~~~~~~~~RESTRICTED

ORS F Inv CReport N0.T.O. 95-a

This document was prepared for internal use in the Bank. In makingit available to others, the Bank assumes no responsibility to them forthe accuracy or compieteness of the information contained herein.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TECHNICAL REPORT

ON

'YAWATA STEEL PROJECT

October 17, 1955

Department of Technical Operations

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CURRENCY CONVERSION

$ 1$Oo 2 Y360

Y 1 s $ 0.00Z77778

Y 1,000,000 - $ 2,777.78

TABLE ' CONTENTS

Page

Summary 1

Introduction 3

I, The Japanese Steel Industry 4

II. Yawata Iron & Steel Co. Ltd. 7

Appendices

Appendix Table 1 - 6 (General)

Annex A-1 - A-10 (Yawata)

SUIMP.Y

1. The Japanese Government has submitted for Bank financing severalsteel projects. This report deals only with the plate-mill project of YawataIron and Steel Co. Ltd. Other proJects tre under study.

2. A brief general section deals with the Japanese steel industry as awhole, providing some historical persoective and summErizin& its present comp-etitive position in world markets. M.odernization of existing finishing capac-ity, where economic, is accorded high priority.

3. The Yawata Company, the oldest and largest steel company in Jepan,had sales of almost $200 million (equivalent) in 1954, employed 36,000 menin integrated mills producing over 1.3 million tons of finished steel in ad-dition to supplying 370,000 tons of pig iron and semi-finished steel to others.Its management and staff is capable and experienced.

4. The project for which Bank financing is sought is the replacement ofthree existVMg but obsolete olate-mills by a sin4le modern plate-mill with acapacity of 360,000 metric tons per year. The net increase in annual capacityis nominal, 18,000 tons. The new mill would have a total cost of tl15.6 millionequivalent. Of this tot.l, t5.4 million represents foreign exchange, all butabout $0.1 million of which is proposed to be borrowed from the Bank.

5. Studies indicate that this modernization project should enableYawata to reduce its plste productioni costs by more than 10% ard afford it anannual pre-tax return of almost 20% per annum on the total investment. Theexecution of this project would also help improve Japan's competitive positionin rorld steel and shipbuilding markets.

6. Yaiwsata, like most Japanese industrial companies, in the post-rarperiod has resorted to short and medium-term debt financing to cover require-ments for increased wrorking canital and new fixed investment. As comparedwith the pre-T-ar situation, financial liquidity is lovr and frequent debtrefunding ooerations are necessary. Earrnings coverage of interest chargesis relatively lowr, but is likely to improve in the next few years. Furtherimprovement in interest coverage denends on an improved financial structure.

7. While Yairata's immediate refunding problems over the next two years(approximately coincidin47 with the estimsted time of project completion) aremanageable, the company is cognizant of the need to reduce the risks inherent incont inual refunding.

8. Yavrata's future investment needs (after March 31, 1957) are likelyto be reduced sharply and it is estimpted that internal cash generation willordinarily more than suffice to meet investment recuirements. Yawata hasaccordinfly undertaken to eliminate the present excess (',8.8 billion) of totalliabilities over current assets by 1tarch 31, 1965 and to improve its debt-equity position.

9. The term of the proposed loan is set at 15 years, including a graceperiod of 2f years. The borro er would be The Japan Development Bank, a govern-ment agency, which would in turn relend the proceeds to Yavwata. A similarprocedure vas followed in the thermal powzer loans to Japan in 1953.

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10. 'he Yarata plate-m411 project is considered suitable for Bank lendingin the amount of $5,300,000 equivalent.

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Introduction

11. The Japanese Government, through its Ministry of International Tradeand Industry (11ITI) applied to the Bank in the summer of 1954 for financialassistance for six projects, for the modernization of the steel industry..Thereas in an earlier modernization program, the maior emphasis had been placedon rehabilitation of existing basic steel facilities, mainly in pig iron andsteel ingot producing facilities, current emphasis is almost exclusively onfacilities for finished steel.

12. The applications were submitted in August 1954 and field investiga-tions were carried out in October and Movember.

13. One project, a plate-mill for the Yawata Iron & Steel Co., Ltd. isthe subject of the present report. Tv7o projects of other comparies are stillunder study.

14. An introductory section treats briefly the Japanese steel industry,as a ir7hole to provide persnective as to the Yawata project.

I. T,-IE JAPATESE SME3L INCDUS MY

A. Irends in Steel Production

15. Large-scale steel production in Japan dates from 1901 -^rhen theYawata Iron Works was established by the Imperial Japanese Governnent.Several private firms began operation somewhat later on a small scale.ingot steel output in Japan did not exceed one million tons until 1921i.During the 120s, steel capacity increased steadily. Contrary to the trendin most countries, both capacity and output kept growing rapidly duringthe t30s, spurred by Japanese aims of self-sufficiency and war preparation.Steel ingot production rose from slightly over two million tons in 1929 toover six million in 1938 and reached 7.6 million tons in 1943. AppendixTable 1 traces the growth of Japanese production relative to world pro-duction in recent decades.

16. After the war, ingot production fell below the one million ton markin 1946 and l9l7 and did not attain a level of four million tons before1950 (Korean incident). Production since then has risen to 7.6 and 7.8million ingot tons in 1953 and 1954 respectively; production in 1955 willprobably exceed 8 million tons.

17. In terms of finished products, there has been a parallel risefrom 0.5 million tons in 19)7 to over five million tons in 1953 and 195)4.Table 2 in the Appendix lists production of finished steel products byyears for the postwar period.

B. Structure and Organization of Japanese Steel Industry

18. The government-oTwmed Yawata company dominated the Japanese steelpicture in the first three decades of this century. Almost all the privatecompanies producing finished products were dependent on Yawata or on importsfor pig iron and semi-finished steel. During the early '30s low prices forimported scrap and pig iron and 1,OW ocean freights greatly impaired theposition of the few independert blast furnaces. In 1934, a merger wasarranged between Yawata and the independent blast furnace operators. The-riperial Government emerged as the holder of 80% of the Stock of the new

steel giant, Japan Iron and Steel Manufacturing Company.

19. Tne new company, capitalized at 360 million yen (over $100 millionea,uivalent at 1934 exchange rates), accounted for 96% of the oig iron, 53%of the raw steel and 4L% of the finished steel output of Japan in 1934.lirtually all other steel companies were dependent on it for pig iron andto a lesser extent for semi-finished steel (see Appendix Table 3). Thenew company also owned and operated coal and iron ore depositsin Japan forits own use.

20. Shortly after the war, as a part of the decartelization policy,the governmentts entire holdings in the Japan Iron and Steel ManufacturingCompany were sold through the securities markets. Early in 1950, theholding company itself wzas dissolved after its iron and steel facilitieswere transferred, for the most part, to two new companies, Yawata Iron &Steel Co., Ltd. and the Fuji Iron and Steel Company. The interests heldin coal and iron ore mines were disposed of separately.

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21. As a result of this action, the tw!o new companies Yavata and Fujiwere formally orgenized on April 1, 1950. The original Yawvata iron and steelfacilities on Kyushu Island w vere turned over to the new Yawata Compehy. Thebulk of the iron and steel facilities on the islands of Honshu and Hokkaidorwere conveyed to the Fuji Company. These tvwo companies thus became the twolargest steel producers in Japan and between them continue to be the mainsunpliers of pig iron and semi-finished steel to other small companies.

22. The leading Japanese steel producers are listed in Appendix Table 4.It will be noted that the five leading companies accounted for 90% of the pigiron, 71% of steel ingots and about 63% of finished steel production in 1954.Ya,ata alone accounted for over a third of the national production in each ofthe categories. It is the largest producer of rails and tinplates and a leadingproducer of plates, sheets, bars, wire rods and structural steel. It does not,horever, engage in poroduction of pipes and tubes or railway wjheels.

C. Harketing Aspects

23. From the cost standpoint, the competitive position of the steelindustry is influerced mainly by the assembled cost of raw materials, cost ofcanital, Vrare rates, plant and labor efficiency and freight advantages incertain markets.

24. The cost of canital in Japan is higher than in North America orTRestern Burope. Loan funds cost 9% or more. Japanese equity securities sellat prices yieldinp 8% or more to the new purchaser, and nevr issues in the lastyear have been Priced to yield 10% or more.

25. The high cost of coking coal and, to a lesser extent, iron ore andscrap, causes the assembled cost of ravw materials to be hither by from $3 - 9g

per ton than for those in other leading steel producing areas. Cn the otherhand, most of the major basic (but not finishing) iron and steel making facili-ties have been modernized during the past five years, which at present helpscompensate for higher material costs through their more efficienlt utilization.

26. V here the same technological process is used in Japan end elsewhere,lower wage ra 'es in Japan l-/help keep processine costs lovw and thereby reducethe basic raw material and canital cost disadvantages referred to above. '.:herethe technology in Japan has lagged behind that of other countries, existingwage differentials are less significant. This disadvantage applies especiallyto small-scale non-integrated finiishing plants ,,here extra handlinF costs andheot losses are costly.

27. Japan would find it difficult to compete with lower cost productionof 'estern Europe and North Anerica if it did not enjoy freight advantages incertain markets. In fact, hoT;ever, a large part of Japanese exports are toneighboring countries in Southeast Asia or Oceania where it has a freight ad-vantage over its competitors and rThere in some cases the softness of Japanesecurrency also affords it at least a temporary advantage. This freight advantagemay be roughly estimated at $10 per ton in Southeast Asia and ki5 for such mar-kets as India, Pakistan or .4ustralia. In exports to Europe or to South America,particularly to those countries on the East Coast, Japan is at a substantialdisadvantage, perhaps $15 - ~'20 per ton.

1/ Monthly manufacturing wages in Japan averaged less than $50 in 1953 ascompared to $,90 in Germany, about $100 in U.K. and $300 in U.S.A.

28. Taking account of Japants freight advantage to nearby arees and itsprogress in modernaizing pig iron and basic steel facilities in recent years,the fundamental rar material cost handicep does not appear insurmountable. InSoutheast Asia, in general, its natural freight advantage anpears to outweighits raw mtterials handicap. In more distant markets, and particularly in thet!estern Hemisohere or Europe, Jaannese steel. is not competitive, except inperiods of high demand, because buyers are willing to pay high prices for promptdelivery of marginal tonnages or because special trade or currency arrangementsprovided a special advrantage to the Japanese trader, usually at the expense ofsome other sector of the Japanese economy.

29. The bulk of Japanese steel production is used at home. Exports offinished steel in recent years have accounted for between 10% and 28% of output.The largest percentage irwas in 1952 -hen the combinationof the Korean boom anda long steel strike in the U.S. favored Japanese steel exports. In 1953 thefall in exports reduced the export share to 12% but it rose to about 17% in1954. In 1954, exnorts of iron and steel - including pig iron, scrap andsecondary processed products as wr!ell as finished steel products - accountedfor over 10% by value of total Japanese exports. 1955 exnort tonnage, basedon shipments for the first half yeer and contracts booked, is likely to besubstantially above 1954 levels.

30. Japanese official estimates are that the finished steel exports Vwill average about 1 million tons per year in 1959. 177hether or not Japaneseestimates are fully justified it does seem probable that the average level offinished steel exports in 1959 and later years till be at least 800,000 tonsper year.

31. Internal demand for finished steel in 1953 and 1954 averaged about4.5 million tons per year and may be expected to rise by about 10% by 1959.Appendix Table 6 contains an approximate breakdown of estimated total demandby products for 1959 as compared wfith 1953 and 1954.

32. Total capacity for basic iron and steel and finished steel in Japanappears adequate. However, significant segments of capacity in certain productsare out-moded and economical modernization appears warranted. Such improvementswould help improve Japan's competitive position abroad both for steel productsand for fabricated products such as ships and machinery.

1/ This estimate is confined to finished steel. See Appendix Table 5 fortotal exports of iron and steel products.

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II. YAWATA IRON & STEEL CO. IfD.

A. CorDorate History and Organization

33. The Yawata Iron & Steel Company, established in 1897, is the largeststeel plant in the Far East. Yawata's role in the Japanese steel industry hasbeen described earlier (Part I, paras, 15-22). The company's operations -integrated from coke ovens to a variety of finished steel products - areconcentrated at Yawata and Tobata on Kyushu Island. It is also erecting amodern wire rod mill at Hikari on Honshu Island, across the inland sea. Infiscal 1954 2/ total sales were 71.6 billion (about $^99 million equivalent)and year-end employment exceeded 36,000. Assets totalled Y 104 billion includ-ing net plant and equipment of almost Y 50 billion. In that year, the companyproduced over 1.3 million tons of finished steel products and in additionsupplied more than 370,000 tons of pig iron and semi-finished steel to otherJapanese steel companies or for export. Annex A-1 contains details of salesby products.

34. The management of Yawata is capable and its technical staff wellqualified, both from long experience and by technical contacts with variousAmerican firms, ensuring a reasonable degree of progressiveness. Its marketingexecutives appear well-informed and keenly alive to opportunities in the exportmarkets. Labor relations in recent years have been satisfactory and much effortis devoted to employee welfare in the communities which are highly dependent onthe stability of Yawata's operations.

B. Present Facilities

35. Annex A-2 lists the present facilities of Yawata, including thoseunder construction. Since 1951, an extensive modernization program has beenunder way. This program was designed to improve iron and steel making facili-ties either by renovation or repair of existing facilities, by the addition ofnew finishing facilities to round out existing plants and by the large newHikari wire rod project. In the four-year period, April 1951 to March 1955inclusive, capital expenditures totalled 1 28.5 billion ($79 million equiva-lent). Completion of this program would entail an additional gross expenditureof about 8 billion yen ($22 million) before the end of fiscal 1956.

C. The Plate Mill Project

36. In addition to the foregoing expenditures, Yawata has undertaken toreplace three existing plate mills by a single modern four-high plate mill.The present operating plate mills have an annual capacity of 342,000 tons ofmedium and heavy plate, while the new mill would have an annual capacity of360,000 tons. Its total cost (excluding interest during construiction) is

2/ Japanese companies generally follow the practice of using a fiscal yearending March 31. Thus, fiscal 1954 covers the reriod from April 1, 1954to March 31, 1955.

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estimated at Y 5.63 billion ($15.6 million) inclading foreign exchange expen-ditures of b5.4 million (9 1.95 million). The companyts loan applicationrequests IBRD financing of all but about $100,000 of the total foreign exchangeexpenditures for the plate mill. The remainder of fore.gn exchange is to beprovided by Japanese sources.

D. Advantages of the New Mill

37. The costs of production of the existing plate mills installed between1905 and 1928 are too high to enable Yawata to compete successfully in home andworld markets. The new mill will be a four-high reversing type with edgers,capable of rolling 160" plate as compared to a maximum of 128" on present mills.It would (a) utilize large ingots direct from a new blooming mill, alreadyinstalled, greatly reducing reheating costs, (b) produce about the same tonnagewith less than half the workers now required, and (c) produce uniform plates,reducing the amount of rejects and sheared scrap. The improved quality of theproducts should enable the company to broaden its markets both in Japan andoutside.

38. Detailed estimates after adjustment, indicate that unit productioncosts, aside from depreciation, can be reduced by over g 4,300 per ton ($12equivalent) or about 12%. On the basis of an annual output of 298,500 tonsper year (83% of capacity) the annual savings over present operating costs(excluding depreciation) would be almost Y 1.3 billion ($3.6 million equiva-lent).

39. Depreciation on the plant is estimated at Y 208 million per year,based on a l%o scrap value for buildings and equipment and a weighted averageof about 24 years for the total (22 for the new equipment and constructioncosts and 45 years for building extensions). If, more conservatively, thetotal cost were to be written off over 20 years, the total depreciation chargewould be increased to Y 281 million per year. Based on an output of 298,500tons per year, the depreciation charges per ton would be Y 697 ($1.94) or X 942($2.62) per ton, respectively. Present depreciation charges on the old millsare Y 105 per ton. The net profit (before profits taxes) on the new investmentwould be almost 20% per year after allowing for the increase in depreciation.

40. A comparison of costs, before and after modernization, is given inAnnex A-3.

E. Eauirnment Procurement

41. Annex A-4 contains detailed estimates of the total cost of theproject. Of the total of about Lr 5,6 billion ($15.6 million equivalent), theforeign exchange cost is estimated at 'r 1,945 million ($5,403,000 equivalent).A breakdown of the total foreign exchange costs is given in Annex A-5. Asindicated in the foLlowing paragraph, the cost estimptes for imported equipmentare firmly based and include adequate allowances for f'reight and insurance.The cost estimates also include the maximum price escalation on imported equip-ment. Domestic cost estimates are based on recent quotat.ions arnd appear

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conservatively calculated, although no separate contingency item is included.oSome of the auxiliary equipment in present mills will be utilized in the new

mill and an allowance for costs of transfer is included.

42. The plate mill project already has a considerable history. Beforeplacing a provisional order, Yawata received offers from European and Americanmakers of such equipment. The offer from United Engineering and Foundry Co.,Pittsburgh, was the most desirable, from the standpoint of prices, suitabilityand delivery time. In May 1953 Yawata, through Nippon Machinery Trading Co.,placed a provisional order for the imported equipment with United, subject tothe granting of an import license of the Japanese authorities. Work on thisorder had progressed substantially so that by September 1953, the United Co.was reported to have spent $480,000 on preparatory work. Because importlicenses were not forthcoming, orders to stop work were issued in September1953. No settlement for expenditures thus far incurred has been made,the Bank isinformed. It is understood, however, that the work already done on thiscontract (drawings, purchased materials and components, etc.) can be fullyutilized in the completion of the contract. If this loan is granted, thecontract slightly modified to take care of minor specification changes andincreases in wage rates and material prices will come into effect.

43. The company estimates that the manufacture of the imported equipmentwould require 12 months and that the complementary domestic equipment can bedelivered within 15 months. After allowing for transport and installation, itappears reasonable to assume that the new mill can be put into initial operationwithin 20 months after the orders have been confirmed, or by mid 1957.

F. Con_etitive Position in Plate Markgetig

44. In calendar 1954, about 15 different Japanese steel companies pro-duced plates but over 80% were produced by four companies as indicated below:

000 M.T. % of Total

Total Japan ,091 lOCO

Yawata 227 21Fuji 259 24Japan Steel Tube 237 22Kawasaki 162 25

Sub-Total =92 82

45. Although full details for 1954 for other producers are lacking, theyoperated on a much smaller scale. In 1952 the largest of the others producedonly 67,000 tons, with five companies producing less than 1,000 tons per monthon the average.

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46. The market for plates declined sharply in 1954, due largely to adelay in the government-sponsored and financed domestic shipbuilding program,but even in this year total output exceeded 1.0 million tons as indicated inthe following table which compares production, exports and imports of platesin recent years (000 tons):

ApparentYear Production Imrorts Exports Consumption

1949 432 8 4241950 805 - 75 7301951 1,153 0.7 231 9231952 1,419 0.5 459 9601953 1,412 0.1 223 1,1891954 1,091 negligible 197 894

47. Plate consumption in Japan in the next few years is likely to be onemillion tons or more. If probable exports of 150,000 tons or more per yearare added, the production outlookA is for an increase over 1954 levels.

48. Only three plate mills in Japan today are classified as modern four-high plate mills. These mills have an annual capacity of 829,000 tons, one ofwhich was only brought into operation in May 1954. There is thus clearlyconsiderable marketing scope for further modern capacity in plate production,which can show economies over costs in presently operated obsolete mills.

49. The Yawata Co. has long been a major plate producer (see AppendixT_2 ble 3). However, in recent years only about 3/4 of its plate output has beenof prime quality and most of the remainder has had to be sold as an off-gradeproduct, due to increasing deficiencies in its plate mill equipment. Conse-quently, its recent sales of plates and its estimates of sales in the periodbefore the proposed new plate mill comes into operation must be adjustedaccordingly. For example, plate production in fiscal 1953 was 314,000 tons,but sales as plates amounted to only 223,600. Aside from small changes inplate inventories (which at the end of fiscal 1953 totalled 18,700 tons), theremainder wes sold as off-grade steel, reflecting the fact that only about 75%of plate output was saleable as a first-quality product.

50. A comparison of plate production, sales as plates and sales of off-grade steel from 1952-1957, the latter years estimated, is made in the followingtable (figures in 000 metric tons):

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Total SalesSales Plate of Off-grade

Fisca] Year as Plates Production Steel

1952 263 339 801953 224 314 1071954 180 20 v/ 801955 (estimated) 195 260 a/ 941956 (estimated) 200 270 v/ 971957 (estimated) 270 282 ?After completion (estimated) 282 298

a/ Calculated on assumntion that sales as plates would be75% of output. Remainder are sold as rejects. Totalsales of off-grade products are as shown above; thepercentage thus sold probably varies with state ofsteel market, being low in periods of shortage andhigh prices and vice versa.

51. In view of Yawata's premier position in Japanese steel marketing, itis likely to have little difficulty in slightly increasing its share of plateszales over that of recent years, when and if its output of quality plates isincreased within the limits of the proposed plant capacity. The reduction inits costs made possible by the new mill should enable it to meet any localcompetition effectively and increase its ability to compete for ex'Port business.

G. Firancial Position

52. Background - The working capital position of Yawata like that of allJapanese industries is substantially less favorable than in the pre-war period.Pre-war composite statements of most brancles of Japanese industry showed acurrent ratio of 2:1 or better, and current assets generally exceeded totalliabilities l/ by a wide margin. In 1954, similar composite statements showedratios of slightly better than 1:1 as indicated below.

ElectricalIron & Steel Phchinerv Mining Textiles

Financial Ratios 1938 1.954 128 1924 1938 145_ 1938 1954

Current AssetUs/Curr. Liab. 2.40 1.18 2.68 1.29 2.74 1.08 2.18 1.27

Current Assets/Total LTab. V1 1.79 0.90 1.95 1.11 1.97 0.68 1.41 1.03

53. Yawata's current ratio in 1954 was orly slightly better than theindustry average (1.22 vs 1.18) while its ratio of current assets to totalliabilities was slightly worse (0.87 vs 0.90).

1/ Wherever total liabilities is used in this report, it is intended toexclude capital, surplus and surplus reserves, unless otherwise indicated.

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54. This less favorable financial position for all Japanese industryreflects the heavy effort of post-war reconstruction of industrial facilities,financed by short-term loans, because of limited savings and limited availa-bility of long-term or permanent capital funds. While the reconstruction ishighly desirable from the national standpoint, nevertheless relative short-term financing of investments with a much longer life could create seriousfinancial problems for the borrowers. Whatever the merits of such financingin the past, continued resort to such financing increases the possibilitiesof undesirable consequences.

55. The funded debt of Yawata and other steel companies, has, almostwithout exception been issued on terms calling for repayment in five years orless. It should also be noted that funded debt due within one year is notclassed as a current liability in Japanese accounts. Extensive refunding ona longer term basis does not appear feasible in the near future except in theunlikely event of major changes in Japanese capital markets.

56. The customary comparison of debt/equity relationships is distortedby the fact that physical assets have not, on the whole, been revaluedsufficiently to offset the huge price rise (270-1 between 1938 and 1954).Comparisons as between firms or over time are therefore subject to possiblemisinterpretation.

57. Under the circumstances, financial analysis is predicated largely onthe criterion of the adequacy of current assets in relation to total liabili-ties, neither of which are subject to the revaluation problems mentioned above.Comparisons of total assets/total liabilities and of total liabilities/networth are also shown, but should be considered in the light of the qualifica-tions already mentioned.

58. Balance Sheet - Yawata's total assets have grown from about * 55billion ($153 million) in March 1951 to X 104 billion ($289 million) in March1955 (see Annex A-6). Almost g 29 billion gross was invested in fixed assetsin this oeriod, resulting in a net increase of about .16 billion afterdeducting almost sr 13 billion in earned depreciation.!/ Current assets roseabout Y 31 billion of which 22 billion represented increases in inventoriesand 9 billion increases in receivables and cash. There was also an increaseof about i 1 billion in securities investments from a negligible figure in1951.

59. These increases in assets are reflected on the liability side of thebalance sheet by the following increases (rounded to the nearest * billion):

Increase in Current Liabilities 1X billion"i " Funded Debt l9q. "

" Net Worth 9 i

i/ Fixed asset figures were adjusted for all asset revaluations madeafter March 1951 so that the changes indicated above are realchanges and exclude any write-up due to revaluations.

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60. In the four-year period, total liabilities (except net worth)increased at least X 39 billion as compared with an increase in net worth of9e billion. Of the increase in current liabilities, it is estimated that atleast wv 12 billion was an increase in short-term bank loans. The increase infunded debt was even larger, but almost entirely on the basis of five-yearserial loans with consequent heavy nearby maturities.

61. The following table of various financial ratios indicates the four-year change in the composition of Yawata's assets and liabilities:

March March March March March1951 1952 1953 1L9_ 1295

Current Assets/Current Liabilities 1.08 1.16 1.18 1.22 1.33Current Assets/Total Liabilities 0.97 1.00 0,95 0.87 0.86Total Assets/Total Liabilities 2.49 1.86 1.61 1.64 1.70Total Liabilities/Net Worth 0.67 1.17 1.64 1.57 1.44

62. While the current ratio improved somewhat, its present level (1.33)is low, especially since maturities of funded debt due within one year are notclassed as a current liability.

63. Because 80% of the asset expansion in four years was offset by in-creases in liabilities, the ratio of total assets to total liabilities fellsharply and the ratio of liabilities to net worth rose sharply, particularlybetween 1951 and 1953. With a reduction in inventories and related borrowings,these ratios showed some improvement between 1953 and 1955. However, expansionof fixed assets and non-liquid investments continued in this period resultingin a further decrease in liquidity. This is reflected in the declining ratioof current assets to total liabilities. As Annex A-6 indicates, the absoluteexcess of total liabilities over current assets rose from 3.0 billion yen in1953 to 8.6 and 8.8 billion in 1954 and 1955 respectively, paralleling thedrop in the ratio from 0.95 to 0.87 and 0.86 respectively.

64. Yawata's total debt is substantial, totalling Y 46 billion ($128million), if interest-bearing notes and bills payable are included. In thenext two years it faces scheduled maturities of funded debt of 7e and 1 *billion yen, respectively, in addition to the refinancing of 24 billion ofshort-term loans and notes and bills payable. All but 2% of the funded debtis due within 5 years. Projected cash generation is estimated at only 5 to 6billion per year, before any allocance for capital expenditures makingnecessary substantial refinancing of both funded debt and short-term obligations.

65. Profit and Loss Record - Profits have fluctuated widely in recentyears. High profits in 1951 - due to the Korean boom and inventory gains -were followed by a sharp dip in 1952, some recovery in 1953 and another dropin 1954. Profits are expected to rise above 1954 levels in 1955-1956 due tohigher volume and lower unit costs resulting from installation of new facili-ties - tin plate and wire rods. A simplified profit and loss statement for1951-1956 - later years estimated - is given in Annex A-7.

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66. The company's sales estimates appear reasonable and profit estimatesare in line with past experience. It will be noted that special depreciationis not allowed for in 1955-1956. In practise, about 500 million yen per yearis likely to be taken on this account reducing taxes by 45% of this amount,reducing net income by about 275 million per year, but increasing cash availa-bilities by about 225 million per year.

67. No detailed estimates for profits and sales have been furnished forthe period after 1956. There is, however, no reason to believe that theearnings situation will deteriorate; in fact, the coming into operation of theplate mill alone should increase net profits beLore taxes by over one billionyen per year. However, because Yawata has in the past been able to charge highprices for domestic sales of rails and tin plate, in which products it has hada near monopoly, it may well be that prices of these products will be reduced.Under the circumstances, a conservative projection would indicate relativelylittle change in the overall profit position of the company after 1956.

68. Interest Coverage - Reflecting the rapid rise in Yawata's debts inrecent years, earnings coverage of interest requirements declined sharply. In1951, net profits before taxes and depreciationwere almost five times total interest charges. The coverage fell sharply in1952 and declined further to slightly less than 1.5 times before taxes in 1954,as indicated in the following table (also based on Annex A-7):

Net Profits Profits Before = Interest Interest CoverageAfter Taxes Taxes, Special Funded Pre-Tax

but Before Depreciation Debt & Spec.-Interest a teres Total Onl After Tax Deorn.

-- - -- -- ( In Million Yen)…Actual

1951 4,690 6,712 1,386 207 3.36 4.841952 4,955 6,010 3,791 807 1.30 1.581953 5,130 7,642 3,852 1,203 1.33 1.981954 5,259 6,411 4,351 1,785 1.21 1,47

Estimated1955 6,173 7,334 4,500 2,002 1.37 1.631956 6,570 7,949 4,500 2,113 1.46 1.77

69. It is evident from the foregoing that interest coverage is low andthat although there are sound prospects for some improvement in coverage, themargin will remain narrow. This in part reflects the high average interestrate paid for borrowings: a 10% rate on short-term loans is quite common.

70. The sharp reduction in earnings coverage after 1951 was pertly dueto inadequate depreciation in that year, when depreciation represented only5-6% of the net plant, after adjustment for subsequent revaluations. Bycontrast in 1953, the percentage rose to 9N% and exceeded 8% in 1954. In thenext few years, ordinary depreciation should average about 7% of the net plant,allowing for planned additions. Allowing for 500 million yen per year ofspecial depreciation would raise the rate to 8%.

- 15 -

71. Because with the completion of the plate mill in 1957, the manorimprovement programs will have been accomplished, new investment is li1kelyto be less than the amount of cash generation derived from operations, enablingprogress toward debt reduction. If this is accomplished, earnings coverage ofinterest should rise in the period after 1957.

72. In view of the large maturities of term-debt and the need to rollover short-term borrowings, internal cash generation alone would not sufficeto meet interest and amortization thus necessitating refunding.

73. Financial Proarm 1956_l9 - In the two-year period ending March1957, Yawata will need to find about g 36 billion ($100 million) to meetmaturities on funded debts, increase its net working capital and meet the costsof an investment program. Annex A-8 contains details as to the estimatedsources and uses of funds for the two-year period.

74. Half the requirements (over 18 billion yen) are to meet maturitiesof funded debt. About 4C% of the total is the cost of the investment programwhich is equal to about twice the amount of estimated ordinary depreciation;the remainder is accounted for by increased working capital needs and term-borrowing which will vary with the level of undistrituted profits.

75. Cash generated from operations, including Z 1.5 billion anticipatedprofits not distributed as dividends, is estimated at c 11 billion. A newissue of capital stock successfully floated in the summer of 1955 yieldedy 3.8 billion, of which 2 billion is earmarked for increased working capital,by reducing short-term borrowings in the first instance. These sources, plusthe amount of proposed IBRD lending (Y 1,908 million) would more than suff1ceto meet the total investment expenditures budget. If undistributed profitsexceed 1.2 billion, no net new borrowing (aside from IBRD) would be required.However, the financial program in Annex A-8 lists net new borrowing pro-visionally at Y 1.187 million, to provide for the unlikely contingency of alack of any undistributed profits.

76. The largest single requirement is to meet the maturities of fundeddebt which exceed Y 18 billion in the two-year period ending Mbrch 31, 1957.Yawata has already arranged to refund pert of these borrowings. In view ofits working capital, its large cash balance (1 8.8 billion on March 31, 1955)and the working capital improvement made possible by the new stock issue, therisk of being unable to execute the two-year lorogram is considered very slight.

77. Seven banks and one insurance company are among the ten largeststockholders. Their combined holdings constitute over 15% of the stock out-standing. They are also among the principal creditors (both of short-termand funded debt) which would appear to assure refunding.

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78. This refinancing problem was considered within the Bank aind it wasdeemed undes.rable to attempt to obtain Governmental assurances as to assuringthe refunding needs of Yawata. The probable disadvantages of increased Govern-mental intervention appeared to outweigh the risks in this case. However, itwas deemed necessary that Yawata should take steps to improve its financialposition during the life of the pronosed loan, so that the recuLrring refundingproblen could be steadily reduced to more readily riangeable proportions as asafeguard against future contingencies. (See paras. 83-85).

79. Pro Forma Balance Sheet - March 1957 - Annex A-9 compares the summarybalance sheet as of March 31, 1955, with the pro forma balance sheet as of March31, 1957 - based on the financial plan shown in Annex A-8.

80. Comparison of the two balance sheets indicates some further improve-ment in the current ratio, and a sharp reduction in the ratio of liabilitiesto net worth. The ratio of current assets to total liabilities is, however,virtually unchanged, reflecting the fact that the improvement in net worth isabout equal to the increase in non-current assets. The excess of totalliabilities over current assets as compared with 1955 levels is shown below:

March 31, March 31, 19571955 _(a) (b)

Current Assets 52,536 55,151 56,634Total Liabilities 61,3! 64.932 64932

Excess of Liabilitiesover Current Assets 8,780 92781 8,29

(a) Assuming no undistributed profits(b) Assuming undistributed profits (1,483) are used to

increase current assets or reduce liabilities

81. A detailed balance sheet as of March 31, 1955, is presented inAnnex A-10.

82. Financial Policies - Yawata t s management believes that, with thecompletion of the 1955-1956 program, its future investment requirements will,ordinarily, be smaller than the prospective cash flow from operations (5-6billion yen per year). Consequently, it considers it will be in a positionafter March 31, 1957, to progressively improve its liquidity and debt-equityposition.

83. Agreement was reached with Yawata, that if the proposed Loan weregranted Yawata would undertake to achieve a generally continuing reductionof the margin between total liabilities and current assets after March 31,1957, to the end that the entire sargin would be eliminated by March 31, 1965.This margin as of March 31, 1955 was g 8.8 billion and may be estimated at1 8.3 billion on March 31, 1957.

- 17 -

84. Yawata also undertakes to progressively reduce its total liabilitiesas compared with net worth during the same period. The ratio of liabilities tonet worth which stood at 144:100 on March 31, 1955, is to be reduced progress-ively to 115:100 by March 31, 1965. The successful sale of new stoc' in thesuirner of 1955 has already effected a substantial improvement on this score.

85. These undertakings by Yawata are designed to effect a significantand continuing improvement in its financial position and to reduce progressivelythe need for frequent debt refundings. The choice of means for effecting theimprovement (e.g. timing of new capital stock issues, changes in dividendpolicy, investment programming, etc.) is left to Yawata.

86. Term of Proposed Loan - While the facilities to be erected will havean estimated physical life of 20 or more years, in view of the possibility oftechnological change and possible obsolescence, it would appear desirable tolimit the total life of the proposed loan to 15 years from September 1, 1955.A grace period of 28p years should suffice, since it is estimated that the millcan be placed in initial operation by mid 1957.

87. The Borrower - The Japanese Government has requested that any loansfor the steel projects be made through the Japan Development Bank (JDB), aGovernment-owned institution, on the pattern of the power loans made in October1953. A similar procedure in the present case would appear appropriate.

88. Securitv - This asnect is covered in a separate memorandum by theOffice of the General Counsel. The arrangements proposed are designed toassure that the Bank's creditor position with respect to the ultimate borrower(Yawata) will not be unsatisfactory.

H. Conclusions

89. The Yawata Iron and Steel Company, the largest steel company in Asia,is well-managed. The plate mill project is an integral part of the company'smodernization program, designed to increase operating efficiency and to reduceproduction costs. It is considered a sound project and offers a suitable basisfor a Bank loan of $5.3 million equivalent, for a total term of 15 years,including a grace period of 29-t years.

APPENTDIX TDBLE 1

COI?As.ISO-TT O.F JAPA`r,PS-ND ANWJ WORL:D STIIL T3OC-T OUTIHTPUT

Japan's PercentageW4orld Japan Of I orl'd COtriut

(Mi llliion s .T*) ( INilli on 1-H.T .)

1915 67 0.5 o.8

1920 73 0.8 1.1

1925 90 1.3 1.4

1929 1221 2.3 19

1932 51 2.4 4a.7

1937 136 5.8 4.3

1943 160 7.6 4o7

19116 112 o.6 o.5

194.7 136 0.9 0.7

194J8 156 1.7 11

1919 160 3.1 1.9

1950 186 .8 2.6

1951 211 6.5 3.1

1952 211 7.0 3.3

1953 235 7.6 3.2

1954 223 (est.) 7.3 3.5

Sources:Pritish Iron and Steel Foderation Yearbook to 1950;Iron -Age and japan Iron and Steel Fedleration for lateryears,All figures in origiinal sources converted to metrictons, where necessary.

APPENDIX TABLE 2

JAPANESE, FINTSD STEEL PRODUCTION

Vear Total(000 M.T.)

1947 570

1948 1,115

1949 2,141

1950 3,509

1951 4,701

1952 4,776

1953 5,181

1954 5,357

Source: Compiled from production datapublished by Japan Iron andSteel Federation.

APPDEIIX TABLE 3

RATIO OF OT'PKTT OF TIEJAPAk\T IRON & STE.L IEG. CO. 'TO THE TOTkL 0T1T7iT I.l JAPAN (1934)

Output ofTotal Output Japan Iron &

Item in Japan Steel M±'fg. Co.(In PFerFne-aT

Pig Iron 1,9314,420 E.T. 95.9%

Steel Ingots 2,823,654 52.5

Rolled Steel 3,095,616 145.6

Sheets 294, 867 8.8

Thick and l edium Plates 625,591 147.1

Tin Plates 61,161 90.3

Steel B3ars 769,903 35.8

Shapes 1446,857 62.3

Rails 370,692 100.0

VWire Rods 348,2814 32.5

Steel Pipe 137,094 0.0

Other3 41,167 17.7

Forged Steel 63,52C 140,l

Cast Steel 82,770 9.1

Alloy Steel 54,479 6.7

Source: Japoan's Iron & Steel Indust-y1953-51 ^Iditioa, p. 64

AFPENDDI TABIE L

PIG 1CN AND STEEL INGOT OUTPUT CF UADINGSTEEL C001PANIES AS COMPARED WTiH NATIONAL TOTAIS -

Piz Iron Ingot Rolled Steel

Yawata 1,405 1,899 1,226

Fuji 1,550 1,491 845

Nippon Steel Tube 804 994 569

Sumnitomo 141 499 282

Kawasaki 225 625 42

Total - five companies 4,125 5,508 3,364

% National Total 90 71 63

Source: Japanese Iron and Steel Federation.

APFEIETtLTX TABLE 5

JAFAr'AS1E L' 0OS OF IRON AIND STE_L PTO)TCS 3Y C ASSES7Thosand l-etric Tons)

Pig Iron Alloy Semni- Secondary& Ferro- Steel Finished Finished & lIisc.

Year Alloys Scra, Steel Steel Products Total

1949 1 163 - 1884 34. 382

1950 8 112 94 396 116 726

1951 6 11 59 819 140 1,035

1952 38 2 234 1,292. 91 1,666

1953 28 (a) 126 64o 71 860

1954 50 (a) 139 907 157 1,254

(a) Less than 500 tons

Note: Total may differ from .srm of portsdue to rounding.

Source: Japan Iron anrd 93teel Federation

APTE'DIX TABPLE 6

COM5PARIS ON DENDS FOR FINISHED STEEL IN JAPAN

2253.J;254 AND 1959(000 Metric Tons)

1 5 3 _ 1959 (E s tedL)Pro- Internal Pro- Internal Pro- Internal

duction T Den nmand ducton Trade eamand

Plates 1,412 1,/ 11196 1,091 - 894 1,250 - , 1,100217b/ 19'7X/ 150h/

Sheets 993 598/ 806 1,441 3 9 a/ 1,100 1,600 - 1,200246b/ 3801/ 400A/

Pipes, Tubes 609 3a/ 533 497 3§J/ 448 600 - 550& Hoops 794/ 52b/ 50h/

Others 2,167 24./ 2,093 2,328 39a/ 2.,089 2,350 - 2,1509812/ 2782/ 2001/

Total 5,181 87-/ 4,628 5,357 81 4531 5 ~ 800 87 5,Q00641/ 4,31 5,b/- 5,0

/ = Imports

h/ = Exports

ANNEX A-1

YAWATA -- SALES gt MEL RCITS BY FISCAL EARS

Value of Sales (Billion Yen)

Actual Estimated1252 1953 195L 1955 1956

Pig Iron 3.7 4.0 2.7 2.8 2.8

Semi-Finished Steel 10.4 12.3 7.2 8.1 8.3

Finished Steel 63.0 66.3 58.2 66.1 68.7

By-Products 92._ 32 -52.2 L4 .2,2

Total Sales 80.0 85.8 71,6 80.4 83.3

Sales Tonnae (ooo MAT.2

Pig Iron 134 163 124 130 132

Semi-Finished 282 344 247 256 264

Finished Steel 1,218 1,298 1,321 1,340 1,389

AI A-2

YT II-TA - L1ST 0' 1ACTITrLS AI D CAP ICITI3'S

Numnber Year lapac-Ity(Hletric Tons7

Blast furnaces 12 2,160,000

Coke ovens 9 a/ 2,).75.,000

Open hearth .£rrnaces 34 3,0003000

Electric furnaces 8 350, 000

Blooraing mills 7 2,7740,000

Rails and section mills 6 966,000

Wire rod mill 1 120,000

New wire rod mill (Hiikari) 1 144L,000(under erection)

Plate mills 3 3422000

Sheet mills (handmill) 1 48,o00

Silicon sheet mills 1 h ,000

Cold strip mill with facilities for:

Galvanized sheets 1 120,000

Tin plates 1 120,000

Cold rolled sheets 1 150,3000

a/ Batteries

AINrEX A-3

YAWATA - COMPARISON OF MFG. COST-OF PLATES IN OLD A71D INEW MILLSEstimated

Present Mills 22,476/mo New Mill 24.880/moquantity Price (4) Cost per Total Cost quantity Price (*) Cost per Total CostPer Ton Per Unit Ton-Subtotal Per Ton Per Ton Per Unit Ton-Subtotal Per Ton

MaterialsIngots 0.740 24571 18183 0.120 24571 2949Slabs O.6o6 28311 l7256 L.O09 28311 28453

1.346 35339 35339 1.125 31402 31402LaborPresent - 769 men 0.0342 23000 786 0.0132 23000 304Future - 333 men

'Y 23,000 per manWelfare cost 66 852 21 325

Fuel Cost 1,030,000 898 630,000 549kilo calories kilo calories

Electric Cost: D.C. 5.5 kwh 6.73 37 70 kwh 6.73 471 471A.C. 40.5 kwh 5.06 205 242

Water 18 m3 4.72 85 21 m3 4.72 99Steam (eliminated in

new plant) 648 kg 853/t 553 _Rolls 2.8 kg 62000/t 174 0.9 960oo/t 86Transport 130 85Repair 767 190Supplementary Material 698 200Testing 189 120Others 1337 800

Total Operating Cost 41264 34327Scrap & Other Credits 338 kg 14/kg Cr 4752 122 kg 14/kg Cr 1708Mfg. Cost (exel. Depr.,)Losses on Seconds & Rejects 661 230

Depreciation 105 697

Grand Total 37278 33546

Source: Company estimate adjusted for comparability of prices in both cases

ANNEX A-&

YAWATA - ESTI'IATEDD TOAL 5CCT CrF PLATE ,aLL PROJECT

Million EquivalentYen ID$000 US

Foreian Exchange Costs

Imported Equipment -Bank Financed 1,908 5,300Other 37 103

Total Imported Equipment 1,945 5.403

Domestic Currency Costs

Construction 928 2,578Electrical Equipment 998 2,772Electrical and Gas Installation Cost 59 164Non-Electrical Equipment (including installation

cost of domestic and imported equipment) 1,014 2,817Installation Cost of equipment transferred from

existing mills 49 136Auxiliary facilities (water, transport, cranes, etc.) 436 1,211Handling Costs on Imported Equipment 197 547

Import Du;ties 15Internal Transport 97Dealer's Commission 39Letters of Credit Charges 39Internal Insurance, etc. 7

Domestic Costs 3681 10,225

Total Costs (excluding interest during construction) 5,626 15,628

ANNESX AH5

YAWATA - ESTLIMTED FORE,IGN EXCHANGE COST OF FROJECT

Price(o0-o)

Plate jillEjuipment - United Engineering and Foundry Co.

Main Items

a. Mill Stands and tables 2,512

b, Edger and side guides 380ca Edger table 195d. Trimming shear and scrap cutter 322e, Air controls and Systems - grease, oil,

hydraulic, descaling 279

Snare Parts

f. Work Rolls - 2 sets 66g. Chucks and Bearings - 2 sets 31h. 1 Set Back-up Rolls 85i. 1 Set Chucks and Bearings _ 5

Sub-total 4,029Maximum Escalation - 10% 403Freight - 13% of base price 524Insurance

Total Plate Mill Equipment 5,002

Roll Grinder - Farrel Birmingham Co.

Body - 26' 0"t Heavy Duty Wheel Moving Roll Grinder 196Accessories 12PackingEquipment 212Freight 12Insurance 2

Total - Roll Grinder 226

Contingencies 72

Total Bank Financed 5,300

Financed by Other MbansReheating Furnace Accessories 61Blueprints for Reheating Furnace L2

Total Other Financing 102

Grand Total LA22

ANNEX A-6

YAWATA - S1Pfl-9RY BALANCE SHICET IN BJ•CFTNT YEARST illion Yen) ~~

Mar. 31, 19)51 MLar. 31, 1952 Mar.31, 1953 Mar.31, 1954 Mar.31, 1955

Current Assets 21.5 42.9 63.1 56.8 52.5Inventories 8 4 244. 38.3 32.9 30.3Cash & Receivables 13.1 18.8 24.8 23.9 22.2

Adjusted Net Fixed Assets 33.8 36.6 42.3 48.6 49.6Reported Curren-ly 16.9 25.0 32e5 48.6 49.6Adjustment for Subsequent Revaluation a/ 16.9 11.6 9.8 - -

Investments, etc. b/ 0.4 1 O 1.6 1,8Investments n.a. 0,3 0.9 1.5 1.7Deferral-s n.a. 0.1 0.1 0.1 0.1Intangibles -an.a. - /

Total Assets 55.3 79.9 106,4 107.0 103.9

Current Liabilities 20.0 37.2 53.6 46.6 39.6Of which Short-Term Loans n.a. (5.6) (16.8) (14.6) (15.7)

Funded Debt 2.2 5.8 12.5 18.8 21.7

Total Liabilities (except Capital a/c) 22.2 43,0 66.1 65r4 61.3

Net Worth 33.1 36.9 4o.3 41,6 42.6Capital Stock 0,8 1,6 4.8 4.8 4.8Surplus & Reserves 32.3 35.3 35.5 36.8 37.8

Total Liabilities 55.3 79.9 106.4 107.0 103.9

a/ Adjustment to reflect asset revaluationsretrospectively to assure comparability

b/ Less than 50 million yenMemorandum: n.a. Not available

Excess of Liabilities over Current Assets 0-7 001 3.0 8.6 8.8

ANNEX A-7

YOAkTA - SUIiARY PTROFIT AMD LOSE STATEIENTS(million yen)

A c t u a 1 Estirnated2952 1221 192 1956

Sales 77,0X00/ 80,007 85,768 71,687 80,400 83,300

Gross Profits before -

Depreciation, Interest & Taxes 8,689 8,273 10,529 10,038 10,824 11,519Depreciation - Ordinary 1,977 2,263 2,887 3,627 3,480 3,M70

- Special - 208 1,457 427 - -Interest Charg3s 1,386 3,791 3,852 4,351 4,500 4,500

Net Profit before Taxes 5,326 2,011 2,333 1,633 2,834 3,449Profits Taxes 2,022 847 1,055 725 1,161 1,379Net Income 3,304 1,164 1,278 908 1,673 2,070Dividends 400 617 480 480 800 1,440Bonuses 10 10 10 10 10 10

Undistributed Profits 2,894 537 788 418 863 620

Gross Profit % Sales 11.3 10.3 12.3 14/r. 13.4 13.9Depreciation % Sales 2.6 3.1 5.0 5.6 4.3 4.3Interest Charges % Sales 1.8 4.7 4.5 6.0 5.6 5.4Net Income % Sales 4.3 1.4 1.5 1.3 2.1 2.5

v Estimated from total income, including non-operatingincome of 78,970 million.

W Special depreciation is a specific deduction for taxpurposes, permitted when the project is qualified underthe Enterprises RatS onalizaion Inducenment Law. Theprocedure resembles the procedure used in the U.S. forspecial five-year amortization beginning in 1950 afterthe Korean incident.

ANNEX A-8

YAWATA - FINAITC L PROGRAM F 1OR 1956 FISCAL YEARS(Million Yen)

Sources of Funds Uses of Fund s

Borrowings - Refunding 18,190 Repayment of Fixed Debt 18,190Borrowings - IBRD 1,908 Increase in Net Current Assets 2,099

- Others 1,187 Increase in Reserve Funds 1,483Undistributed Profits 1,483 Capital Expenditures - Gross 13,173Ordinary Depreciation 7,050 Other Investments 1,269Other Non-Cash Charges 2,556Capital Stock Proceeds 3,2/ .

36,214

Allocation by Years

1955 16 1955 1926

Borrowings - IMD 535 1,373 Repayments 7,589 10,601Borrowings - Others 7,776 11,601 Increase in NetUndistributed Profits 863 620 Current Assets 2,000 99Depreciation 3,480 3,570 Increase inOther Non-Cash Charges 1,278 1,278 Reserve Funds 863 620Capital Stock Proceeds 3,840 - Capital Expenditures 6,463 6,710

Other Inv-estments 8 5

I7,772 7 1772 18 442

Note: The allocation between years for non-cash charges,current asset increases and other investments ispreliminary.