R E ST R I CT E D

RETURN TO R e p o r t N 0.TO-255aREPORTS DES(

WITHINONE WEEIC __

This report kas prepared for use within the Bank. It may not be publishednor may it be quoted as representing the Bank's views. The Bank accepts noresponsibility for the accuracy or completeness of the contents of the report.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

APPRAISAL PROJECT

SUMITOMO METAL INDUSTRIES, LTD.

JAPAN

December 7, 1960

Department of Technical Operations

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CURRENCY EQUIVALENTS

U.S. $1 = Y360El million = $2,780

All ton8 are metric tons of 2, 200 pounds.

APPRAISAL REPORT

SUMITOMO METAL INDUSTRIS., LTD.

TABIE OF CONTENTS

Paragraphs

SUMMARY AND CONTCLUSIONS i i - i

I. INTRODUCTION 1-

II. THE COMIPANY 6 - 27A. History and Organization 6 - 8B. Operations 9 - 20

(i) Production 9 - 12(ii) Properties 13 - 17

(iii) Management and Labor 18 - 20C. Financial 21 - 27

III. THE MARKET 28 - 31

IV. THE CONSTRUCTION PROGRAM 32 - 45A. The Need for Expansion 32 - 33B. Description 34 - 38C. Construction Schedule 39 - hoD. Cost Estimates 41 - 45

V. FINANCING PLAN AND PROJECTIONS 46 - 58A. Financing Plan 46 - 48B. Proposed Loans 49 - 50C. Financial Proiections 51 - 56D. Financial Covenants 57 - 58

VI. CONCLUSIONS 59 - 62

ANIEXES

1. Principal Subsidiaries as of March 31, 19602. Facilities in Operation at March 31, 19603. Market Prospects of the Japanese Steel Industry4. Sources of Raw Materials5. Construction Schedule6. Construction Cost Estimates7. Schedule of Disbursements and Currencies Required8. Past and Projected Income and Surplus Statements9. Past and Projected Balance Sheets10. Wash Flow Projectinns11. Assumptions for Financial Forecasts

MAP

APPRAISAL REPORT

SU1I1TOMO METAL IIDUSTRIFS, LTD.

SUESEARY AND CONICLUSIONS

i. The Bank has been asked to consider a loan of $7 million equiva-lent to The Japan Developmnent Bank to be relent to Sumitomo Metal In-dustries, Ltd, The proceeds are to be used to finance a portion of thecompany's Additional Projects for extending the range and quality of itswelded pipes and providing it with the necessary flat products for pipemanufacture. The loan would be part of a joint operation with the privateU.S. market and is designed to assist the company to enter that market forthe first time (see paras. 1 - 5).

ii. Sumitomo Metal Industries, Ltd, is the successor to a businessthat was started in 1897. It is today one of the major Japanese steelcompanies, deriving substantial benefit from its association with thefinancial and industrial members of the Sumitomo group, The company pro-duces about 5% - 6% of total Japanese output of rolled steel products andis the leading manufacturer of steel pipe and tubes. Production of finishedproducts in the most recent fiscal year was 839,000 tons (see paras. 6 - 12).

iii. Sumitomo embarked on a major postwar expansion program somewhatlater than its competitors. It is now building a modern integrated steelplant at Wakayama in the Kansai district, financed in part by a previousBank loan of $33 million. The company is well managed and has a competenttechnical staff. Its financial position is good. Sales and earningsreached an all-time high in the past year after having been adversely af-fected by the 1958 recession (see paras. 13 - 27).

iv. Market forecasts indicate that the company's planned expansionprogram is reasonable. The project proposed as the basis far a Bank loanis the construction at Wakayama of an 80" combined hot strip and platemill, a medium-size electric resistance welded pipe mill and expansion ofblooming facilities and general services, The project will raise thecompany's annual capacity for pipes and tubes from 398,600 tons to 518,600tons and for hoop, plate and strip from 216,000 tons to 600,000 tons,The cost of the Bank project is estimated at *17,0 billion ($47.3 millionequivalent) out of total Additional Projects of *24.4 billion ($67.9 mil-lion equivalent). These projects are additions to the company's SecondModernization and Expansion Program, amounting to I54.8 billion (4152.3million equivalent) of which Y35.5 billion ($98.6 million equivalent)had been spent to t4arch. 31, 1960 (see paras. 28 - 45).

v. The company proposes to finance the remaining portions of thisprogram and to meet its other financial requirements amounting to a total!957.7 billion ($160.3 million equivalent) through retained earnings anddepreciation amounting to '20.4 billion ($56.6 million equivalent), share

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issues amounting to Yl10.4 billion (§P28.9 million equivalent), and fromborrowings as follows: old IBRD loan -h.2 billion ($11.7 million equiva-lent), proposed IBRD loan, $7 million; U.S. private investors, $5 million;domestic borrowing, $51.1 mi'llion equivalent. Arrangements for theseloans are being made. The financing plan would result in debt servicecoverage reaching a low of 1.2 times during the next five years, but asubstantial portion of domestic long-term debt is held by members of theSumitomo group who are being asked to agree to refund it upon maturity(see paras. 46 - 58).

vi. Provided that appropriate arrangements are made for obtainingthe additional funds required, for the refunding agreements referred toabove, for limitations on the company's borrowing power and for protec-tion of its liquidity, and for The Japan Development Bank to receivesecurity consistent with its usual practice, the project is a suitablebasis for a Bank loan of $7 million equi-vlent for a term of' 15 yearswith three years' grace (see paras0 59 - 62)o

I. INTRODUCTION

1. The Japanese steel industry, after rehabilitating its war-damagedfacilities, carried out a substantial investment program between 1951 and1955. Capacity was expanded sufficiently to make possible an increase iningot steel production from about 7.7 million tons in 1953 (equal to theprewar peak level) to 11.1 million tons in 1956. To keep pace with therapidly rising domestic demand, however, further expansion was required,and in early 1956 the Japanese steel industry embarked on a Second Expan-sion and Modernization Program. It was for this program that help wassought from the Bank. This second program was aimed at a) expanding ingotsteel capacity to 20.5 million tons by 1962; b) installing facilities toenable the industry to meet the demand for higher quality and wider rangeof products; and c) modernizing the mills in order to reduce operatingcosts.

2. Host of the projects included in the Second Expa.nsion and Lodern-ization Program are under way; some have been completed. Developmentshave amply justified the expansion of capacity. In the year ended lIarch 31,1960 ingot steel production reached 18.2 million tons, about 5.5 milliontons in excess of the record level reached in the previous year. Currentoperations are at an even higher rate.

3. The Japanese steel industry has both advantages and disadvan-tages compared with its U.S. and European counterparts. It is heavilydependent upon imported raw materials, which involve large and fluctuatingfreight charges. It has been able to offset this disadvantage throughhighly productive, low cost labor and efficient operation of facilities.Although many facilities are still obsolete, the substantial improvementsin recent years have enabled Japan to compete with the U.S. and Europeansteel industries in export markets. Some 10% to 15% of Japanese steelproduction is exported in the form of primary products and a substantialproportion is exported as manufactured products (to date mainly ships butincreasingly machinery and other products). If Japan is to maintain itscompetitive position it must continue to keep pace with the U.S. andEuropean industries in productivity, quality, and efficiency; this willinvolve continued substantial investments in modern facilities.

4. The Bank has already made loans to the Japanese steel industryamounting to a total of %145 million equivalent. All of the six largeststeel companies have had a portion of their expansion financed by theBank: Yawata $25.2 million; Fuji $24 million; Nippon Yokan $24.6 million;Kawasaki $28 million; Sumitomo $33 million; and Kobe 110 million. TheBank has now been asked to consider two further projects, that of KawasakiSteel Corporation for $6 million equivalent, and that of Sumitomo MetalIndustries, Ltd. for $7 million equivalent. These loans are part of ajoint operation with the private New York market and are designed toassist these companies in entering that market for the first time.

5. The program which is appraised in the following report is thatof Sumitomo Metal Industries, Ltd. for extending the range and qualityof its welded pipes and to provide it with flat products for theirmanufacture.

II. TH C'OPANY

A. History and Organization

6. Operations of Sumitomo Metal Industries, Ltd. date back to thefounding in 1897 of a copper rolling mill in Osaka, followed in 1901 bythe acquisition of a steel rolling plant. The present name was adoptedin 1935, by which time the company had become a leading steel pipe andtube manufacturer as well as a major supplier of steel railway wheels,forgings and castings.

7. In 1953 the company acquired the Kokura Steel Elanufacturing Com-pany, thereby obtaining facilities for production of its own pig iron.The company is now one of the major Japanese steel companies, with con-solidated capital and surplus of w30 billion ($83 million equivalent) andnet fixed assets amounting to about ;38 billion (51e6 million equivalent).In 1959 the non-ferrous operations, which had come to include aluminumas well as copper, were separated into a new company, Sumitomo Light MetalIndustries, Ltd. The company has other minor investments in subsidiaries,a list of which is given in Annex 1.

8. The company was originally a member of the Sumitomo group, afamily industrial and financial complex which was dissolved following thewar. However there remains an informal association of former members ofthe group, and the company derives substantial competitive strength fromits relations with group banking, industrial and trading companies. Asof M.arch 31, 1960 the company had more than 113,000 shareholders, of whichabout 750 were corporations and the rest individuals. Corporate share-holders held about 40% of the stock, with the five largest (of which fourwere members of the Sumitomo group) holding about 17%.

B. Operations

(i) Production

9. In recent years Sumitomo has produced about 5% - 6% of totalJapanese output of rolled steel products. Out of its total production of839,000 tons in the year ended March 31, 1960, 27% was steel pipes andtubes, 19% bars and shapes, 23,o wire rod, 11% hoop and 3% copper andaluminum products, with the remainder spread among railway equipment,forgings and castings, electrical and aircraft parts, etc.

10. Production of pig iron, steel ingot and finished products forthe past five years has been as follows (thousand tons):

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Years ended March 311956 1957 1958 1959 1960

Pig Iron 145 293 236 370 517Steel Ingot 622 724 758 727 1,073

Finished Products:

Pipe and Tubes 132 147 17 1L40 227Bars and Shapes 107 141 139 134 161Wire Rod 77 74 76 100 190Hoop 32 39 33 46 96Railway Equipment 79 78 80 68 59Forgings and Castings 18 22 26 19 28Non-ferrous Products 13 16 18 19 28Other 41 46 49 45 _50

Total Products 499 563 568 571 839

11, The company is the leading Japanese manufacturer of pipe andtubes, and in the past year accounted for about 25% of total pipe andtube production, However this represents a decrease from 37% in the yearended March 31, 1953, The decrease has resulted from the companyts delayin installing facilities to meet the increasing demand for a wider rangeof types and sizes of these products, especially welded pipes. Sumitomoaccordingly plans to expand its pipemaking facilities,

12. The company at present does not have equipment for productionof the sheets and plates which the new pipemaking facilities will require.To supply these requirements the company intends to install equipment forthe production of its own sheets and plates.

(ii) Properties

13. Before the war the company had two main plants, at Amagasakiand Osaka, in the Kansai district. Neither had facilities for the pro-duction of pig iron, and the company had to purchase all of its require-ments. Plans were made for the building of a new integrated plant,including a blast furnace, at Wakayama, a site not far from the othertwo plants. However the war interrupted this program, and by the timethe Sumitomo group was dissolved in 1945 the company had completed afew installations at Wakayama but had no blast furnace.

14. The company did not proceed immediately with the development ofWakayama, but in l953 took over the Kokura Steel Manufacturing Company, Ltd.in northern Kyushu. Although far from the other plants this company had.two old blast furnaces, and the acquisition relieved the pig iron shortageand enabled Sumitomo to concentrate its expenditures in the followingyears on improvement of its finishing facilities.

15. The expansion of Wakayama was subsequently resumed and in July1958 the company obtained a first Bank loan for the construction there ofa 1:,200-ton/day blast furnace, a coke oven plant, remodelling of theexisting open-hearth furnaces, construction of a 47" blooming mill andimprovements to the harbor. This construction is now well under way andahead of the original schedule, as well as within the cost estimates.Expansion of the other three main plants is being undertaken at the sametime.

16. The company has two smaller specialized plants at Suita andKanzaki for the production of magnet steels and aircraft parts. Its sub-sidiary, Sumitomo Light Metal Industries, Ltd., has a plant at Nagoyawhere copper, brass, aluminum and titanium products are manufactured.

17. The company has been extremely conservative and did not initiatea large-scale modernization program until well after the other major Japa-nese companies. Consequently much of its equipment is old and it nowfaces the prospect of major expansion which will place considerable strainon its available resources. Total facilities in operation at March 31,1960 are shown in Annex 2.

(iii) Management and Labor

18. The company's management is conservative and capable. All ofthe top officers have been with the company or other members of the Sumi-tomo group for their entire careers. There is a large and expert staff ofengineers and technicians.

19. Early in 1959 the company made a contract with Kaiser Engineersfor supervision of the general engineering of the Wakayama plant. Thishas resulted in major modifications in the layout and changes in speci-fications of some of the equipment.

20. As of September 30, 1959 the company employed a total of about13,000. Workers are organized in a company union which has never hadserious problems with the company. The expansion of Wdakayama will requireabout 500 additional workers who can easily be hired in the area andtrained in the company's own training school.

C. Financial

21. Income statements and balance sheets for the past five years aregiven in Annexes 8 and 9. The figures include the operations of thepresent subsidiary,Sumitomo Light Metal Industries, Ltd., until the sepa-ration of that company in September 1959 and are consolidated with thatcompany's figures thereafter. Other minor investments in subsidiariesare not consolidated. The accounts are audited by an independent auditorunder Japanese regulations. Suammaries are as follows (i million):

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Years ended MIrch 311956 1957 1958 1959 1960

Net Sales 36,721 52,290 58,048 45,906 67,674Net Income 1,218 2,539 2,933 1,687 4,525Retained Earnings & Depreciation 1,958 3,760 3,482 2,989 6,254

- 56March 311956 1957 1958 1959 1960

Assets

Current Assets 21,441 30,643 33,417 31,651 43,977Net Fixed Assets 12,454 14,547 20,401 27,090 38,116Other Assets 1.386 1.655 2.173 _3.g18L 4,66

Total Assets 35.281 46.&&5 5. 61 25 86.739

Liabilities and EquitY

Short-Term Debt 2,913 4,195 8,509 8,106 6,250Other Current Liabilities 11,483 17,862 13,683 11,941 19,804Long-Term Debt 4,009 6,773 10,275 17,773 30,676Capital Stock 5,000 5,000 10,000 10,300 17,293Surplus and Reserves 11876 13.015 13.5 13.805 12.716

Total Liabilities and Equity 25.281 _,825 521 61,925 86.739

Current Assets/Current Liabilities 1.49:1 1.39:1 1.51:1 1.58:1 1.69:1Current Assets/Current Liabilities(excl. short-term debt) 1.87:1 1.72:1 2.44:1 2.65:1 2.22:1

Total DebtA4quity 35/65 41/59 46/54 53/47 56/44

22. The company's sales had increased steadily for several yearsuntil the impact of the 1958 recession. J'Is a result sales declined bymore than 20% and net income was drastically affected, although increaseddepreciation moderated the decline in cash generation ard the company'scurrent position was maintained. The recovery of the past year wasspectacular, and carried sales and earnings to an all-time high. Currentoperations are at an even higher rate, although it is not possible topredict how long such level can be maintained.

23. Japanese law permits half of the cost of new fixed assets to bewritten off within five years. As a consequence the company's total de-preciation charges have thus far been substantially greater than theywould have been if based on the properties' economic lives.

24. The company's current ratio has been among the strongest of theJapanese steel companies. Inventories are valued on a LIFO basis. Japa-nese custom permits short-term bank debt to be considered for purposes offinancial analysis as long-term debt, since it is allowed to be renewedregularly as a matter of course. Sumitomo has a stronger position thanmost companies in this respect by virtue of its close relationship withthe Sumitomo Bank and other financial institutions within the group.

25. The previous Bank loan to the company was made in July 1958 for$33 million equivalent at 5 3/8% for 15 years. As of October 31, 1960$4.7 million remained to be disbursed. The first repayment is scheduledfor August 1, 1961.

26. The existing Bank loan contains a covenant obliging the companyto refrain from incurring indebtedness which would result in a debt/equityratio exceeding 60/40 before March 31, 1963 and 55/45 on and after suchdate. A very large increase in debt had caused this limit to be approachedby the middle of the past fiscal year and the company accordingly made a60% capital increase, effective in December 1959. Shares amounting to a50c increase were priced at par (s50), with the remainder being distributedas a bonus out of reserves. Net proceeds were 5,308 million. This issuemakes possible the present borrowing within the financial covenant. Anadditional issue of Y8,906 million has been announced, with payment dueDecember 22, 1960.

27. The company decided during the 1958 recession to cut its dividendfrom 12% in cash to 6% in cash and 6% in stock. Because of the require-ments of the expansion program the former rate was not restored afterbusiness turned upward, and the company proposes to continue the presentrate at least for the next few years.

III. THE MARKET

28. An analysis of the market prospects of the Japanese steel in-dustry for the period ending March 31, 1968 is attached as Annex 3. Thebasic conclusion is that by that year there will be a demand for about27.6 million tons of ingot steel. This estimate rests on the followingassumptions:

(a) that domestic demand for finished steel products willincrease at an average annual rate consistent with anincrease of about 6% in gross national product from acomputed "normal" level for the year ended March 31,1959; and

(b) that exports of finished steel products will amount tosome two million tons in the year ending March 31, 1968.

Both assumptions appear conservative.

29. Since the actual demand for the year ended March 31, 1960 wasabove the "normal" curve, the projections for Sumitomo have assumed that(a) demand would remain at the actual level of the pact year until the"tnormal" demand curve rose above that level, and (b) that it would risethereafter along the "normal"t curve (see Annex 3, page 4).

30. In estimating Sumitomo's sales it has been assumed that thecompany would recoup a portion of its traditional share of the pipe andtube market as a result of its installation of modern equipment, and thatits projected capacity for sheets and plates in excess of its own needswould gain it a small share in the market for these products. Theseassumptions seem warranted by actual demand from the company's presentcustomers. Sumitomots share of the market for other products has beenassumed to remain at present levels.

31. On the above assumptions as to the overall market, demand forsteel should be great enough to permit operation of the facilities nowfirmly planned or contemplated by Japanese producers at a reasonably highrate. This makes it unlikely that there will be any sharp reduction inprofit margins. However, at present prices of steel products and rawmaterials, the operating profit margin is higher than it has been on theaverage in the past five years, because product prices are above theirdepressed 1958-1959 levels, while raw material costs have not shown acorresponding increase. The financial projections for Sumitomo haveassumed that the profit margin will be somewhat lower, equal to theaverage for the past two years. This would allow for the possibilityeither of a decline in sales prices or a recovery in prices of rawmaterials. For the purposes of calculation we have taken the presentprices of finished products as a basis.

IV. THE CONSTRUCTION PROGRAM

A. The Need for Expansion

32. The company is currently engaged in a construction phase knownas its Second Modernization and Expansion Program, a portion of which isbeing financed by the first Bank loan (see para. 15). The purpose ofthis program is the modernization and expansion of the company's fourprincipal plants to increase productive capacity of pig iron, ingot steeland finished products (see T.O. 177a). The company has now proposedcertain Additional Projects designed to extend the range and quality ofits welded pipes and to provide it with the flat products needed forpipemaking.

33. The pipe manufacturing equipment is required to restore thecompany's traditional share of the Japanese pipe and tube market (seepara. 11). The new rolling equipment will furnish the company with asupply of strip and plates required for pipe manufacturing.

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B. Description

34. Sumitomo's Additional Projects involve the following additionsat Wakayama:

- Construction of an 80" semi-continuous combined hotstrip and plate mill.

- Construction of a medium-size electric resistance weldedpipe mill.

- Construction of a welded spiral pipe mill.

- Expansion of blooming facilities.

- Expansion of the general services of the plant (power,water supply and transportation).

35. In addition to the expansion at Wakayama, the company will buildan 80-ton electric furnace and install additional casting equipment atOsaka. It will also add a blooming mill at its Kokura Works.

36. The projects proposed as the basis for a new Bank loan are thecombined hot strip and plate mill, the medium-size welded pipe mill andthe expansion of blooming facilities and general services at Wakayama.

37. The foregoing program will increase the company's annual capa-city for pipes and tubes from 39F15,0 tons to 518,600 tons and for hoop,plate and strip from 216,100 tons to 600,00O tons.

38. The company has taken steps to assure itself of an adequate sup-ply of raw materials. Principal requirements and sources are shoirm inAnnex 4.

C. Construction Schedule

39. The construction schedule for the company's program is given inAnnex 5. Construction of the Additional Projects was started in April 1960and should be completed by April 1962. The schedule is reasonable. Ordersfor the main pieces of equiprent, the combined mill and the medium-sizewelded pipe mill, have been placed. The layout of the plant has beendesigned by Kaiser Engineers and the details worked out by Sumitomo'sown staff. The company has demonstrated its ability in carrying out theSecond Expansion and i4odernization Program and can be expected to completethe Additional Projects successfully.

40. The Additional Pro2ects at Wakayama are part of an ultimate goalfor that plant of six blast furnaces of 1,500 tons/day, an oxygen top-blowing converter plant, two blooming-slabbing mills, an 80" semi-continuoushot and cold strip mill, a 160" wide plate mill, 11 pipe mills ard twosection mills. The timing of the different stages of this program woulddepend on demand and on the company's ability to raise further equity.

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D. Cost Estimates

41. A breakdown of the cost estimates for the program through March31, 1963 is given in Annex 6. (While construction is expected to be com-pleted by April 1962, final payments will extend well into the ensuingyear.) The main figures are as follows (Y million):

ExpendituresTotal to March 31, RemainingCost 1960 Expenditures

Additional Projects:

Combined Mill 12,300 - 12,300Medium-size Welded Pipe Mill 1,840 - 1,840Additions to Blooming Mill 1,650 - 1,650General Services 1,220 - 1.220Total Bank Project 17,010 - 17,010

Other Construction 3,730 - 3,730Contingencies 2,190 - 2,190Repairs and Renewals 1,500 - 1.500Total Additional Projects 24,430 - 24,430

Second Modernization andExpansion Program 54,820 35,502 19,318

Sumitomo Light MetalIndustries, Ltd. 4.29 2,033 2.25Total Program 83,540 37,535 46,005

42. These cost estimates are reliable. They are based on December1959 prices, and a general price increase in Japan is not expected duringthe period covered. Escalation on foreign orders is not included in thecost estimates, and would amount to about Y138 million as a maximum.

43. The Bank has been asked to make a loan of $7 million (*2,520million equivalent), which would be sufficient to cover about 72% of theimported equipment for the Bank project. The loan would represent about15% of the cost of the Bank project and about 10% of the total cost ofthe company's Additional Projects. A schedule of estimated disbursementsand currencies required is given in Annex 7.

44. The contingency reserve for the Additional Projects amounts to*2,190 million, about 10% of the estimated costs after deducting the *138million escalation. The contingency reserve is satisfactory. Interestduring construction is not included in construction costs but will becharged against operations.

45. Contracts have already been placed on a competitive basis. Themajor pieces of equipment will have to be imported, and foreign ordershave been placed through international competitive bidding.

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V. FINANCING PLAN ATD PROJECTIONS

A. Financing Plan

46. Financial projections on a consolidated basis with Sumitomo LightMetal Industries, Ltd. are attached showing the expected earnings of thecompany (Annex 8), its financial position (Annex 9) and its cash flowprojections (Annex 10) during the remainder of the construction period andthe first three operating years. The assumptions on which the calculationsare based are given in Annex 11, The projections indicate that the financ-ing plan is sound and that the company's earnings should be adequate toenable it to meet all its financial obligations.

47. The company's total requirements for the remainder of the con-struction period, the three years ending March 31, 1963, are as follows:

$ millionY million equivalent

Investments in fixed assets 46,005 127.8Other investments 3 ,280 9.1Repayment of long-term loans 8,388 23.3Decrease in short-term loans _ 20 0.1

57.693 160.3

Sumitomo proposes to meet these requirements from the following sources:

$ millionX million equivalent %

Retained earnings anddepreciation 20,361 56.6

Share issues 10,406 28.9 53.3

Decrease in Working Capital 8 -

Long-term loans:IBRD - old loan 4,198 11.7

- new loan 2,520 7.0 6U.S. Private Placement 1,800 5.0 46*7Domestic Borrowing 18.4OO 51.1

57.693 160.3 100.0

48. The estimate of the company's retained earnings and depreciationduring the three-year period is based on the market assumptions discussedabove (paras. 28 - 31). Sumitomo has announced a 1-for-2 share issue forDecember 1960 and, with the backing of the Sumitomo group, can reasonablyexpect the issue to be successful. The company's subsidiary plans al-for-l issue in 1963. Further share issues will have to be made if thecompany proceeds with its further modernization program (see para. 40).

B. Proposed Loans

49. The proposed IBRD loan of $7 million (Y2,520 million equivalent)is part of a joint borrowing operation with the New York market. The

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company has made arrangements for a private placement of $5 million of 7.5%14-year notes, to be guaranteed by the Sumitomo Bank. The arrangementsfor these loans are contingent upon the making of the proposed loan bythe Bank.

50. Firm arrangements have not been made for the raising of theadditional '1l8,400 million of domestic borrowing. However the company hasundertaken to obtain satisfactory assurances as to the placement or under-writing of such obligations.

C. Financial Projections

51. The projections show that during the three years ending Mlarch 31,1963 the company should be able to complete its present expansion programand meet all its financial obligations with a net cash accrual of aboutX555 million.

52. During the three years after the completion of construction cashgenerated from the company's operations (after payment of taxes, interestand dividends) would amount to about Y23,3 billion. Against these fundsthe company will have requirements of about Y20 billion for debt retirement,Y9.5 billion for normal renewals and repairs, *3 billion for other invest-ments and 77.4 billion for increased working capital. It will thus haveto borrow about 16.5 billion at short and long term unless it is ableto raise additional equity. In fact the company will probably make atleast one and possibly two stock issues during this period.

53. Over the full six years the financial prospects would be asfollows:

(a) Interest on total debt would be covered at least 1.7times.

(b) Total long-term debt service would be covered a minimumof 1.2 times.

(c) The current ratio would reach a low of 1.19:1.

(d) The ratio of total debt to equity would reach a highof 57:43 during the years endig M arch 31., 19.k2 and'Iarch 31, 1963.

54. It will be seen that coverage of total long-term debt servicewould reachan 1indesirably low level. however about 25% of the company'sdomestic long-term debt is at present owed to two members of the Sumitomogroup, The Sumitomo Trust & Banking Co., Ltd. and The Sumitomo MutualLife Insurance Co., and these companies will be major participants inany future long-term borrowing. The company therefore proposes to obtaincommitments from these institutions to refund such loans upon maturityif so required. Excluding repayment of this debt from total debt servicewould give a minimum coverage during the period of 1.4.

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5.5. The company expects to obtain an undertaking from The SumitomoBank, Ltd., to refinance short-term loans upon maturity up to an amount ofU15 billion. This commitment would run for five years and would be re-newed every year for the ensuing five years during the life of the Bankloan. Short-term debt up to such amount could accordingly be treatedas long-term debt and eliminated from current liabilities for the purpose ofcomputing the current ratio. On such basis the minimum current ratioreached during the next six years would be lc63:l.

56. By the end of the period, assuming no further investments infixed assets other than normal renewals and repairs, the ratio of totaldebt to equity would have been reduced to 53:47, The company has furtherexpansion plans, the details of which are being worked out at present.The timing has not yet been decided upon and the cost estimates andsources of funds have not yet been studied in detail. The company informulating its plans will have to watch its current position carefully,and consider its ability to service any further debt which it may incur.

D. Financial Covenants

5?. The Subsidiary Loan Agreement in connection with the previousBank loan contains a limitation preventing the company from incurringindebtedness which would result in increasing the ratio of total debt toequity above 60:40 before March 31, 1963 and 55:45 on or after such date.The company should be able to carry out the -proposed expansion programuithin this limitaticn, anc4 it uould be a)ro-riat to maintain it inthe Second Subsidiary Loan ;.greenent.

5A. In view of the projections of the company's current ratio, itwould be appropriate to include a provision that the company may notdistribute cash dividends if the result would be the lowering of the ratioof current assets to current liabilities (excluding short-term loanssubject to the proposed Sumitomo Bank agreement) below 1.50:1.

VI. CONCLUSIONS

59c. The Japan Development Bank, which would relend the proceeds ofthe proposed Bank loan to the company, has the primary interest in secu-rity arrangements. The company's long-term loans are secured by mortgages,and The Japan Development Bank should be satisfied that the arrangementsproposed are in accordance with its usual requirements.

6o. Before the subsidiary loan agreement is made effective, firmarrangements for (a) the U.S. private placement, (b) undertakings tounderwrite domestic bond issues or to supply long-term loans as requiredby the financial plan, and (c) agreements of The Sumitomo Trust & BankingCo., Ltd. and The Sumitomo 1'utual Life Insurance Co. to refund the com-pany's long-term debt held by them upon maturity, should have beenevidenced in form satisfactory to The Japan Development Bank and to theBank.

- 13 -

61. The loan documents should contain the same debt limitation cove-nant as is now in effect and, in addition, a restriction on the company'sfreedom to distribute cash dividends if this resulted in lowering thecurrent ratio below 1.50:1.

62. Provided that the contractual arrangements include protectiveprovisions along the lines indicated in paras. 59 to 61 above, the project(the combined mill, the electric resistance welded pipe mill and the ex-pansion of blooming facilities and general services at Wakayama) is suit-able for a Bank loan of $7 million equivalent, with a term of 15 years,including three years of grace.

STUMITO0MO MET4L INDUSTRIES, LTD.

Principal Subsidiaries as of iarch 31, 1960(Yen Million)

1959 D e b tAnnual Owed to

% Owned Sales Total Sumitono Nature of Business

Suniitonio Light Metal Industries, Ltd. 100.0 6,289 5,555 5,055 Non-ferrous metal processing.

Igeta Steel Tube Co., Ltd. 31.8 13,941 1 352 148 Wholesaler of pipes and tubes.

Sumikura Kogyo K.K. 100.0 1,068 21 - Machinery manufacturer.

Yamamoto Hatsujo Bunki K.K. 86.9 293 57 43 Spring manufacturer.

Narumi China Corporation 100.0 510 132 2 Ceramics.

Nitto Sangyo Co. Ltd. 99.8 415 20 - Steel processing.

Fuso Kiko K.K. 100.0 214 119 119 Forgings.

Wakayama Chemical Industries, Ltd. 50.0 - - - Chemical by-products.

Sumikin Kozai K.K. 100.0 35 - - Steel Processing.

Shinko Magnet K.K. 90.0 2 - - Magnet manufacturing.

Others v/ 1,510 57 7 Miscellaneous.

A substantial portion of the parent company's sales are channelledthrough this company at a very small margin.

/ Companies with capital of less than Y 50 million.

ANNEX 2Page 1

SUMITOMD METAL INDUSTRIES, LTD.

Facilities in Operation at March 31, 1296

AnnualCapacity

('000 tons)

Steel Works

Wakavama

2 open-hearth furnaces of 200 tons capacity and 2 open-hearth furnaces of 100 tons capacity 600

1 2-high blooming mill with 47" stand in tandem with36" stand 900

1 continuous 15-stand hoop mill 2161 Stiefel-Mannesmann type tube mill (double piercing) 2402 electric resistance weld tubing machines 722 cold draw benches 2

Amagasaki

3 electric arc furnaces (from 15 to 50 tons) and1 120-kg. induction furnace 103

1 2-high reversible blooming mill 34" and 1 section mill 3241 Stiefel-Mannesmann type tube mill 961 Singer type extruding press 211 Ugine type extruding press 231 inert arc welding pipe mill 12 cold reducing mills, 14 cold drawing benches and4 hydraulic cold drawing benches 24

8 hydraulic forging presses (from 300 to 4,000 tons) 9

Osaka

1 50-ton open-hearth furnace 665 electric arc furnaces (from 6 to 15 tons) and 1 setof induction furnaces 80

1 continuous casting 3014 molding machines 157 hydraulic presses (from 600 to 3,000 tons) )1 counter blow hammer, 5 drop hammers and 5 air hammers) 5712 crank and forging presses reducing rolls, etc. )1 vertical wheel rolling mill and 2 hydraulic presses 1302 horizontal tire rolling mills and 3 hydraulic presses 961 bar rolling mill 36

ANNEX 2Page 2

Kokura

2 blast furnaces (1 510-ton, 1 750-ton) 5481 sintering machine - Dwight Lloyd 4201 pelletizing machine 604 50-ton open-hearth furnaces 4101 pig iron mixer, 300 tons1 medium section mill 1801 small section mill 871 wire rod mill 1021 wire and bar mill 252

Other Plants

Suita (magnet steels and electrical materials)

3 high-frequency furnaces2 vacuum melting furnacesfacilities for castingpressesrolling mills

Kanzaki (propellers, landing gear and other elements forairplanes, and parts for heat-exchanging apparatus)

84 machine tools15 test units

Sumitomo Light Metal industries Ltd. (copper and light alloy products)

11 induction furnaces3 electric arc furnaces7 reverberatory furnacessheet rolling millstube, shape, bar and wire-making millsfacilities for casting

ANNEX 3Page 1

SUMITOMO MKETAL INDUSTRIES LTD.

Market Prospects of the Japanese Steel Industry

Introduction

The market prospects of the Japanese steel industry were examinedby the Bank in May 1958 and again in the fall of 1959 (TO-178 and TO 223a,Annex 5). Both studies were made in connection with proposals for loans tofinance expansion included in the japanese steel industry's Second Moderniza-tion Program (1958-1963) and were concerned with the market prospects of theindustry in the period ending March 31, 1963. The present analysis is madein connection with proposals for loans to finance expansion that will be com-pleted at a later date, and is concerned with the market prospects of theindustry over the period ending March 31, 1968. It will be useful, however,to review the conclusions reached in the earlier analyses and to compare themwith actual developments in the industry as an aid in judging prospects forlater years.

The Bank surveys placed considerable reliance on market analysesprepared in late 1957 and late 1958 by the Japanese Ministry of Industry andTrade (MITI). MITI's estimates of the probable level of demand for Japanesesteel in the period ending March 31, 1963 rested on the proiections made inthe Japanese Long-Range Economic Plan for 1958-1963, and particularly on theunderlying assumption of that Plan that during that period, Japanese GrossNational Product might reasonably be expected to increase at an average annualrate of 5.85% from its actual level in the year ended March 31, 1957. / Onthe assumption that past relationships between growth in Gross National Pro-duct, industrial production and domestic and export demand for steel would bemaintained, MITI estimated in its December 1957 study that by the year endingMarch 31, 1963, total demand for Japanese crude steel would amount to 20.2million tons.

MITI's assumptions as to the probable future relationships betweengrowth in GNP, industrial production and domestic demand for steel seemed,on examination, to be reasonable and were accepted by the Bank. On the otherhand, analysis indicated that it would be more prudent to modify the otherassumptions underlying MITI's estimates as follows: (1) to assume, in linewith the estimates of the Bank's economists, that the average annual increasein GNP would amount to 5%, instead of 5.851 as MITI had assumed; (2) to useas a base for the projection of domestic demand for steel a figure for theyear ended March 31, 1957 which appeared to provide a reasonably good measureof actual domestic consumption in that year rather than the figure for appar-ent consumption used by MITI which was inflated by inventory accumulation;and (3) to adjust MITI's estimate of exports downward. As a result of thesemodifications in MMITI's assumptions, the Bank's May 1958 study concluded thata reasonably conservative estimate of demand for Japanese crude steel in theyear ending March 31, 1963 would probably not exceed 17± million tons.

1The Long-Range Plan actually assumed that GNP would rise by 6.5% perannum from a "normal" base in the year ended March 31, 1957. This wasequivalent to an increase of 5.85% per annum from the actual level ofGNP in that year.

ANNEX 3Page 2

1IATI's second (December, 1958) estimate of demand for Japanesesteel in the period ending in 1963 left unchanged its basic assumptions:(1) that GNP would rise at an average annual rate of 5.85% from its actuallevel in the year ended March 31, 1957; and (2) that past relationshipsbetween the growth of GNP, industrial production and domestic and exportdemand for steel would remain unchanged. However, as a result of thesubstitution of a "nornal" rate of domestic consumption in the year endedM,arch 31, 1957 for the actual apparent consumption in that year (used asa base for its projection in the December 1957 study) MITI arrived at anestimate of demand for crude steel in the year ending March 31, 1963 of18.8 million tons (as compared with its earlier estimates of 20.2 milliontons).

The Bank's second (1959) estimate, like its 1958 estimate, as-sumed that the average annual growth of GNP from its actual level in theyear ended March 31, 1957 to March 31, 1963 would amount to about 5% but inview of actual developments in exports revised its estimate for exportsupward. The result was an upward revision of its 1958 estimate of demandfor crude steel in the year ending March 31, 1963 to 17-3/4 million tons(as compared with its earlier estimate of 17 million tons).

Recent Develotpments

Actual demand for steel has considerably exceeded the Bank'sestimates. When the Bank's first study was made in May 1958, the Japanesesteel industry was experiencing a recession. In the nine months January-September 1957, crude steel production had amounted, on an annual basis,to 13 million tons. In the following nine months (October 1957-June 1958)production fell to an annual rate of 11.6 million tons (see Table 1).

However, although it was not yet apparent, the industry was al-ready recovering. Production had, in fact, reached its lowest level inthe October-December quarter of 1957. Throughout 1958, production rosesteadily and by the October-December quarter of 1958 was almost back tothe peak levels reached in the March-June and July-September quarters ofthe preceding year. The advance picked up momentum in 1959. In the yearended March 31, 1960 production of crude steel amounted to lS' milliontons, i.e. half a million tons in excess of the Bank's second and higherestimate for the year ending March 31, 1963 of 17-3/4 million tons. Norwas this level of output dependent upon exports. Exports showed no changefrom the previous year, while imports rose, so that net exports actuallydeclined from 2.0 to 1.8 million tons crude steel equivalent.

Prospects. 1960-1968

The growth prospects of the Japanese economy continue to appearexcellent. The Bank's latest report on the economic position and pros-pects of Japan (FE-13a, October 14, 1959) points to a number of factorsthat make it seem highly probable that the Japanese economy will continueto grow rapidly: the skill, vitality and determination of the people and

ANNLX 3Page 3

their ability to find and capitalize on new economic opportunities, theirhigh rate of savings; and the fact that until the later 1960's, the laborforce will be increasing so rapidly as to make unlikely the developmentof labor shortages which might result in real wages outstripping laborproductivity. The Bank's economists concluded that while the growth ofGNP inight fall somewhat short of the average necessary for the achievementof the official goal of "doubling in ten years" (an increase of about 7%per year), it should be substantial; and that there was every reason toexpect the achievement of at least the minimum increase of 5% per yearrequired to permit the employment of the 2% annual increase in the laborforce, taking account of the rise in labor productivity.

In December 1959, MITI prepared a third estimate of future de-mand for steel, this time extending to March 31, 1968. MITI's estimatescontinue to assume the maintenance of past relationships between growthin GNP, industrial production and domestic and export demand for steel, anda rise in GINP at a rate of 6.5% per annum from the "normal" level of theyear ended Mlarch 31, 1957 (equivalent to a rise of 5.85% per annum fromthe actual level in that year). Recognizing that its assumption of growthcould only be tentative, MITI prepared alternative estimates based on theassumptions of increases of 6% and 7% per year in GNP from the "normral"level.

Since the actual growth of GNP to date has surpassed the Long-Range Plan targets, IITI's assumed rates of growth considerably exceedthose required to carry GNP to the assumed levels for the year endingMarch 31, 1968 from the levels actually achieved in the last two years.In the boom year ended Mlarch 31, 1960, GNP surpassed its "normal" levelby 12.5%; arnd even in the depression year preceding, the actual GNP was6% above its "normal" level. Thus, the average annual increase from theactual level of GNP in the year ended Mvlarch 31, 1959 to MITI's estimatedlevel for the year ending IMlarch 31, 1968 (which assumes a 6% increase peryear from the "normal" level) amounts to only 5.3% per year; the averageannual increase from the actual level in the year ended March 31, 1960to this estimated level is only 4.4% per year. Such rates of growth (4.4% -

5.3% per annum) are clearly on the conservative side.

A comparison of MITI's estimates of domestic demand for carbonsteel rolled products (the principal component in total demand for steel)with actual demand in the past year provides further support for acceptingMITI's estimates as reasonably conservative. The estimate of annualdomestic demand for carbon steel rolled products for the year endingMarch 31, 1968 amounts to 18.6 million tons. If we assume a steady rateof growth from a computed "normal" level in the year ended March 31, 1959of 8.6 million tons!!, estimated demand would not exceed the actual levelof demand in the past year (11.5 million tons) until the year endingMarch 31, 1963.

1/ Actual demand in that year amounted to only 7.8 million tons.

AINNEX 3Page 4

In estimating demand for steel in the years between 1960 and1968, iITI has assum.ed a steady rise from the level actually reached inthe year ended ,larch 31, 1960. This assumption might result in undulyhigh estimates for the next few years. It is probably not prudent to as-sume that demand will continue to rise snarply after such a spectacularupthrust as occurred last year. On the other hand, as has been pointedout above, if it is assumed that demand will grow at a steady rate fromthe t tnormal" level in the year ended lIarch 31, 1959, the estimate w-illbe below the actual level of the past year until 1963. This assumptionseems unduly conservative. *ihile it seems prooable that the econorqy 1illcontinue to expand in the next few years, for the )urpose of preparingfinancial forecasts for a single ccmpany it may be advisable to make theconservative assu=ption that (1) demand will remjain at the actual levelof the past year until the "?normal" demand curve rises above tailt level;and (2) that it will rise thereafter along the "normal" curve. 1/

Table 2 gives the IBRD's estirates of demand (domestic and ex-port) in the years ending i;arch 31, 1963, 1966 and 1968 "or various classesof finished steel and the related demand for crude steel in these years,arrived at on the basis of the assumpticns outlined above and set forthin detail in Table 2. They show an average arnual demand for crude steelin the years to !iarch 31, 1963 of a little over 18 million tons, risingto 23.1 million tons by the year ending March 31, 1966 and to 27.6 milliontons by the year ending HAarch 31, 1!68.

These estimates seem reasonably conservative. On the basis ofavailable informnation as to expansion of facilities already under way orknow-n to be firmly planned, it seems likely that the Japanese steel inrdustryshould be able to operate at reasonably high rates in the period to klarch 31,1968.

Prices

In estimating future prices of finished products, account mustbe taken not orly of the market prospects of the industry but also ofrecent developments in prices and raw material costs which have led to awidening of the operating profit margins of the Japanese producers.

Betwveen l954 and i957, prices of both finished products and rawmaterials rose, but the latter rose more markedly than the former. in therecession of 1957-58, when both declined, the relationship was reversed -i.e. product prices fell less than raw material costs. Since late 1958,product prices have recovered most of their losses, while raw materialcosts have remained at their 1957-1958 lows. As a result, product pricesare now higher than raw material costs in relation to their average levelin the past few years, and the operating profit margins of most corganies(w,hich were large enough in the earlier period to make possible a sub-stantial expansion of the industry) have risen.

1/ The attached chart compares the various estimates of domestic delmand forcarbon steel rolled products. This is the principal component of totalsteel demand, and the basis for the estimates of demand for other productclasses.

AY-NEX 3Page 5

The decline in raw material costs in 1957-195B and the absenceof a recovery since then is attributable priLaarily to the fall in oceanfreiglhts iwhich account for a large fraction of the delivered cost of rawmaterials for steelmaking in Japan, a substantial proportion of which areinported, but also to an easinrg of dermand for certain raw iiaterials, inparticular scrap, on the world market. Recovery in both may be delayedfor some years. In any event, the substitution of Japanese industry-ownedvessels for chartered vessels to transport iron ore to Japan and the sub-stitution of lower-cost sources for the existing sources of imported oreand coking coal may keep raw rnaterial costs at a level lower in relationto current product prices than obtained on the average in the past fewyears.

In view of the imiarket prospects of the industry, it would seemunlikely that product Drices would decline from their piresent level (excepttemporarily in recession periods) were it not for raw material price pros-pects. However, should raw material costs not increase the possibility ofsome decline in prices cannot be excluded.

Thus, while it is not unreasonable to assume that product priceswill remain at their present level, it seemis more prudent to base finan-cial estimates for individual companies not on any assumption as to pricesalone, bu1t rather on the assunption that operating profit margins wijll beno higher on the average than they have been in the last few ye rs.

Table I AN1NEX 3

Japan: Crude Steel Production and pperent Home Consuraption Page 6

(Thousand metric tons)

Production Imports Exports Home SupDply(A) (B) (c) (A) + (B)-(C)

1950 4.,839 2 727 4.4,1141951 6,502 33 1,269 5,2661952 6,988 31 1,988 5,0311953 7,662 124 1,035 6,7511954 7,750 106 1,1465 6,3911955 9,408 82 2,305 7,1841956 11,106 283 1,570 9,8201957 12,570 1,584 1,219 12,93141958 12,118 188 2,122 10,18141959 16,629 1402 2,172 114,859

1956 Jan.-Mar. 2,561 43 451 2,153Apr.-June 2,705 37 439 2,303July-Sept. 2,843 36 378 2,501Oct.-Dec. 2,996 168 302 2,862

11,105 2,3 11790

1957 Jan.-Mar. 3,133 369 277 3,225Apr.-June 3,366 540 243 3,663July-Sept. 3,252 575 285 3,542Oct.-Dec. 2,819 100 415 2,504

12,77-0 -1,57 0 1,219 12,934

1958 Jan.-Mar. 2,872 56 428 2,500Apr.-June 2,987 39 510 2,516July-Sept. 3,040 59 493 2,606Oct.-Dec. 3,217 33 691 2,559

12,116 1 2,122 10,181

1959 Jan-!Aar. 3,527 56 53b 3,049Apr.-June 3,976 116 518 3,5714July-Sept. 4,361 119 519 3,961Oct.-Dec. 4,766 111 601 4,276

16,630 2,172 14,860

1960 Jan.-Mar. 5,132 76 574 4,634

Source: Annual, 1950-1958 - Japan's Iron and Steel Industry, 1959 Edition.Annual, 1959 and monthly - Japan Iron and Steel Federation, MonthlyReport of the Iron and Steel Statistics.

Production dates as published.Import and export data estimated fromn published mLonthly data for importsand exports of semifinislhed steel and individual finished products andadjusted in 1956-58 to published annual data.

Annual totals may not equal sum of the quarters because of rounding.

ANNEr 3Page 7

Table 2

Japan: Estimated ConswVption of Steel(Thousand Tons)

Years Ending M'Jarch 31 1959 )960 1963 1966 1968(Normial) (Est. Actual) Est. Est. Est.

Carbon Steel Rolled Products

Demand: Domestic 8,600 11,1497 11,900 15 ,200 18,000Export 1,2G0 1,200 1,500 2,000Total 12,697 13,100 16,700 20,000

Deduct: Rerolled 521 535 685 820Import 68 50 50 50Balance 12,353 12,515 15,965 19,130

flot Rolled Carbon Steel Equivalentof Balance 12,781 12,835 16,375 19,620

Special Steel Rolled Products

Demand: Domestic 690 850 850 1,075 1,300Export 20 30 50 60Total 870 880 1,125 1,360

Cast and Forged Steel 415 480 538 660 750

Crude Steel 3quivalent:Of Hot Rolled Carbon Steel 15,830 15,850 20,200 24,220Of Special Steel Rolled Products 1,370 1,400 1,790 2,160Of Cast and Forged Steel 820 900 1,100 1,250Total 18,020 18,150 23,090 27,630

AIN EX 3Page 8

Table I

lotes

1. Domestic demand for carbon steel rolled products estimated as followis:

a. Estimate for the year ended iiarch 31, lY60 by ivaTI (Dec. 1959) basedon data for part of the year. Actual sales were probably somewhathigher, since production of carbon steel rolledptoducts in the fourquarters of that year were as follows:

Actuel Annual Rate

April-June, 1959 2,889 11,556July-Sept., 1959 3,209 12,836Oct.-Dec., 1959 3,559 14,236Jan.-dar., 1960 3 721 14,884

b. Estimate for the year ending ilarch 31, 1968 by 14ITI (Dec. 1959)assumes:(1) that gross national product will rise by 6% per annum on theaverage from the "normal" level in the year ended i-larch 31, 1959(this is equivalent to iniereases of 5.3,0 and h.440 per annumrespectively from the actual level in the years ended ±larch 31,1959 and 1960, which seemsadequately conservativ4; and(2) that the relationships obtaining in the period 1951-1958between growth in GIU, industrial demand, and domestic demandfor carbon steel rolled products will persist to harch 31, 1968.

c. Estimate for the years ending 1'arch 31, 1963 and 1966 assumes asteady increase from the estimated "normal" level to the levelfor the year ending Miarch 31, 1968 as estimated by AITI.

2. Exports of carbon steel rolled products in the year ending iiarch 31,1968 estimated by 14ITI. Exports in the years ending hMarch 31, 1963 and1966 estiated by IBRD as 10% of domestic demand.

3. Deductions estimated as follows:

a. Rerolled: estimates for 1960 and 1968 by Z'ITI (Dec. 1959), esti-mates for 1963 and 1966 by IBRD, assume that the supply ofrerolled steel will bear the same relationship to the total out-put of carbon steel rolled products as wjas assumed by -TI forthe year ending March 31, 1968.

b. Imports, estimates by PIITI (Dec. 1959).

ANNEX 3? age 9

Table 2

4. Hot rolled carbon steel equivelent of balance assuri3the sane relation-ship as was assumed by .IJTI for the year ending hiarch 31, 1968.

5. Domestic demand for (1) special steel rolled products and (2) cast andforged steel. estimated as follow-s:

a. Estimates for the years ending harch 31, 1960 and 1968 by JATI(Dec. 1959); the latter assumes that deaand for (1) and (2) uillbear the same relationship to (3) domestic demand for carbonsteel rolled products as existed between 1951 and 1958.

b. Estimates for tihe years ending ±iarch 31, 1963 and 1966 by IBRDfrom its estimates of domaestic demalnd for carbon steel rolledproducts in these years; estimaates assume the same relationshipbetwieen (1) and (2) respectively and (3) as assumed by iTTI forthe year ending .iarch 31, 1968.

6. Exports of snecial steel products estimated by liITI (Dec. 1959).

7. Crude steel equivalent of steel product classes estimated as followls:

a. Estimates for the years endirig hlarch 31, 1960 and 1968 byiTIPI (Dec. 1959).

b. Estimates for the years ending kiarch 31, 1963 and 1966 byI1?2D assxme the same relationship between L3RD estimates forfinished products and crude steel as was assumed bli hiITI forthe year ending march 31, 1968.

ACTUAL AND FORECAST DOMESTICDEMAND FOR CARBON STEEL ROLLEDPRODUCTS IN JAPANMARCH 3 1, 1952 -1968

20 1 I I I I I I

(MILLIONS OF METRIC TONS)

10

8 -

7

6

5

4-

Actual (1960 as estimated by MIITI).

"Normal". Computed by =fI from Index of Mning and Manufacturing Production.

0000000 Projection assuming rise of 6% per year in GNP from "normal".

-MITI projection (December 1959). Assumes steady rise, 1960 actual toMarch 31, 1968.

IBRD projection. Assumes no change from 1960 until normal curve risesabove this level, then rise along "normal" curve.

Earlier Estimates for 1963

O MITI, December 1957.

* MITI, December 1958.

D TBRD, 1958 and 1959.

'52 '53 '54 '55 '56 '57 '58 '59 '60 '61 '62 '63 '64 '65 '66 '67 '68

YEARS ENDING MARCH 31

IBRD- Economic Staff

1675

ANNEX 4

SUMITO01iO IETAL INDUJSTRIES. LTD.

Scurces of Raw Materials

The expected production of pig iron during the year ending March31, 1963 is 894,000 tons. This will require about 1,146,000 tons of ironore, of which only 7,000 tons will come from domestic sources. About 45%of the ore will be sintered. The main sources of imported iron ore willbe Malaya (31%), Goa (18%), India (15%), the Phili+ppines (11%) and miscel-laneous small suppliers. The increase in Sumitono's ore import requirementsis only part of the expected increase in the ore import requirements of theentire Japanese industry. The industry is taking steps to assure that theseincreased requirements will be met. An agreement was recently concludedwith the Indian Government to secure four million tons annually from theBailadila mines in addition to the two million tons from the Rourkela mineswhich uas arranged two years ago.

Coal recuirements for the year ending March 31, 1963 will be about711,000 tons, of which about 31% will be sup-.,lred from domestic sources.The main suppliers will be the TJnited States (45% of total requirements),and Australia (13% of total requirements). Like other Japanese steel com-panies, Sumitomo is planning to meet part of the imported coal recuirementswith Australian coal, which is cheaper than West Virginia coal. In addi-tion to these coal requirements, Sumitomo plans to purchase about 229,000tons of domestic coal from its traditional suppliers for the Kokura Works.

For a planned steel ingot output of 1,414,000 tons in the yearending March 31, 1963, total scrap requirements would be about 628,000 tons,of which 321,000 tons are to be purchased, the remainder being return scrap.Of the purchased scrap, about two thirds are to be imported, the main sup-plier remaining as at present the United States. The pig iron to totalscrap ratio of the company would be 59/41.

Annual limestone requirements will be 283,000 tons by 1962. Thecompany should have no difficulty in securing that amount from domesticsources.

A.NEX 5

SUMITO0MiO 1ETAhL INDUJSTRIES. LTD.

Construction Schedule

Waka3ama

Steelmaking facilities Comspleted.Blooming mill Completed.Blast furnace and facilities December 1957 - April 1961Port facilities April 1957 - January 1961*Comboined hot strip and plate mill April 1960 - April 1962*Medium-size welded pipe mill May 1960 - April 1962Reconstruction of seamless pipe mill Completed.Electric resistance welded pipe mill Completed.*Wolded spiral pipe mill April 1960 - October 1961

AmaRasaki

Ugine extrusion presses Completed.Reconstruction of Mannesmannseamless tube mill Completed.

Reconstruction of cold-drawn pipe mill Completed.Reconstruction of section mill Completed.

Osaka

Steel tire and wheel mill Completed.Alloy steel rolling mill Completed.Casting and forging equipment October 1956 - December 1961

*Electric furnace and casting equipmLent March 1960 - March 1962

Kokura

Reconstruction of blast furnace #2 Completed.Oxygen top-blowing converters April 1959 - June 1961Wire rod and steel bar mill Completed.*Blooming mill May 1960 - December 1961

*Additional Projects to the Second Modernization and Expansion Program.

ANNEX 6Page 1

SUMITOMO METAL I1DUSTRIES. LTD.

Construction Cost Estimates(Yen Million)

Expenditures Estimated Remeining Expendituresto March Years Ending March 31.

Total Cost 31. 1960 1961 1962 12963 TotalAdditional Projects:

WakayamaCombined Hot Strip and Plate Mill 12,300 - 3,130 6,530 2,640 12,300Medium-size Welded Pipe Mill 1,840 - 270 1,350 220 1,840Additions to Blooming Mill 1,650 - 330 1,100 220 1,650General Services:Power 650 - 150 500 - 650Water 320 - 20 300 - 320Transportation 25 - 180 70 250Total Bank Project 17,010 - 3,900 9,960 3,150 17,010

Welded Spiral Pipe Mill 600 - 120 48 - 600

Total Wakayama 17,610 - 4,020 10,440 3,150 17,610

OsakaElectric Furnace and Cesting Equipment 1,840 - 400 1,440 - 1,840

KokuraBlooming Mill 1,290 - 200 1,090 - 1,290

Contingencies 2,190 - - 610 1,580 2,190Repairs and Renewals - - 1.500 1,500

Total Additlonal Projects 4.43 _ 4.620 13.580 .20 24,4_2

Second Modernization and Expansion Program:

WiakayamaLanl Purchase and Reclamation 5,860 3,270 1,520 1,070 - 2,590Transportation and Unloading 2,170 1,420 750 - - 750Raw Material Storage 1,620 380 940 300 _ 1,240Blast Furnace 2,870 420 1,780 670 - 2,450Blowing Facilities and Power Plant 1,770 580 590 600 - 1,190Coke Oven and By-Product Plant 1,760 520 750 490 1,240Steel-making Fpcilities 1,670 1,270 130 270 - 400Blooming Mill 6,730 6,550 180 - - 180Ancillary Facilities 2,610 1,170 1,130 310 - 1,440Contingencies 500- - SOO - _ 0Total Bank Project 27,560 15,580 7,770 4,210 - 11,980

Electric Resistance Welded Pipe Mill 290 290 _ - - -

Remodelling Seamless wipe Mill 2,210 2,210 - - - -

Miscellaneous 1.260 810 330 120 45

Total Wakayama 31,320 18,890 8,100 4,330 - 12,430

Ama-asakiUgine Pipe Extrusion Press 2,030 1,900 130 - _ 130Modernizing Seamless Tube Mill 790 330 460 _ _ 460Expansion of Cold Drawn Pipe Mill 610 610 - - -

Section Mill 220 30 190 - _ 190Miscellaneous 1.710 1,180 320 210 - 530

Total Amagasaki 5,360 4,050 1,100 210 - 1,310

hNNEX 6Page 2

OsakaSteel Tire and Wheel Mill 1,490 1,490 - _ _ _Alloy Steel Rolling Mill 1,300 1,050 250 - - 250Casting and Forging Equipment 1,770 1,560 100 110 - 210Miscellaneous 710 55 160 _ - _ 160

Total Osaka 5,270 4,650 510 110 - 620

KokuraReconstruction of Blast Furnace #2 2,850 2,850 - - -Harbor 1,070 500 570 - - 570Converters 3,240 860 1,650 730 - 2,380Wire Rod Mill #2 1,800 1,800 _ - - -Medium Section Mill 900 20 330 550 - 880Miscellaneous 450 400 30 20 -5

Total Kokura 10,310 6,430 2,580 1,300 - 3,880

Suita and Kanzaki 2,160 1,482 378 300 - 678Repairs and Renewals 400 - 200 200 - 400

Total Second Modernizationand Expansion Program 54.820 35502 12.868 6.4 - 19.318

Sumitomo Light Metal Industries, Ltd. 4.290 2.033 1.107 55 600 2.25

Total Expansion Program 83,540 37,535 18,595 5 6,830 46,005

ANNEX 7

SUMITOMO METAL IODUSTRIES, LID.

Schedule of Disbursement and Currencies Reauired

Years endingMarch 31, $ Mil.

1961 1962 1963 Total Equiv.… …X Million - - -

Total Bank Project

Foreign Exchange 1,112 2,267 144 3,523 9.8Local Currency 2,78 79 3,oo6 13,4/87 37.5

Total 3,900 9,960 3,150 17,010 47.3

- - $ Million - - - -

Estimated Disbursement ofBank Loan 2. 43 7 - 7 >0

Foreipn Exchange Requirements

$ MillionCurrency Equivalent

U.S. Dollars 6.4D. Marks 0.6

7.0

SUMITOMO METAL INDUSTRIES, LTD.

Past and Projected Income and Surplus Statements(Consolidated with Sumitomo Light Metal Idustries Limited)

(Yen million)

A C T U A L P R O J E C T E DYears ending March 31, 1956 1957 1958 1959 1960 1961 1962 1963 19614 1965 1966

Sales 36,721 52,290 58,048 45,9o6 67,674 77,008 89,707 95,185 103,865 110,865 115,635

Operating Expenses:Cost of Sales 30,606 42,270 45,905 35,307 51,575 59,107 68,109 71,222 78,687 85,279 89,181Salling and A"inistrative Expenses 2,652 3,241 4,102 4,166 5,337 5,603 6,353 6,737 7,336 7,906 8,201Depreciation Y) 1. 335 1 843 1 428 1.949 2.547 3 608 5 505 7 043 6,572 6,120 6.075

314259- b712p54 6:61z35 41 J22 59,l459 6_,3__ 79,967 o5,002 92.595 9190305Operating Profit 2,128 436 8,215 8,690 9, 10,183 11,270 12,178Non-Operating Income (net) 688 217 85 215 144 600 353 365 234 337 417Gross Income 6,69 14,699 9 9,290 110,509 11,504 11,897 12,595Less Interest 1 318 1 564 2 565 2,572 3 364 4 834 6 257 6,202 6 207 6,164Net Income Before Taxes 4;332 2 ,127 29,312 6,431Income Taxes 280 1,050 1,200 440 470 1.404 1,330 1,343 1,697 1.964 2,163

Net Income 1,218 2,539 2,933 _,67 4.525 3,052 3,012 _Q948 3,6o5 3.726 4,268

Surplus snd Reserves at Beginning of Year 11,524 11,876 13,015 13,524 13,805 12,716 13,206 12,492 11,629 10,904 10,499Net Income 1,218 2,539 2,933 1,687 4,525 3,052 3,012 2,948 3,605 3,726 4,268Premium on Stock Sold _ _ - - 4 - 0 - -

Total Funds Available :n- r 13% 15,349 2.211 14,3 .15,23467

Dividends and Bonus 510 614 874 617 779 1,249 1,727 1,831 2,242 2,359 2,484Additional Depreciation / 201 670 483 329 3,082 90 170 170 170 (219) (99)Increase in Reserve for Bad Debts, Etc. 70 108 62 130 30 170 170 50 50 10 5Capitalization of Reser7es - - 1,000 300 1,688 1,053 1,659 1,760 1,868 1,981 2,103Tax on Revaluation Profit 85 8 _ 5 30 39 - - - - - -

Total Allocations ~ 140 -2.42 1,406 5,613 2 3,726 3,811 =4.131 -l

Surplus and Reserves at End of Year 11.876 13,015 13,524 13,I85 12.716 13.206 1 2 ,49 11,629 109904 , 74

Net Income Before Taxes, Plus Interest 2,816 5,153 6,698 h,699 8,359 9,290 10,093 10,548 11,504 11,897 12,595Times Interest Covered 2.1 3.3 2.6 1.8 2.5 1.9 1.8 1.7 1.9 1.9 2.0

Net Income After Taxes, Plus Depreciationand Interest 3,871 5,946 6,926 6,208 10,436 11,494 14,268 16,248 16,379 16,053 16,506

Times Debt Service Covered 1.5 1.5 1.8 1.7 2.2 1.8 1.7 1.5 1.3 1.2 1.3Times Debt Service Covered 21 - - - - - 1.9 1.8 1.7 1.5 1.4 1.5

Total Retained Earnings and Depreciation 1,958 3,760 3,482 2,989 6,254 5,411 6,790 8,160 7,935 7,487 7,859

y Calculated approximately on 10%-declining-balance basisI/ Including net increase in Reserve for Special RepairsExcluding repayments to members of Sumitomo group

SUMITOMO METAL INDUSTRTES, LT0.

Past and Projected Balance Sheets(Yen Million)

A C T U A L PROJECTED

March 31, 1956 I957 1958 1959 1960 1961 1962 1963 196)4 1965 1966

ASSETS

Current Assets:Cash and Deposits 1,520 2,299 3,508 3,844 5,207 13,519 5,387 5,762 5,850 6,195 6,406Notes and Accounts Receivable 9,429 10,737 10,180 9,732 14,092 14,517 16,676 17,440 18,854 20,152 20,825

Less Reserve for Bad Debts (100) (220) (320) (400) (454) (624) (794) (844) (894) (904) (909)

Inventories a 8,692 15,617 17,422 15,635 17,901 18,108 18,527 20,745 22,373 23,739 24,784

Other Current Assets 1,900 2,210 2,627 2,840 7,231 5,103 5,576 5,919 6,119 6,319Total Current Assets 21,441 30,643 33,417 31,651 43,977 50,623 ,679 52,102 55,301

Fixed Assets:Gross Fixed Assets 16,925 20,726 27,930 36,761 53,156 71,751 92,331 99,161 101,171 106,136 108,641Less Reserve for Depreciationi/ 4 471 6 179 7529 9,671 15040 18738 24,413 31,626 38 368 44,269 50 245

Net Fixed Assets f2,454 1 20,401 27,090 3 67,535 2, 61,867 8

Investments 1,261 1,534 1,966 2,740 3,985 5,035 6,085 7,135 8,185 9,185 10,185Other Assets 125 121 207 444 661 702 735 791 790 783 773

Total Assets 35.281 46,845 55,991 61,925 86,739 109,373 119,882 124,1140 123,880 127,136 126,779…~~~~~~~~~~~~

LIABILITIES AND EQUITY

Current Liabilities:Short-term Debt 2,913 4,195 8,509 8,106 6,250 3,538 4,590 6,230 8,380 14,440 15,700

Long-term Debt - Cuarrent Matarities 2,339 1,360 1,179 1,369 1,564 2,492 4,332 6,455 6,824 6,602 7,757Other Curn'rent Liabilities 9,11414 1.6,502 12,50)4 10 572 18 240 21,581 22,887 23,340 23,8)42 23,986 2)4,743

Total Current Liabilities 22,057 22,192 2 26,054 27,61 31,809 36,025 39,046 45,028 48,200

Long-tern Debt:IBRo - Old loan - - _ 2,268 7,682 10,852 11,192 iO,467 9,702 8,895 8,044IBRD - New Loan - - - 850 2,520 2,520 2,380 2,231 2,073U.S. Private Placement - - - - - 1,800 1,800 1,800 1,650 1,500 1,350Domestic Long-tern Debt 6,348 8,133 11,454 16,874 24,558 30,294 35,090 35,983 32,983 29,565 26,472

Less Current Maturities (2 339) (1,360) (1179) (1 369) (1 564) (2,42) ,3) (6,3455) (6.82 4) (6,602) (2,757)Total long-term Debt 416,773 10,275 173 30,676 41304 46,670 44,315 35,589 30,102

Eqaity:Capital Stock 5,000 5,000 10,000 10,300 17,293 27,252 28,911 32,17. 34,039 36,020 38,123Surplus and Reserves 112 876 13 015 13,524 13,805 12,716 13 20A 12 492 11 629 10 904 10 499 10 274

Total Equity 1,6 o 23,52)4 2,105 30,009 41,403 ° 1X,4 46,519

Total Liabilities asrd Equity 35,281 46,845 55,99I 611925 109,373 119,8 2 124,140 123,880 127,136 126,779

Current Assets/Current Liabilities 1.49:1 1.39:1 1.51:1 1.58:1 1.69:1 1.83:1 1. 1 2:1 1.35:1 1.33:1 1.23:1. 1.19:1Current Assets/Current Liabilities 1.87:1 1.72:1 2.44:1 2.65:1 2.22:1 2.10:1 1.66:1 1.63:1 1.70:1 1.81:1 1.77:1Total Debt/Equity 35/65 41/59 46/54 53/47 56/44 54/46 57/43 57/43 55/45 55/145 53/47

2I Including Reserve for Special Repairsg/ Excluding short-term debt.

SUJII1TOMO METAL IND'JSTRIES, LTD.

Cash Flcw Proiection(Consolidated with Sumitomo Light Metal Industries Limited)

(Yen Million)

Total TotalYears ending March 31, 1960 1961 1962 1963 1961-63 1964 1965 1966 1964-66

(Actual)

SOURCES CF FUNDS

Net Income before Interest and Taxes 8,359 9,290 10,093 10,548 29,931 11,504 11,897 12,595 35,996Depreciation 2,547 3,608 5,505 7,043 16,156 6,572 6,120 6,075 18,767Capital Increase 5,308 8,906 - 1,500 10,406 - - - -

Long-term DebtsIBRD - Old loan 5,413 3,170 1,028 - 4,198 - - - -IBRD - New loan - 85o 1,670 - 2,520 - - - -

U.S. Private Placement - 1,800 - - 1,800 - - - -Domestic Borrowing 9 054 7,300 7 000 4 100 18 400 2 400 2,300 2.350 7.050

Total Long-term Debt 13,120 2,300 2,350 7,050

Increase in Short-term Debt (1,856) (2,712) 1,052 1,640 (20) 2,150 6,060 1,260 9,470Increase in Other Current Liabilities 7,668 3,341 1,306 453 5,10C 502 144 757 1,403

Total Sources 36,493 35,553 27,654 25,284 88,491 23,128 26,521 23,037 72,686_ - _

APPLICATIONS CF FUNDS

Fixed Assets 16,656 18,595 20,580 6,830 46,oo5 2,010 4,965 2,505 9,480Investments and Other Assets 1,462 1,091 1,083 1,106 3,280 1,049 993 990 3,032Interest 3,364 4,834 5,751 6,257 16,842 6,202 6,207 6,164* 18,573

Amortization: -IBRD - Old loan - - 688 725 1,413 765 806 851 2,422IBRD - New loan -- - - 140 150 158 448U.S. Private Placement - _ - - - 150 150 150 450Domestic Long-term Debt 1 369 1 564 1,804 3,607 6 975 5 400 5 718 5 443 16 561

Total Amortization 1,36 2,492 4,32 6,02

Taxes 483 1,404 1,330 1,343 4,077 1,697 1,964 2,163 5,824Dividends and Bonus 779 1,249 1,727 1,831 4,807 2,242 2,359 2,484 7,085Increase in Current Assets (other thancash) 11,017 (1,496) 2,823 3,a0 4,537 3,385 2,864 1,918 8,167

Total Applications 27 241 35 786 24 909 87 936 2 r4 6 176 22 8

Cash Surplus for Year 1,363 8,312 (8,132) 375 5I5 88 345 211 644Accumulated Cash Surplus at Beginning

of Year - - 8,312 180 - 555 643 988 355

Accumulated C-sh Surplus at End of Year - 8.312 180 555 55 643 988 1,199 1.199

ANNEX 11Page 1

SUMITO0O METAL INDUSTRIES, LTD.

Assumptions for Financial Forecasts

The company's financial forecasts are based on the followingassumptions:

1) The volume of Japanese production of ingot steel would be as

shown in Annex 3. Sumitomo would be able to recoup a portionof its former share of the market for pipe and tubes wJhen itsnew facilities are completed, and to enter the market for

strip and plate by selling tlhat portion of its new capacitynot needed for its own consumption. The company's overall

share of the Japanese market would rise from approximately6% at present to about 7.5% in the year following completion

of construction. Prices received for most products wouldremain at about present levels. Operating profit wouldremain at 11% of sales, the average of the past two fiscalyears, except that the present operating rate of 12% hasbeen taken for the current year. (As higher margins shouldresult from the increased productivity and efficiency of thenew equipment, the last is considered a conservative assump-tion.) Sales of Sumitomo Light i4etal Industries, Ltd. are

as forecast by that company based on (a) a market projection

made by an industry association, and (b) the assumption that

the company '1l maintain its present share of the market.

Its sales represented 9.3% of consolidated sales in the past

year and will increase to about 1h%.

2) Ordinary depreciation would bes as in past years, the maximumamount permitted by law. No special depreciation is taken

in the projections as the law is due to expire, although itis possible that it may be extended. Past and projected de-

preciation has been taken on approximately a 10l-declining-

balance basis.

3) Increases in the Reserve for Employees Retirement and the

Reserve for Bad Debts would be the maximum permitted by taxlaw. Increases and decreases in the Reserve for Special

Repairs correspond to the estimated cost and timing of re-lining and major repairs of the blast furnaces.

4) The company would secure new long-term loans during theconstruction period as follows:

(a) IBRD Loan - $7 million (Y2,520 million equivalent)

for 15 years including a three-year grace period, atan interest rate of 6.,C5, (5 3/4!s for IDRR pJlus O.3{J forJDB). Amortization by level payments of principaland interest. Since the projections were made, the Bank

interest has been reduced to 5 3/4%. The difference ininterest chargc for the year ending March 31, 1964 wouldonly be about X6 million.

ANWEX 11Page 2

(b) U.S. Private Placement - $5 million (41,800 millioneqiLvalent) for 14 years including a three-year graceperiod at an interest rate of 7.5%, plus O.1% as aguarantee fee for the Sumitomo Bank. (This rate doesnot include any refund which may have to be made totax-free U.S. investors for income taxes withheld inJapan.) Amortization by level payments of principal.

(c) Domestic Long-term Loans - '9,9400 million for five toten years at an interest rate of 9.3%. Various amor-tization rates.

(d) Domestic Miortgage Debentures - *9,000 million forseven years including a two-year grace period at aninterest rate of 7.5%. Amortization 4% annually,balance at maturity,

5) The company would be able to continue to roll over most ofits present short-term debt. Interest rate would be 7.3%.

6) The company would be able to increase its short-term debtby ;9,470 million and obtain new long-term debt amountingto B7,050 million in the three years following completionof construction.

7) Investment in fixed assets in the three years after the endof the construction program would total *9,480 million, in-eluding normal renewals and repairs. Annual investment insecurities or loans to other companies would be aboutY1,000 million.

8) Income tax would continue at an effective rate of 35% ofnet income after ordinary and special depreciation andother reserve allocations permitted by law. This rateresults from the large portion of the company 1s produc-tion which is exported and is thus free of the normal38% tax rate. Other taxes included in cost of sales arethe enterprise tax (about 12% of net income) and localtaxes (about 5% of net income).

9) Dividends would continue to be paid 6% in cash and 6% instock.

10) Total receivables outstanding would represent about 2.75months, sales, about the sarie as at present (2.9 monthssales). Sixty per cent of total notes receivable wouldbe discounted.

ANEX 11Page 3

11) Inventories of raw material.s, goods in process, finishedproducts a-id ope-rating supplies would average about 2.8months of sales, which is the level as at March 31, 1960and the average of the past three years.

12) Accounts payable would be three months' purchases andconstruction expenditures. This represents about 75%of the maximum terms that could be obtained from sup-pliers.

II-IllLOER /

f ov/ / | 7 s n o M SLI 2 E -- 0

PIP E J r _JAPAN

LAYOUT OF WAKAYAMA WORKS

SUMIMOTO METAL INDUSTRIES LTD.

CN -TS C_E CAL Ci_ENS . F.S N F Ci

JUNE 1960D I