NIPPON STEEL CORPORATION

With the Steelmaking Business accounting for approximately 90% of consolidated revenue, domestic demand continues to trend downward due to population decline and the relocation of manufacturing operations overseas, while overseas, increased exports of low-priced steel products driven by China's excess production capacity are depressing international market conditions. Uncertainty is increasing due to the compound effects of protectionist trade policies, the imposition of reciprocal tariffs, and geopolitical risks, which may have a material adverse effect on the Group's business performance, financial position, and future growth. Since domestic and overseas revenue each account for approximately 50% of consolidated revenue, deterioration in either market would have a significant impact on business performance.

The majority of key raw materials such as iron ore and coal are imported from Australia, Brazil, Canada, the United States, and other countries, and fluctuations in international supply-demand conditions and ocean freight rates directly affect procurement costs. If, during periods of sharply rising market prices, it is difficult to pass these costs on to steel product sales prices, profitability may be significantly squeezed. The Group must also address the risk of supply disruption due to natural disasters, strikes, or political instability in raw material and fuel producing countries, and while efforts are made to secure stable procurement through diversification of procurement sources, complete avoidance of such risk is difficult.

The Group holds foreign-currency-denominated transactions related to product exports and raw material/fuel imports, as well as foreign-currency-denominated assets and liabilities, and exchange rate fluctuations affect business performance. A stronger yen leads to declining export competitiveness and reduced domestic steel demand, while a weaker yen expands the risk of a sharp increase in raw material and fuel costs beyond previous levels. Although the Group works to mitigate risk through forward foreign exchange contracts and other means, significant exchange rate fluctuations may adversely affect business performance and financial position.

Under the "Nippon Steel Carbon Neutral Vision 2050," the Group is working on developing new process technologies such as large electric arc furnaces, hydrogen reduction, and hydrogen reduction in blast furnaces, but achieving these goals is expected to require enormous investment and increased operating costs. If sufficient policy measures are not implemented, or if external conditions such as the stable supply system for high-grade iron ore, scrap, and green energy, and the social implementation of CCUS differ from expectations, the anticipated results may not be achieved. With the full-scale introduction of the GX-ETS from FY2026 (ending March 2027)*, risks of business constraints and increased costs due to CO2 emission regulations have also become apparent.

At the end of the fiscal year under review, the Group held a large amount of non-financial assets, including property, plant and equipment of ¥5,899,500 million, intangible assets of ¥832,800 million, and goodwill of ¥259,700 million, and when profitability declines due to a deteriorating business environment, recognition of impairment losses becomes necessary. In addition, with respect to deferred tax assets (before offsetting) of ¥480,600 million, there is a possibility that reversals may occur due to changes in estimates of future taxable income or changes in tax systems. In the fiscal year under review, the Group recorded a loss on business restructuring of ¥271,200 million, and there remains a risk of further loss recognition depending on future changes in the business environment.

Consolidated interest-bearing debt at the end of the fiscal year under review reached ¥5,174,200 million, and financial costs will increase in a rising interest rate environment. While the medium- to long-term management plan targets a D/E ratio of approximately 0.7 (adjusted for the equity component of subordinated loans and subordinated bonds) and a D/EBITDA ratio of 3.5 or below, if financial market instability or a downgrade in credit ratings occurs, there is a risk that the Group may be unable to raise necessary funds on appropriate terms, leading to increased fund-raising costs. Failure to achieve financial targets could also hinder the execution of business strategy.

The Group continuously carries out organizational restructuring and investments, including mergers, acquisitions, and the establishment of joint ventures, both domestically and overseas. If changes in demand trends, competitive environment, or political and economic conditions in target regions occur, or if the transfer and integration of technology and know-how does not proceed as planned, there is a risk that the intended investment benefits will not be realized, resulting in goodwill impairment. The Group may also continue to restructure or withdraw from unprofitable existing overseas businesses with no prospect of profitability recovery, which could result in production cuts or temporary losses. While investment decisions are made through careful business evaluation and internal deliberation processes, it may be difficult to respond to sudden changes in the external environment.

The Steelmaking Business depends on critical equipment such as blast furnaces, coke ovens, converters, and continuous casting machines, and in the event of electrical or mechanical accidents, fires, explosions, or occupational injuries, operations may be interrupted, and delays in production and shipment or compensation payments may result. Although the Group is promoting measures to strengthen manufacturing capabilities in terms of both equipment and personnel and has taken out certain insurance, adverse effects on business performance and financial position cannot be completely avoided in the event of a large-scale accident. The nature of the steelmaking process results in a high degree of dependence on specific equipment with limited alternative means, which heightens this risk.

Business activities are highly dependent on information systems, and preventing the leakage of confidential information, including technical information, is positioned as the most critical management issue. If a cyberattack or similar incident causes system downtime, leakage of confidential information, or data tampering, this could lead to suspension of production and operations, loss of competitive advantage in intellectual property, litigation, and decline in social credibility. Although the Group is promoting measures such as strengthening security, establishing operational rules, and providing employee training, complete defense against increasingly sophisticated cyber threats is difficult.

Special tariffs such as anti-dumping duties have already been imposed by the United States and Southeast Asian countries, among others, and tariff policies under the U.S. administration and other factors may worsen the global steel supply-demand balance and cause steel prices to decline. If import restrictions such as tariff increases or quantity restrictions are further strengthened in major market countries in the future, export transactions may be constrained, adversely affecting business performance and financial position. Uncertainty is increasing due to the rise of protectionist trade policies, and while the Group strives to respond appropriately, quantifying the impact remains difficult.