Nakayama Steel Works, Ltd.

Prices of key raw materials for steel products are affected by trends in international resource supply and demand, and when prices rise sharply it can be difficult to promptly pass on the resulting increase in manufacturing costs to selling prices. Fluctuations in crude oil prices also have a significant impact on fuel costs such as heavy oil and natural gas, as well as on sales and transportation costs. As a countermeasure, the Company flexibly switches between electric-furnace billets and purchased billets to maximize the steel materials spread.

The Company's main customers are in the construction, construction machinery, and industrial machinery fields, and a decline in demand in these areas would lead directly to a decrease in steel demand, affecting the financial position and business results. The Company employs an indirect sales system through general trading companies, steel trading companies, wholesalers, and cutting operators, thereby diversifying sales to a wide variety of small and medium-sized end users nationwide to reduce risk. The Company is also promoting collaborative sales activities with group companies and enhancing its product lineup through increased processing capacity.

With many domestic nuclear power plants remaining offline and the share of thermal power generation increasing, electricity unit prices have remained at high levels, and there is a possibility that fuel cost adjustment unit prices will rise further depending on coal, LNG, and crude oil prices as well as exchange rate trends. For the Group, which relies mainly on electric furnaces, electricity costs are a major cost factor with a significant impact on business results. In the event of a sharp rise in electric furnace costs, the Company's policy is to minimize the impact on production and earnings by expanding the use of purchased billets.

Against the backdrop of accelerating decarbonization since the Paris Agreement, if environmental regulations, carbon taxes, or emissions trading schemes are strengthened or introduced both domestically and internationally, this could constrain steel business activities and increase costs. The Company announced its support for the TCFD recommendations in October 2022 and is undertaking initiatives toward carbon neutrality by 2050; however, insufficient or delayed responses could result in increased production costs or new tax burdens. The Company addresses this risk by establishing and operating an environmental management system through ISO14001 certification.

The Company conducts business in accordance with various laws and regulations, including those related to the environment, commercial transactions, labor, intellectual property rights, taxation, and foreign exchange, as well as licensing regulations from government authorities. In the event of stricter regulations or a determination of legal violations, the Company may be subject to administrative or criminal penalties such as fines. If an unfavorable ruling is rendered in a significant lawsuit, this could result in the suspension or restriction of business activities, or the need for compensation. The compliance promotion department is responsible for employee education and system development, and the Company strives to collect regulatory information in a timely manner through participation in industry associations and seminars.

Loan agreements with financial institutions include financial covenants related to consolidated net assets and consolidated ordinary income (loss). If these covenants are breached, the Company could lose the benefit of the term on its borrowings and be required to repay them in a lump sum. Such a requirement could have a material impact on the Company's financial position and business results. The Company addresses this risk by steadily executing its management plan to secure stable earnings and strengthen its financial position.

If the share prices of listed stocks held by the Company decline significantly, it may become necessary to recognize impairment losses on investment securities. In addition, a decline in the valuation of listed stocks comprising pension assets could give rise to actuarial differences under retirement benefit accounting, affecting the financial position. The Company does not hold shares for pure investment purposes and has a policy of reducing holdings of shares deemed to lack sufficient significance. Pension assets are structured such that highly safe assets, such as domestic bonds, account for more than half of the portfolio, thereby reducing risk.

The head office and Funamachi Plant are concentrated at a single business site within Osaka City, and if a large-scale natural disaster such as a typhoon or earthquake, or an outbreak of infectious disease, occurs on a scale exceeding expectations, production and sales could become difficult, potentially having a material impact on the financial position and business results. This concentration of business locations entails a structural risk in which alternative production is difficult. In the event of an emergency, the Company aims to minimize business risk by changing work arrangements, such as implementing remote work, formulating codes of conduct, and operating response manuals.

In Japan, where the declining birthrate and aging population continue to progress, if the Company is unable to secure sufficient human resources, this could lead to a decline in the level of production, sales, and services, affecting the financial position and business results. From April 2024, the Company extended its retirement age from 60 to 65, and, together with strengthened new graduate and mid-career hiring, is working to secure human resources on a long-term, stable basis. The Company is also concurrently promoting labor-saving and rationalization investments in equipment to reduce its dependence on human resources.

If tangible and intangible fixed assets, including business facilities and real estate, fail to generate the cash flows expected in the future and profitability declines, it may become impossible to recover the amount invested, necessitating the recognition of impairment losses. The recognition of impairment losses has a direct impact on the financial position and business results. The Company addresses this risk by maintaining stable equipment utilization and striving to generate stable cash flows.