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2006 New Year's Message from President Yasuo Inubushi

January 5, 2006

On January 5, the first working day of the New Year, President and CEO Yasuo Inubushi gave a speech to company employees. Here are his remarks translated from the Japanese.

To all employees, I wish you a Happy New Year! Please let me take this opportunity to share my thoughts with you.

In 2005, the economic climate surrounding the Kobe Steel Group continued to improve. In this environment, we worked hard to maintain a high-level of operation by using our originality and creativity to meet customers' requirements. At the same time, we increased the sales of our distinctive products while raising sales prices to offset soaring raw material and energy costs.

As a result, we forecast that our consolidated ordinary income in fiscal 2005 will reach 165 billion yen, far exceeding our initial estimate. This is almost one and a half times larger than that of fiscal 2004, which was the highest ever.

We are also striving to improve our fiscal position. In addition to higher income, the financial performance of our entire Group is also increasing and our debt at the end of March may fall below 600 billion yen. If attained, we will have reduced the debt by nearly 300 billion yen from the end of March 2003.

These results are being achieved thanks to your tireless efforts toward our goals. Taking this opportunity, I would like to express my deep appreciation to you.

On the other hand, we faced serious incidents last year. For example, several fatal accidents occurred at our works, and many accidents and facility trouble happened throughout our entire company. Safety and accident prevention form the foundation of business management and they are the highest priorities of all business activities. It is also our mission to continue stable production in order to earn the trust of customers. Therefore, I would like to ask all of you to break the cycle of accidents and trouble immediately and create a workplace where you can work without worry. For that, you must be aware of the urgency of the issue and keep in mind that each of you is directly involved in the problem.

Next, we must not be complacent with our current level of performance. Some of our competitors, mainly steel companies, are making higher profits than us. They are also strengthening their financial positions at a remarkably high speed, while making every effort to upgrade products and reduce costs. If we look back at ourselves, we may find things hidden behind our good performance. Please look objectively at how we have been achieving such goals as the development and sales promotion of new products; cost reduction activities; and streamlining and upgrading of business operations. To rank among our competitors and show our presence, we must further improve our financial position and enhance our competitiveness.

The current favorable business climate will not last forever. I am sure all of you are well aware of the fact that the economy always has its ups and downs. Since the U.S. and China have a great impact on the Japanese economy, we cannot rule out the possibility that the steady growth of the Japanese economy may stall depending on the U.S. and Chinese trends. In Asia, production facilities of competing products will be newly constructed or upgraded one after another. The influx of material imports is already underway and the demand-supply balance of general steel products is becoming less tight. Oil prices still hover at a high level, boosting production costs. The business performances of our customers vary sector by sector and not all of our customers would willingly accept our price increases.

Again I would like to emphasize that we still have many issues to solve and should always be prepared for the possible worsening of the economic climate.

The Kobe Steel Group is now drawing up its next medium-term business plan. Fiscal 2006, the first year of the plan, will be an important year when we have to steadily implement reforms to the profit structure and further expand our company. Now let me share with you my thoughts on which direction we should take.

Simply put, "stability" and "growth" will be our twin goals and I would like to attach greater importance to the former. Since our core business is basic materials, we cannot escape the impact of macroeconomic trends. I believe that we should maintain our stability so that our current profit level will not be affected even when the business climate changes for the worse. That, I believe, is what our stakeholders, including shareholders and employees, are hoping for.

In order to further solidify our business foundation, we have to strike a balance between improving our financial position and investments. In light of the fact that some Japanese rating agencies are not giving us an "A" rating, it is obvious that the improvement of our financial position is only halfway through.

At the same time, it is vital for us to increase the competitiveness of our core businesses by investing in facilities and development, for our future growth. Capitalizing on alliances with other companies would also be an effective strategy, while I believe the acquisition of other companies could be one of the options we can take if the acquisition strengthens our business. Our direction, therefore, should be upgrading of our distinctive products, technologies and services through strategic investments aiming at stable and higher profits.

It is therefore important for us to strike a balance between implementing necessary investments and maintaining our fiscal health to earn a certain level of rating in the capital market. As for management resources to invest with, we will work out a plan carefully without becoming complacent with our good business performance. Once decisions are made, we will aggressively carry out investments to maximize their effects.

Another policy I would like to emphasize is the strengthening of our group management. Over the past year, we have formulated some management measures to pursue our ideal group management. In 2004, for example, we set up the Group Executive Committee, which consists of executives of Kobe Steel and presidents of our major group companies. This committee decides the group's management goals and policies as well as priority issues. From fiscal 2005, we drew up a plan on a consolidated basis instead of a non-consolidated basis and have been following through with it. We are also making group-wide efforts in such areas as compliance and the environment. Furthermore, cross-sectional operations have been enhanced mainly among staff departments such as corporate planning, finance, accounting, human resources and publicity.

Our new business platform, a structure for group management, is near completion. To further develop this structure, the most important thing is your awareness.

Are sections that share the same demand areas and customers deepening their cooperation and information sharing? Please forget sectionalism and accelerate activities such as the sharing of customer information within the entire Kobe Steel Group so that we can generate synergy. Cross-sectional efforts would be effective in the area of technology development as well. Since our business areas range from materials to machinery, I believe the group-wide integration of technologies would produce unique and innovative ideas and products, thus increasing our business opportunities.

In this way, group management is not only a means to satisfy requirements from outside the company such as the requirement for consolidated accounting. It can be a great advantage to enhance our capabilities. Society sees the entire Kobe Steel Group as one brand. Therefore, I hope all of you at the Kobe Steel Group will unite your efforts to increase the value of the KOBELCO brand and further develop each of the group companies under the same banner. For that to happen, please always bear in mind the importance of taking an interest in other departments and people near you, communicating with them and sharing information and values with them.

The mission of the Kobe Steel Group is to contribute to society by offering distinctive products, technologies and services that meet the needs of the age. For this reason, we will always be true to the spirit of manufacturing. At the same time, we will aim for increased management stability; continued growth; and further development together with society. I expect you to engage in your day-to-day work being aware that you are a member of this Group and society, while taking a broad view of things. I believe in all of you and, at the same time, expect your greater efforts.

In closing, I once again stress safety in the workplace. I thank you for the efforts you have made, and I wish you and your families good health and every happiness for the New Year.