution costs for rolled copper products. This alliance will strengthen the structure and international competitiveness of each company's copper business.
In the Machinery and Information Sector, we transferred our equity in Osaka Chain and Machinery, Ltd., an affiliate that manufactures gears and gear speed reducers, to Sumitomo Heavy Industries, Ltd. We also intend to transfer our equity in Shinko Kobelco Tool Co., Ltd., a cutting tool subsidiary, to Mitsubishi Materials Corporation in January 2000. Moreover, we sold our equity in a software subsidiary and a plastics subsidiary.
We will continue to aggressively implement the KOBELCO-21 plan and its additional measures. By taking these measures, we intend to focus on selective consolidation to boldly and rapidly achieve strategic and structural reforms. In doing so, we aim to build a strong management foundation for the 21st century.
We ask you, our stockholders, for your understanding and continued support.

December 1999

Koshi Mizukoshi
President and
Chief Executive Officer