CONFIDENTIAL

Update on the Japanese Steel Industry

September 2012

Prepared by Fore Research & Management, LP (Fore). Public use or external distribution is prohibited. The information contained in this document is proprietary and strictly confidential, is intended solely for the person to whom it is delivered and is supplied with the understanding that it will be held in confidence and not copied or disclosed to third parties without the prior written consent of Fore. By receipt of this document, the recipient agrees that it will, and will cause its directors, partners, officers, employees, attorneys, agents and representatives to, use the information only to evaluate its potential interest in Fore and the funds it advises, and for no other purpose and will not divulge any such information to any other party. Reproduction of this information, in whole or in part, is prohibited. The information may also be subject to a separate confidentiality agreement and the terms contained therein. Notwithstanding anything to the contrary herein, each recipient shall be permitted to disclose the tax treatment and tax structure of the transactions described herein (including any materials, opinions or analyses relating to such tax treatment or tax structure), but without disclosure of identifying information or, except to the extent relating to such tax structure or tax treatment, any nonpublic commercial or financial information SUBJECT TO FURTHER TERMS & DISCLAIMERS SET FORTH ON PAGE 2

2012 Fore Research & Management, LP

Terms & Disclaimer

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Agenda

Executive Summary The Japanese Steel Industry JFE Holdings Inc. Kobe Steel Ltd

Executive Summary

We believe Japanese steel credits trade too tight given a deteriorating fundamental outlook and significant near-term maturities. In our view:

Domestic demand is in secular decline. We expect auto makers will continue shifting production overseas. The construction sector is under pressure. And shipbuilders are reducing capacity in light of shrinking orders and competition from Korean and Chinese shipyards. Exports have peaked. Increasing exports helped offset soft domestic demand in recent years. However, Japans largest export destinations Korea and China have invested heavily in new capacity and are themselves experiencing a slowdown in demand. Imports are rising and the technology edge is eroding. Overcapacity has pushed China and Korea to become net exporters. Foreign producers are also closing the quality gap, placing some higher-margin specialty products at risk of commoditization. Japanese steel companies are no longer cost competitive. We believe the highly fragmented global steel industry which buys raw materials from a mining oligopoly and sells end products to a handful of large auto OEMs is in a challenging position. Elevated labor and processing costs place Japanese steelmakers higher on the cost curve than Chinese and Korean peers in an oversupplied market. Capacity reductions or policy support arent coming anytime soon. Japans largest steel producers still target volume growth. And, similar to Western Europe, taking capacity offline in Japan is difficult and expensive. Trade barriers restricting the flow of imports would help mitigate pressure from lower-cost competition but we dont see any new policies on the horizon.

Credit default swaps on JFE Holdings and Kobe Steel the 2nd and 4th largest steel makers in Japan, respectively may offer the best opportunity to play this theme. In addition to common challenges facing all Japanese steel producers, company-specific risks include:

JFE Holdings (1) is more reliant on exports than its peers; and (2) has a large and struggling shipbuilding segment. Kobe Steel has outsized exposure to (1) commoditization in specialty steel products; and (2) a slowdown in China. We expect increasing leverage and cash burn in FY13. We forecast JFEs net leverage will increase from 5.7x currently to 6.2x by the end of FY13. We also expect the company will generate negative FCF in FY13. For Kobe Steel, we estimate net leverage will increase from 5.6x currently to 7.4x by the end of FY13. The company expects to burn Y120 bn of cash in FY13, equal to approximately 60% of its current market cap. Both companies also face significant near-term maturities. For JFE, Y338 bn in debt (22% of total debt) is due in the current fiscal year, with only Y42 bn cash on hand as of 1QFY13. Kobe Steel has Y283 bn of debt due in the current fiscal year (31% of total debt), with Y100 bn cash on hand as of 1QFY13.
4

Sources: Company reports, Fore Research & Management estimates

Global Steel Relative Value Spread Versus Leverage*

Japanese steel companies trade tight compared to US and European peers. As of June 30, 2012, JFE and Kobe Steel are net levered (net debt / EBITDA) 5.7x and 5.6x, respectively.

Relative Value Spread versus Leverage

CDSspread(bps)

In Europe, ArcelorMittal is net levered at 2.6x, but its CDS is trading at 530 bps. U.S. Steels net leverage is 3.1x and its CDS trades at 685 bps. AK Steels net leverage is 5.4x and its CDS trades near 945 bps.
*Note: leverage calculations do not include pension or other postemployment benefit obligations.

1,000 900 800 700 600 500 400 300 200 100 0 0.0x

AKS

X MT Kobe Steel JFE Nippon Steel 2.0x 4.0x 6.0x Netdebt /EBITDA 8.0x

Sources: Company annual reports and Fore Research & Management estimates

Agenda

Executive Summary The Japanese Steel Industry JFE Holdings Inc. Kobe Steel Ltd

Domestic Demand is in Secular Decline

Steel companies used to be one of the key growth engines of the Japanese economy. They were on the leading edge of innovation within their industry and enjoyed a dominant (if not exclusive) position supplying the domestic automakers. But the Japanese steel producers have struggled since 2008 with a decline in domestic demand. We dont expect domestic demand will return to past levels anytime soon.

Japanese Domestic Steel Shipments (million metric tons)1

70 60 50 40 30 20 10 0 1997 1999 2001 2003 2005 2007 2009 2011

Domestic steel demand steadily increased through the early- to mid-2000s

but has declined at a 7% average annual rate from 2007-2011

Close to a third of the steel produced in Japan goes to the automotive industry. While production has recovered from the March 2011 earthquake, most of the major carmakers have announced plans to move production overseas in the last few months. A government incentive program for ecofriendly vehicles is lapsing, which could pressure auto sales. And, to make matters worse, the auto industry is the largest buyer of higher-margin specialty steel products. Roughly another third of steel produced in Japan goes to the construction sector, which is currently under pressure. Nonresidential fixed investment declined 2% on a seasonally adjusted basis in 1Q12. Finally, 15% of steel produced in Japan goes to the shipbuilding sector, which faces lower shipping rates, declining orders and competition from Chinese and Korean shipyards. Nikkei recently reported that Japans top four shipbuilders plan to reduce capacity for the first time in a decade.3

Japanese Domestic Steel Demand by Sector2

Containers 3% Other3%

Electrical machinery 5%

Industrial machinery 9% Shipbuilding 15%

Auto35%

1. The Japan Iron and Steel Federation: Domestic shipment of ordinary steel products by year 2. The Japan Iron and Steel Federation: Domestic steel orders booked in 2011 3. Japan's Shipbuilding Capacity To Sink 1st Time In 10 Yrs, Nikkei article dated July 19, 2012 Sources: Company reports and Fore Research & Management estimates

Construction 30%

Exports Have Peaked

As domestic demand came under pressure, Japanese steel producers increasingly relied on exports to keep their mills running and margins high. Steel exports increased 36% from 2008 to 2010, reaching almost 40% of total production.1 Korea and China are the top destinations, accounting for over one third of total exports.2 However, these two markets are now experiencing a slowdown in demand combined with higher production capacity. In 2011, exports to Korea and China fell 19% and 8%, respectively. The trend has continued in 2012, with exports to Korea and China down 17% and 16% year-todate.3

Japan Steel Exports (million metric tons)1

30 25 20 15 10 10% 5 0 1997 1999 2001 2003 2005 2007 2009 2011 0% 20%
Steelexports(leftside) Exportsasa% ofproduction(right side)

40% 30%

Japanese Steel Exports by Destination2

Annual Exports to China and Korea (million metric tons)3

Korea 21% Others 38%

12 10 8 6
China 15%

Year-to-date exports to Korea and China are down 15% and 16%, respectively

4 2 0 2008 2009 2010 Korea 2011 China

8

USA 7%

Thailand 11%

Taiwan 8%

1H11

1H12

1. 2.

The Japan Iron and Steel Federation: Exports of Ordinary Steel Products The Japan Iron and Steel Federation: January to April 2012

3. The Japan Iron and Steel Federation: Exports of Iron and Steel by Country Sources: Company reports and Fore Research & Management estimates

Korea Rapidly Becoming a Net Steel Exporter

Korea is Japans largest export destination for steel products (21% of Japans total steel exports in the first 4 months of 2012). However, the large Korean steel makers have been investing aggressively in new production capacity, and we expect Korea to turn from a net steel importer to a net steel exporter in 2012.3 New capacity is slated to come online.

Monthly Crude Steel Production for South Korea (million metric tons)1
7 6 5 4 3 2 1 0 Jan06 Jan07 Jan08 Jan09 Jan10 Jan11 Jan12

POSCO (Koreas largest steel producer) is investing $4.1 billion to build a new 2 million metric ton per year blast furnace in Korea and a 3 million metric ton per year blast furnace in Indonesia by year-end 2013. These two plants would increase POSCOs total capacity more than 10%. Hyundai Steel (Koreas 2nd largest producer) is investing $2.9 billion on a 4 million ton per year capacity expansion, also scheduled to come online in 2013. That plant would increase Hyundai Steels total capacity approximately 25%.

Annual capacity (million metric tons)2

90 80 70 60 50 40 30 20 10 0
2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E
1. 2. Bloomberg Goldman Sachs, Global Supply & Demand Model, dated July 26, 2012

Korea Net Steel Imports (million metric tons)3

7 6 5 4 3 2 1 0 1 2

3. Korean Iron and Steel Association Sources: Company reports and Fore Research & Management estimates

China Aggressively Expanding Steel Production Capacity

China is Japans 2nd largest export destination for steel products (15% of Japans total steel exports in the first 4 months of 2012) and has been expanding its production capacity aggressively over the past few years.2 In June 2012, trailing twelve month steel production volume was up 5% year-over-year and up 59% from the June 2007 level.1 Given a slowdown in construction and industrial activity in China, we expect Japanese steel exports to China will come under pressure (and Chinese imports into Japan will grow). According to recent press articles, the Chinese government is considering a 17% value-added tax rebate for domestic steelmakers that produce steel for export markets.4 We are also starting to see the signs of pricing pressure.3 For instance, Chinas Baoshan Iron & Steel recently announced that it would reduce its benchmark price of hot-rolled and cold-rolled steel products for September delivery. Baosteel has now cut prices three months in a row.

Monthly Crude Steel Production for China (million metric tons)1

70 60 50 40 30 20 10 0 Jan06 Jan07 Jan08 Jan09 Jan10 Jan11 Jan12

Annual Capacity (million metric tons)2

1,000 800 600 400 200 0
2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E
1. 2. 3. 4. Bloomberg Goldman Sachs, Global Supply & Demand Model, dated July 26, 2012 Bloomberg China Considers Resuming Tax Rebates for Steelmakers, Bloomberg News article dated July 31, 2012

China Domestic Hot-Rolled Coil and 25 mm Rebar Spot Price (CNY/metric ton)3
5,300 5,100 4,900 4,700 4,500 4,300 4,100 3,900 3,700 3,500

Hotrolled coil

25mm rebar

10

Sources: Company reports and Fore Research & Management estimates

Imports Rising and Competitive Advantage Eroding

Compounding the problems of slowing domestic demand and peaking exports, Japanese steel producers are facing more competition at home. Imports increased 66% from 2009 to 2011 and now account for approximately 10% of total domestic demand.1 In addition to overcapacity in China (and to a growing extent Korea) and a stronger yen, Japanese producers are losing their technological edge as foreign producers close the quality gap. Even the Japanese agree that foreign products are catching up in quality. In its December 14, 2011 ruling on the proposed merger between Nippon Steel Corporation and Sumitomo Metal, the Japan Fair Trade Commission stated the following regarding hot-rolled sheets: according to the results of interviews with automobile manufacturers, they consider the quality and lineup of Korean products to be the same as those of Japanese blast furnace steelmakers, and may increase import volumes in the future.3

Japan Steel Imports (million metric tons)1

6 5 4 3 2 1 0 1997 1999 2001 2003 2005 2007 2009 2011 Steel imports(LHS) Importratio(RHS) 12% 10% 8% 6% 4% 2% 0%

In a key vote of confidence, Toyota recently added Korean steel producer POSCO to its list of top suppliers. POSCO is the first nonJapanese steelmaker to enter this exclusive group, which represents the top one percent of Toyotas suppliers.4 Similar to other industries in Japan, the steel producers are facing a brain drain of talent moving abroad. Nippon Steel recently took the unusual step of suing POSCO and a former employee for $1.3 billion in damages. Nippon Steel alleges the former employee passed patented technology for grain-oriented steel sheets used in electrical transformers to POSCO.5

Japan Steel Imports from Korea and China (million metric tons)2
3.5 3.0 2.5 2.0 1.5 1.0 0.5

0.0 1. The Japan Iron and Steel Federation: Ordinary steel products 2. The Japan Iron and Steel Federation: Imports of Iron and Steel by Country 3. The Japan Fair Trade Commission 4. POSCO Joins Toyota Top Supplier Group, Challenging Nippon Steel, Bloomberg News article dated June 28, 2012 5. Nippon Steel sues POSCO over technology, Reuters article dated April 25, 2012 Sources: Company reports and Fore Research & Management estimates

2008

2009

2010 Korea

2011 China

1H11

1H12

11

Margins at Risk from Commoditization of Specialty Steel

We view the Japanese steel market as three segments: commodity (~75%), specialty (~20%) and premium (~5%). Approximately 60% of specialty steel orders come from the auto industry. Premium products (e.g., engine and powertrain components) are difficult to substitute and thus remain insulated from competition. But for less specialized products (e.g., stainless steel, coated sheets and cold-rolled sheets), automakers are increasingly willing to substitute foreign products. Specialty products typically sell at higher prices and offer better margins for producers vs. commoditized hot-rolled sheets. We expect further price pressure in this segment.

Estimated market split by product type1

Companies2 Daido Steel, Hitachi Metals, Sanyo Special Steel JFE (~10%), Kobe Steel (~35%)

Products2 Tools, bearings, crankshafts Stainless steel, coated sheets, coldrolled sheets

Trends Well insulated from foreign competition Increasing Commoditization. Foreign competition pressuring prices. Highly commoditized. Intense price competition.

Premium

5%

Specialty 20%

Commodity 75%

JFE (~90%), Kobe Steel (~65%) Nippon Steel, Sumitomo

Hot-rolled sheets

1. Fore Research & Management estimates 2. Steel cycle bottom not in sight; Kobe, Daido downgraded, Bank Of America Merrill Lynch equity research report published on April 17, 2012; Fore Research & Management estimates Sources: Company reports, Bloomberg and Fore Research & Management estimates

12

Japanese Steel Makers are No Longer Cost Competitive

Japanese steel producers are at the high end of the global supply curve. We estimate cash production costs for the largest Japanese steel producers are, on average, more than 10% higher than Chinese and Korean peers owing to higher labor and processing costs. The highly fragmented steel industry, which sells finished products to a handful of large auto OEMs, lacks pricing power. Illustrating steel producers weak bargaining position, Nippon Steel and Toyota recently agreed to a Y2,000 per ton price cut through September, retroactive to April. According to Nikkei, Nippon Steel had asked for a Y3,000 price increase, citing pressure from higher raw material prices.2

Market Share

Upstream
The iron ore and coking coal industries are highly consolidated.

Others, 38%

Vale, 26%

BHP Billiton, 15%

ArcelorMittal, 7%

Rio Tinto, 21%

Baosteel,3% NipponSteel, POSCO,3% 3% JFE,2% Jiangsu Shagang,2% TataSteel,2% U.S.Steel,2% Anshan Steel,2%

Estimated Cash Production Cost (2011; $ per ton)1

$1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0
Labor Processing Materials

The fragmented steel industry lacks both purchasing and pricing power

Others,76%

Gerdau, 1%

GM,10%

Downstream
The relatively consolidated auto industry is negotiating price reductions
Suzuki,3% Renault,3% Honda,4% PSA, 5% Others,35%

Toyota,9%

Hyundai,9% VW,9% Ford, 7% Nissan,6%

1. Fore Research & Management estimates; Goldman Sachs: Cash cost comparisons 2011 2. Nippon Steel, Toyota Agree To Cut Steel Sheet Prices, Nikkei article dated July 27, 2012 Sources: Company reports, Bloomberg and Fore Research & Management estimates

13

Not Counting on Capacity Reductions or Policy Support

In order to ease the supply/demand imbalance, we believe the Japanese steel industry would need either (1) excess capacity to come offline; or (2) trade barriers to restrict the flow of imports. We dont see capacity reductions on the horizon:

Japanese Steel Supply/Demand (left side million metric tons) and Utilization (right side)1
140 120 100 80 60 40 20 0 2005 2006 2007 2008 2009 2010 2011 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Japans largest blast furnace producers still target volume growth. Nippon Steel and JFE (Japans #1 and #2 producers, respectively) have issued medium-term business plans calling for the construction of new blast furnaces overseas. Two of Japans largest steel producers Nippon Steel and Sumitomo are merging. One would think this presents an excellent opportunity to consolidate excess supply, but their stated post-merger plans include no mention of reduced capacity. Finally, removing capacity in Japan is difficult and expensive. Struggling semiconductor producer Renesas is a good example. In early July, the company announced a plan to close 8 plants and cut 5,000 employees (23% of its workforce). The company hasnt provided detailed restructuring cost guidance, but sell-side forecasts imply costs in excess of $160,000 per employee. Unlike the United States, the Japanese government does not levy tariffs on imported steel products. Japanese manufacturers have traditionally sourced domestically, so they havent had a need to enforce trade protections. With an economy still largely dependent on exports, implementing trade barriers now could invite unwelcome retaliation. Trade restrictions could also take a while to implement given bureaucratic hurdles.

Production

Capacity

Utilization

We dont expect policy support either:

1. Goldman Sachs, Global Supply & Demand Model, dated July 26, 2012 Sources: Company reports, Bloomberg and Fore Research & Management estimates

14

Agenda

Executive Summary The Japanese Steel Industry JFE Holdings, Inc. Kobe Steel Ltd

15

JFE Holdings (JFEHLDS) CDS at 265-2901

JFE Holdings is the 2nd largest blast furnace maker in Japan. In FY12, the company derived roughly 83% of its revenue from its steel business, 9% from its engineering business and 7% from its shipbuilding business. The operating environment for JFEs steel business has become increasingly difficult given a high cost structure and an oversupplied market. Steel demand growth is weak, both in Japan and overseas. JFE has a higher export ratio than its peers (45% in FY12). But a strong yen has made JFE less competitive in overseas markets. In addition, we expect the combination between Nippon Steel and Sumitomo Heavy (which would create the worlds second largest steelmaker, with over 50 mn metric tons of annual production capacity) will intensify domestic competition. JFEs financial results started to deteriorate in FY12, with EBITDA contracting 34% YoY. Its steel ordinary income margin turned negative in 4Q12 for the first time in the past 4 years. On April 20, 2012, the company unveiled a new mid-term plan that calls for Y1tn in investment over the next three years. We are skeptical that JFE will be able to fund this capex plan with internal operating cash flow and believe building overseas blast furnaces in search of growth will likely increase its financial burden. We estimate EBITDA of Y259 bn in FY13 (down from Y283 bn in FY12) and expect JFEs net leverage to increase from 5.7x as of 1QFY13 to 6.2x by the end of FY13. We also expect the company will continue to generate negative FCF in FY13. JFE has significant near-term maturities: Y338 bn of debt is due in the current fiscal year (22% of total debt), with only Y42 bn cash on hand as of 1QFY13.

Capitalization
31Mar 12 30Jun12 Cash OtherCashEquivalents STBankLoans OtherBankLoans Commercial Paper 1.33%Nts'12 1.33%Nts'12 1.853%CB'13 1.278%Nts'13 1.351%Nts'15 0.927%Nts'14 0.708%Nts'15 0.572%Nts'15 0.453%Nts'17 0.858%Nts'17 1.326%Nts'21 0.455%Nts'16 0.686%Nts'18 3.5%Nts'12 Others Debt SharesOutstanding Price MarketCap. Enterprise Value LTMEBITDA CreditRatios NetDebt/EBITDA Debt/EBITDA EV/EBITDA 50.4 0.0 173.4 765.2 0.0 20.0 30.0 300.0 40.0 20.0 40.0 40.0 60.0 0.0 20.0 30.0 20.0 15.0 20.0 0.0 1,593.6 0.6 1,394.0 856.5 2,399.8 283.1 41.7 0.0 91.1 772.5 53.0 0.0 30.0 300.0 40.0 20.0 40.0 40.0 60.0 30.0 20.0 30.0 20.0 15.0 0.0 0.0 1,561.6 0.6 1,113.0 683.9 2,203.7 264.4

1. Trading levels as of September 13, 2012 Sources: Company reports, Bloomberg and Fore Research & Management estimates

5.5x 5.6x 8.5x

5.7x 5.9x 8.3x

16

JFE Holdings Company Description and Background

JFE Holdings was formed in 2001 by the merger of NKK and Kawasaki Steel. JFE is one of the largest integrated steel producers in the world, with a crude steel capacity of 33 million tons. The companys production system primarily revolves around two major steelworks: East Japan Works (where the company built Japans first integrated coastal steelworks in the early-1950s) and West Japan Works. JFE also operates the Chita Works, a large specialized steelworks producing steel pipes and tubes, including tubular applications for the oil industry. JFE has also been investing in its own coking coal and iron ore supplies. In December 2009, the company acquired a 20% stake in Qcoals Byerwen Coal Mine in Australia, which should become fully operational in 2012. As of March 31, 2011, JFE procured 19% of its coking coal and 16% of its iron ore from mines in which it had an interest. The company hopes to achieve 30% raw materials self-sufficiency, but has no specific timetable for reaching this target.

Revenues by segment (FY12)

Shipbuiding 7% Engineering 9%

Steel: Sheets, Plates, Shapes, Pipes and Tubes, Stainless and Specialty Steels, Electrical Steels, Bars and Wire Rods, Iron Powders Services & Management Engineering: Energy Industries Engineering, Environmental Industries Engineering, Water and Waste Water Engineering, Steel Structure Engineering, Solution Engineering, Machinery Center Shipbuilding: Large Tankers, Large Bulk Carriers, LPG/LNG Carriers, Naval Ships, Patrol Vessel, Fishery Surveillance Boats, Anchor-handling Tug & Supply Ships, Ship Repair and Conversion, Defense Equipment
17

Steel 83%

Sources: Company reports, Bloomberg and Fore Research & Management estimates Sources: Company reports and Fore Research & Management estimates

JFE Holdings Large Exposure to Exports

JFE Holdings has one of highest export ratios among the Japanese steelmakers. In FY12, 45% of its products were exported.1 In 1QFY13, JFE reported a 48.5% export ratio, up 250 bps quarter-overquarter. For 2QFY13, the company targets a 49% export ratio, which would represent a 460 bps year-over-year increase. The company does not break-down its exports by destination. However, Korea and China represent approximately 20% and 15% of its Japanese steel exports, respectively. We believe that Japanese steel exports to Korea will come down in FY13 and FY14, as the country turns from a net steel importer to an exporter. We note that several of the large Korean steelmakers are adding significant new capacity, potentially reducing the need for Japanese products. In March 2012, JFE reduced its stake in Hyundai Hysco by 4.99 percentage points. Since 2000, JFE has been supplying Hyundai Hysco with hot coil and manufacturing technology for cold-rolled steel sheets used by the automakers. Reflecting a very challenging environment characterized by oversupply and slowing infrastructure investment, aggregate profit for Chinese steel producers declined 96% year-over-year in 1H12.3 To help ease the burden on manufacturers, government officials are considering a 17% value-added tax rebate for exported steel products.4
55% 53% 51% 49% 47% 45% 43% 41% 39% 37% 35%

JFE Export Ratio1

1. Export ratio on value (and non-consolidated) basis 2. The Japan Iron and Steel Federation: Metric tons; January to April 2012 period 3. Chinese Steelmakers Profit Tumbles 96% on Lower Demand, Prices, Bloomberg News article dated July 31, 2012 4. China Considers Resuming Tax Rebates for Steelmakers, Bloomberg News article dated July 31, 2012 Sources: Company reports, Bloomberg and Fore Research & Management estimates

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13E

Japan - Steel Exports by Destination2

Korea 21% Others 38%

China 15%

USA 7%

Thailand 11%

Taiwan 8%

18

JFE Holdings Shipbuilding Segment Sinking

JFEs shipbuilding arm, The Universal Shipbuilding Corporation, produced 28 new vessels in FY12, for net sales of Y215 bn. The companys backlog has been under intense pressure in the past couple of years (down 28% in FY12). We also believe that the Korean and Chinese shipyards have a cost advantage of 25% to 40% on their Japanese peers (part of it from FX, part of it from lower labor costs). While the Japanese shipping operators could afford to direct their orders to JFE and its peers in the past, we believe strong headwinds facing Mitsui OSK, Kawasaki Kisen or Nippon Yusen will lead to a sharp decline in new orders and backlog over the next couple of years. We expect JFEs shipbuilding sales and ordinary income trends will continue to deteriorate in FY13. However, as of October 1, 2012, JFEs shipbuilding segment will become an equity method affiliate and operating results will be reported below-the-line.
900.0 800.0 700.0 600.0 500.0 400.0 300.0 200.0 100.0 0.0

Shipbuilding Backlog (Yen, bn)1

31Mar08

31Mar09

31Mar10

31Mar11

31Mar12

Shipbuilding Ordinary Income (Yen, bn)

25 20 15 10 5 0 5 10 15 20 FY09 FY10 FY11 FY12 FY13E

1. Includes inter-segment transactions Sources: Company reports, Bloomberg and Fore Research & Management estimates

19

JFE Holdings Summary Projections

(Yen, Bn)
NetSales CostofSales GrossProfit GrossMargin SG&A OperatingIncome InterestIncome DividendsIncome InterestExpense Equityinearningof affiliates Others OrdinaryIncome Extaordinaryincome Income before Taxes Taxes MinorityInterests NetIncome D&A Adjustments EBITDA EBITDAMargin Statementof CashFlows EBITDA CashInterest/dividendreceived CashInterestPaid CashTaxes ChangesinWorkingCapital AccountsRec. Inventories Payables Others NetCashfromFCF Capex FCF Capital Structure Cash OtherCashEquivalents STBankLoans OtherBankLoans Commercial Paper 1.33%Nts'12 1.33%Nts'12 1.853%CB'13 1.278%Nts'13 1.351%Nts'15 0.927%Nts'14 0.708%Nts'15 0.572%Nts'15 0.453%Nts'17 0.858%Nts'17 1.326%Nts'21 0.455%Nts'16 0.686%Nts'18 3.5%Nts'12 Others Debt CreditRatios NetDebt/EBITDA Debt/EBITDA 655.6 20.7 21.6 171.8 34.9 110.8 134.8 28.5 243.7 291.7 48.0 337.1 11.3 20.6 99.1 13.7 200.6 7.0 33.1 389.5 233.4 156.1 FY09 FY10 1Q11 2Q11 3Q11 4Q11 31Mar09 31Mar10 30Jun10 30Sep10 31Dec10 31Mar11 3,908.3 3,199.3 709.0 18.1% 301.2 407.8 1.2 9.0 22.5 22.9 17.8 400.6 69.5 331.0 136.6 0.2 194.2 247.8 0.0 655.6 16.8% 2,844.4 2,505.7 338.6 11.9% 249.8 88.8 0.6 6.7 19.5 6.4 13.8 69.3 1.7 71.0 21.4 3.9 45.7 248.4 0.0 337.1 11.9% 754.7 639.5 115.2 15.3% 61.8 53.3 0.1 3.2 4.3 4.5 5.6 51.4 5.3 46.1 17.0 1.2 28.0 58.6 0.0 111.9 14.8% 817.6 694.2 123.4 15.1% 61.9 61.5 0.4 0.1 4.2 10.6 14.7 53.6 14.3 39.3 20.0 1.2 18.1 60.7 0.0 122.2 14.9% 6months 234.2 6.1 8.5 34.3 3.2 64.4 11.8 22.0 164.5 95.0 69.5 99.9 4.1 3.0 7.1 56.1 33.0 21.6 8.3 34.7 36.8 2.1 95.4 2.6 5.3 3.4 14.9 55.2 19.0 7.1 103.5 54.8 48.7 429.5 12.7 16.9 23.8 74.3 42.3 9.2 20.8 302.6 186.6 116.0 779.6 680.0 99.5 12.8% 60.9 38.6 0.2 2.1 4.1 4.4 4.1 36.5 4.1 32.4 13.6 0.4 18.5 61.3 0.0 99.9 12.8% 843.8 752.0 91.7 10.9% 62.4 29.3 0.1 0.5 3.9 5.6 7.4 24.3 26.9 2.5 2.9 0.5 5.9 66.1 0.0 95.4 11.3% FY11 1Q12 31Mar11 30Jun11 3,195.6 2,765.7 429.8 13.5% 247.0 182.8 0.8 5.9 16.5 16.3 23.6 165.8 50.5 115.3 53.4 3.2 58.6 246.7 0.0 429.5 13.4% 754.5 673.4 81.1 10.8% 59.3 21.9 0.1 4.1 3.7 6.5 3.4 25.4 16.8 8.6 0.6 0.9 7.1 56.1 0.0 78.0 10.3% 2Q12 30Sep11 814.8 723.8 91.0 11.2% 60.0 31.1 0.1 0.8 3.8 5.7 8.7 25.2 77.3 52.0 21.7 1.1 31.4 59.0 0.0 90.0 11.0% 6months 168.0 9.5 7.6 25.8 20.8 88.3 9.2 31.4 54.4 99.5 45.1 71.9 4.1 2.8 14.0 20.5 28.8 32.0 17.7 39.9 39.0 78.9 43.3 1.3 4.9 0.5 53.2 69.1 1.0 40.6 95.6 54.9 40.6 283.1 14.9 15.3 39.3 52.9 48.1 23.8 8.5 110.1 193.5 83.4 3Q12 4Q12 31Dec11 31Mar12 775.6 705.2 70.4 9.1% 59.5 10.9 0.0 2.4 3.8 1.7 2.6 8.7 34.4 25.7 13.2 0.4 12.9 60.9 0.0 71.9 9.3% 821.6 777.2 44.4 5.4% 63.4 19.1 0.1 0.6 3.8 13.3 2.5 6.3 3.7 2.7 3.8 0.5 0.6 62.3 0.0 43.3 5.3% FY12 1Q13 31Mar12 30Jun12 3,166.5 2,879.6 287.0 9.1% 242.2 44.8 0.4 7.8 15.1 27.3 12.2 53.0 124.8 71.8 38.1 2.9 36.6 238.3 0.0 283.1 8.9% 730.6 660.1 70.5 9.7% 58.6 12.0 0.2 3.6 3.6 3.4 5.7 9.9 0.0 9.9 8.9 0.6 18.1 47.3 0.0 59.2 8.1% 2Q13E 30Sep12 708.0 664.4 43.5 6.1% 62.3 18.8 0.4 1.0 4.0 2.5 5.0 23.9 0.0 23.9 8.4 0.5 16.0 50.0 0.0 31.2 4.4% 6months 90.5 5.2 7.6 17.2 27.5 0.0 12.5 12.5 18.3 87.5 69.2 74.7 1.4 4.0 13.0 13.8 0.0 6.3 6.3 32.9 43.8 10.9 94.0 8.4 4.4 9.8 13.8 0.0 6.3 6.3 62.0 43.8 18.2 259.2 15.0 16.0 40.0 55.0 0.0 25.0 25.0 113.2 175.0 61.8 3Q13E 4Q13E 31Dec12 31Mar12 803.2 702.2 101.0 12.6% 76.3 24.7 0.4 1.0 4.0 1.5 0.0 23.6 0.0 23.6 8.3 0.5 14.8 50.0 0.0 74.7 9.3% 925.1 830.8 94.3 10.2% 53.0 41.2 0.6 1.4 4.4 7.6 5.3 39.9 0.0 39.9 16.4 0.4 23.2 52.7 0.0 94.0 10.2% FY13E 31Mar13 3,166.9 2,857.5 309.3 9.8% 250.2 59.2 0.4 7.0 16.0 15.0 16.0 49.6 0.0 49.6 7.4 2.0 40.1 200.0 0.0 259.2 8.2%

206.6 11.4 237.0 747.8 175.9 20.0 30.0 300.0 40.0 20.0

32.3 1.0 203.8 610.7 14.0 20.0 30.0 300.0 40.0 20.0 40.0 40.0

39.2 1,528.3

33.8 1,504.4

48.6 1,526.7

49.6 1,496.4

49.0 0.5 289.7 528.8 28.0 20.0 30.0 300.0 40.0 20.0 40.0 40.0 60.0 20.0

48.5 0.0 355.3 542.4 37.0

48.0 0.0 304.7 582.2 9.0

53.6 0.0 199.4 757.6 43.0

50.4 0.0 173.4 765.2 0.0

50.5 0.1 173.4 765.2 0.0 20.0 30.0 300.0 40.0 20.0 40.0 40.0 60.0 20.0 30.0 20.0 15.0 20.0 0.0 1,593.6

41.7 0.0 91.1 772.5 53.0

39.3 0.0 91.1 862.5 53.0

38.4 0.0 91.1 872.5 53.0

89.1 0.0 173.4 885.2 0.0

89.1 0.0 173.4 885.2 0.0 30.0 300.0 40.0 20.0 40.0 40.0 60.0 30.0 20.0 30.0 20.0 15.0 0.0 1,703.6

20.0 40.0 1,768.7

20.0 0.0 1,468.5

20.0 0.0 1,496.4

20.0 20.0 20.0 20.0 30.0 30.0 30.0 30.0 300.0 300.0 300.0 300.0 40.0 40.0 40.0 40.0 20.0 20.0 20.0 20.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 60.0 60.0 60.0 60.0 20.0 20.0 20.0 20.0 30.0 30.0 30.0 30.0 20.0 20.0 20.0 15.0 15.0 15.0 20.0 20.0 20.0 20.0 0.0 0.0 0.0 0.0 1,574.6 1,570.8 1,655.0 1,593.6

30.0 30.0 30.0 30.0 300.0 300.0 300.0 300.0 40.0 40.0 40.0 40.0 20.0 20.0 20.0 20.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 60.0 60.0 60.0 60.0 30.0 30.0 30.0 30.0 20.0 20.0 20.0 20.0 30.0 30.0 30.0 30.0 20.0 20.0 20.0 20.0 15.0 15.0 15.0 15.0 0.0 0.0 0.0 0.0 1,561.6 1,651.6 1,661.6 1,703.6

2.4x 2.7x

4.3x 4.4x

3.3x 3.4x

3.0x 3.1x

3.1x 3.2x

3.4x 3.5x

3.4x 3.5x

3.9x 4.0x

4.2x 4.3x

4.8x 4.9x

5.5x 5.6x

5.5x 5.6x

5.7x 5.9x

7.8x 8.0x

7.8x 8.0x

6.2x 6.6x

6.2x 6.6x

Sources: Company reports and Fore Research & Management estimates

20

JFE Holdings Segment Overview

(Yen, Bn)
NetSales EBITDA EBITDAMargin Segments Steel Engineering Shipbuiding UrbanDevelopment LSI Elimination Total Revenues Steel Engineering Shipbuiding UrbanDevelopment LSI Elimination Total RevenuesGrowth Steel Engineering Shipbuiding UrbanDevelopment LSI Elimination Total Ordinaryincome Steel Engineering Shipbuiding UrbanDevelopment LSI Total Ordinaryincome Margins

FY09 FY10 1Q11 2Q11 3Q11 4Q11 31Mar09 31Mar10 30Jun10 30Sep10 31Dec10 31Mar11 3,908.3 655.6 16.8% 2,844.4 337.1 11.9% 754.7 111.9 14.8% 817.6 122.2 14.9% 779.6 99.9 12.8% 843.8 95.4 11.3%

FY11 1Q12 31Mar11 30Jun11 3,195.6 429.5 13.4% 754.5 78.0 10.3%

2Q12 30Sep11 814.8 90.0 11.0%

3Q12 4Q12 31Dec11 31Mar12 775.6 71.9 9.3% 821.6 43.3 5.3%

FY12 1Q13 31Mar12 30Jun12 3,166.5 283.1 8.9% 730.6 59.2 8.1%

2Q13E 30Sep12 708.0 31.2 4.4%

3Q13E 4Q13E 31Dec12 31Mar12 803.2 74.7 9.3% 925.1 94.0 10.2%

FY13E 31Mar13 3,166.9 259.2 8.2%

3,423.4 338.3 181.4 25.2 27.8 87.8 3,908.3

2,281.4 294.3 286.7 26.9 24.7 69.7 2,844.4 33.4% 13.0% 58.1% 7.0% 11.3% 20.6% 27.2%

657.5 46.1 52.9 4.9 6.1 12.9 754.7 38.0% 10.0% 22.7% 5.8% 22.0% 24.7% 28.2% 46.2 0.9 7.2 0.7 0.3 0.7 51.4 7.0% 2.0% 13.6% 14.4% 5.7% 6.8%

712.1 58.8 53.8 3.6 6.0 16.7 817.6 21.6% 10.6% 23.6% 42.5% 13.3% 1.4% 13.9% 42.0 4.3 5.3 0.1 0.5 1.3 53.6 5.9% 7.4% 9.9% 3.7% 7.9% 6.6%

672.2 67.4 50.9 1.1 5.8 17.8 779.6 14.2% 8.5% 23.7% 79.2% 11.9% 14.2% 7.5% 29.5 1.9 2.8 0.0 0.3 1.9 36.5 4.4% 2.9% 5.5% 4.6% 5.3% 4.7%

705.6 92.8 53.3 3.8 6.2 18.0 843.7 11.9% 10.5% 34.4% 65.3% 1.5% 10.6% 3.8% 16.6 6.8 1.9 0.1 0.6 1.4 24.3 2.4% 7.4% 3.5% 2.9% 9.0% 2.9%

2,747.4 265.1 210.8 13.4 24.2 65.3 3,195.6 20.4% 9.9% 26.5% 50.3% 2.1% 6.3% 12.3% 134.3 12.2 17.2 0.7 1.7 1.2 165.8 4.9% 4.6% 8.2% 5.5% 7.0% 5.2%

663.7 46.8 54.0 5.9 15.9 754.5 1.0% 1.4% 2.1% 3.3% 23.6% 0.0% 19.7 0.5 5.7 0.4 0.2 25.4 3.0% 1.0% 10.6% 6.0% 3.4%

708.2 57.8 60.4 5.3 16.8 814.8 0.5% 1.7% 12.3% 12.4% 0.8% 0.3% 18.1 1.5 5.4 0.3 0.0 25.2 2.6% 2.6% 8.9% 4.8% 3.1%

668.8 64.4 53.9 5.4 17.0 775.6 0.5% 4.4% 6.0% 7.6% 4.6% 0.5% 4.8 3.6 0.3 0.5 0.6 8.7 0.7% 5.6% 0.5% 10.1% 1.1%

673.6 109.7 46.3 4.8 13.0 821.5 4.5% 18.2% 13.0% 22.3% 27.8% 2.6% 16.9 9.6 0.8 0.3 0.4 6.5 2.5% 8.8% 1.8% 7.2% 0.8%

2,714.4 278.7 214.6 21.4 62.7 3,166.4 1.2% 5.1% 1.8% 11.5% 4.0% 0.9% 25.7 14.3 12.2 1.5 0.9 52.8 0.9% 5.1% 5.7% 7.0% 1.7%

636.7 56.4 46.0 4.8 13.4 730.5 4.1% 20.6% 14.8% 18.8% 15.8% 3.2% 5.9 1.7 2.4 0.4 0.6 9.8 0.9% 3.0% 5.2% 8.3% 1.3%

602.0 63.5 50.0 0.0 7.6 708.0 15.0% 10.0% 17.2% 100.0% 55.0% 13.1% 24.1 0.8 1.0 0.0 1.6 23.9 4.0% 1.3% 2.0% 0.0% 3.4%

622.0 61.2 0.0 0.0 120.0 803.2 7.0% 5.0% 100.0%

636.5 108.7 0.0 0.0 180.0 925.2 5.5% 0.9% 100.1%

2,497.2 289.8 96.0 4.8 279.0 3,166.9 8.0% 4.0% 55.3% 77.6% 1.5% 0.0% 20.0 13.9 3.3 0.4 12.0 49.6 0.8% 4.8% 3.4% 8.3% 1.6%

Steel business revenue appears to be declining.

100.0% 100.0% 50.0% 1487.2% 3.6% 12.6% 12.4 3.7 0.0 0.0 7.5 23.6 2.0% 6.0% 0.0% 0.0% 2.9% 25.7 7.7 0.1 0.0 6.7 40.0 4.0% 7.1% 443.8% 0.0% 4.3%

412.6 10.0 14.9 3.8 4.2 1.0 400.6 12.1% 2.9% 8.2% 15.0% 15.1% 10.2%

32.3 13.4 21.6 1.8 0.9 4.8 69.3 1.4% 4.5% 7.5% 6.8% 3.7% 2.4%

Shipbuilding business appears to have been hit by the rise in yen and apparent loss of competiveness

Steel ordinary income margin turned to negative in 4Q12.

Sources: Company reports and Fore Research & Management estimates

21

JFE Holdings Liquidity

We estimate 22% of total debt (Y338 bn) comes due in the current fiscal year. The company has only Y42 bn of cash on hand as of June 30, 2012. This does not take into account the FCF deficit that will also have to be financed with debt. To make matters worse, the company has an aggressive investment plan for next three years calling for total capex of Y1 tn.
700 600 500 400 300 200 100 0

Estimated Debt Maturities (Yen, Bn)

Cashpositionas ofJune 30,2012:Y41.7bn

FY13E

FY14E

FY15E

FY16E

FY17E

Thereafter

Sources: Company reports and Fore Research & Management estimates

22

100

150

200

250

300

350

50

Jan08 May 08 Sep 08 Jan09 May 09 Sep 09 Jan10 May 10 Sep 10 Jan11 May 11 Sep 11 Jan12 May 12 Sep 12

JFE Holdings Trading Performance

Sources: Bloomberg, as of September 13, 2012

CDS (bps)

1,000 0

2,000

3,000

4,000

5,000

6,000

7,000

Jan08 May 08 Sep 08 Jan09 May 09 Sep 09 Jan10 May 10 Sep 10 Jan11 May 11 Sep 11 Jan12 May 12
23

Stock (Yen)

Sep 12

Agenda

Executive Summary The Japanese Steel Industry JFE Holdings Inc. Kobe Steel Ltd

24

Kobe Steel (KOBSTL) CDS at 500-550;1

Kobe Steel is the 4th largest blast furnace maker in Japan. In FY12, the company derived roughly 44% of its revenue from its steel business, with the rest coming from non-steel businesses such as aluminum and copper, construction machinery and natural resources and engineering. Like its peers, Kobe faces a challenging business environment in its steel segment owing to stagnating domestic demand, overcapacity in the Asian market, rising input costs and a strong yen. The steel segments ordinary income margin fell to -8.7% in 4Q12 (Mar 31st, 2012) and the company suffered a loss in this segment for the full year While steel sheet volumes could be helped by a rebound in automotive production, pricing could come under pressure. In addition, we expect the demand for cast/forged steel by the shipbuilding industry to decline significantly. Kobe has significant exposure to China (14% of total sales in FY11) and is vulnerable to a slowdown. We are concerned that Kobes higher-margin construction machinery segment (16% of FY12s revenue and 58% of ordinary income) will slow down given (1) a noticeable deceleration in demand from China and (2) fierce price competition from local producers. As a result, we dont expect Kobes financials to improve soon. For FY13, we estimate EBITDA will decline 35% year-over-year and expect gross leverage will increase to 8.3x (7.4x net) by year-end. The company expects to burn Y120 bn of cash in FY13. Thats approximately 60% of its market cap. Kobe also has Y283 bn of debt due in the current fiscal year (31% of total debt), with Y99.8 bn cash on hand as of 1QFY13.

Capitalization
31Mar12 30Jun12 Cash OtherCashEquivalents STBankLoans OtherBankLoans Leases Bonds&notes Others Debt SharesOutstanding Price MarketCap. Enterprise Value LTMEBITDA CreditRatios NetDebt/EBITDA Debt/EBITDA EV/EBITDA 95.4 6.5 204.7 394.6 42.1 207.3 0.0 848.8 3.1 119.0 370.7 1,117.6 178.6 99.8 0.0 248.0 391.6 42.0 232.3 0.0 914.0 3.1 63.0 196.2 1,010.4 145.2

4.2x 4.8x 6.3x

5.6x 6.3x 7.0x

1. Trading levels as of September 13, 2012 Sources: Company reports, Bloomberg and Fore Research & Management estimates

25

Kobe Steel Company Description and Background

Kobe Steel, Ltd. was founded in 1905. The company is the fourth largest steel producer in Japan, with annual production capacity of approximately 8 million tons. Kobe Steel operates a diversified mix of industrial businesses under the KOBELCO brand. Products include iron and steel, construction machinery, aluminum and copper, welding technology and eco-solutions. Many of Kobe Steels production facilities were badly damaged in the Great Hanshin-Awaji Earthquake of 1995. Owing to a long and expensive rebuilding process and a focus on non-steel businesses, Kobe Steel has not invested in facility upgrades to the same extent as peers. Although its product mix is more skewed toward higher-price specialty products, Kobe Steels production costs are higher than peers. Kobe Steel has also been investing in the procurement of raw materials. In March, Kobe announced a deal to acquire 10% of a new 10 million ton per year iron ore mine in Australia for Y25 bn. When expected production begins in 2015, Kobe will procure about 20% of its iron ore vs. 7% currently.

Revenues by segment (last twelve months)1

Sources: Company reports, Bloomberg and Fore Research & Management estimates

26

Kobe Steel Margin Pressure from Specialty Steel

Kobe Steel has outsized exposure to specialty steel products vs. blast furnace peers. Neither Kobe Steel nor JFE disclose their product mix, but we estimate approximately 35% of Kobes steel shipments are specialty, vs. about 10% for JFE. We view the Japanese steel market in three segments: commodity (~75%), specialty (~20%) and premium (~5%). Approximately 60% of specialty steel orders come from the auto industry. Premium products (e.g., engine and powertrain components) are difficult to substitute and thus remain insulated from competition. But for more commoditized specialty products (e.g., stainless steel and cold-rolled sheets), automakers are increasingly willing to substitute foreign products. We expect further price pressure in this segment.

Estimated Exposure to Specialty Steel (% of sales)1

40% 35% 30% 25% 20% 15% 10% 5% 0% KobeSteel Nisshin Steel Sumitomo Metal Industries Nippon Steel JFE

1. Steel cycle bottom not in sight; Kobe, Daido downgraded, Bank Of America Merrill Lynch equity research report published on April 17, 2012. Sources: Company reports, Bloomberg and Fore Research & Management estimates

27

Kobe Steel Exposure to the Chinese Construction Market

Kobe Steel is exposed to the Chinese construction market through its steel exports. In addition, Kobes Kobelco Construction Machinery subsidiary (which manufactures hydraulic excavators and wheel loaders) has significant exposure to China and has identified China and Southeast Asia as areas of focus. Kobelco Construction Machinery represented only 16% of Kobes total revenues in FY12, but 68% of its ordinary income (up from 29% in FY11). We expect Kobelco Construction Machinerys performance to deteriorate significantly in FY13, as the company is impacted by the slowdown in Chinese construction activity. We note that Komatsu reported a 38% YoY decline in orders of hydraulic excavators in China in July 2012, in spite of an easier comparison with the prior years numbers (July 2011 was down 32% YoY). In 1QF13, Kobelco Construction Machinery revenue declined 18% year-overyear, despite reconstruction activity driving a year-over-year increase in domestic sales. The company is still guiding to approximately flat revenues in FY13 and to achieve this target, 2HF13 revenue would have to increase 22% year-over-year. As a result, we expect Kobelco Construction Machinerys ordinary income of Y8.8 bn in FY13, down from Y22.9 bn in FY12.

Komatsus Monthly Hydraulic Excavator Orders in China (YoY Change)1

140% 120% 100% 80% 60% 40% 20% 0% 20% 40% 60%

-38% YoY decline in July 2012

1 Aug10

1 Oct 10

1 Aug11

1 Oct 11

1 Jun10

1 Jun11

1 Apr10

1 Apr11

1 Dec10

1 Dec11

1 Feb11

Kobelcos LTM Ordinary Income (Yen, bn)

30 25 20 15 10 5 0

1. 6-ton class and over Sources: Company reports, Bloomberg and Fore Research & Management estimates

1 Feb12

1 Apr12

1 Jun12

28

Kobe Steel - Summary Projections

(Yen, Bn)
NetSales CostofSales GrossProfit GrossMargin SG&A OperatingIncome InterestIncome DividendsIncome InterestExpense Equityinearningofaffiliates Others OrdinaryIncome Extaordinaryincome Income before Taxes Taxes MinorityInterests NetIncome D&A Adjustments EBITDA EBITDAMargin StatementofCashFlows EBITDA CashInterest/dividendreceived CashInterestPaid CashTaxes ChangesinWorkingCapital AccountsRec. Inventories Payables Others NetCashfromFCF Capex FCF Capital Structure Cash OtherCashEquivalents STBankLoans OtherBankLoans Leases Bonds&notes Others Debt CreditRatios NetDebt/EBITDA Debt/EBITDA 245.6 9.2 19.3 57.5 74.3 67.5 16.4 82.9 118.2 123.6 5.4 164.9 6.1 21.4 15.1 9.1 98.6 40.9 10.2 172.9 128.2 44.7 FY09 FY10 1Q11 2Q11 3Q11 4Q11 31Mar09 31Mar10 30Jun10 30Sep10 31Dec10 31Mar11 2,177.3 1,890.3 287.0 13.2% 170.0 116.9 2.2 3.6 20.0 7.9 49.8 60.9 33.1 27.8 59.9 0.6 31.4 128.7 0.0 245.6 11.3% 1,671.0 1,475.5 195.6 11.7% 149.5 46.0 2.3 2.0 21.3 1.8 20.6 10.3 3.8 14.1 1.0 6.8 6.3 118.8 0.0 164.9 9.9% 457.4 370.3 87.2 19.1% 40.6 46.5 0.5 1.3 5.1 0.7 5.8 38.1 0.2 37.8 12.4 5.4 20.0 27.7 0.0 74.2 16.2% 464.6 403.2 61.4 13.2% 38.1 23.3 0.7 0.1 5.2 0.6 8.2 11.3 0.0 11.3 2.8 4.7 9.4 28.5 0.0 51.8 11.1% 6months 126.0 3.4 10.3 1.3 2.4 12.3 79.1 38.5 151.0 39.3 111.7 59.6 2.1 4.1 5.5 2.0 34.8 43.7 10.4 52.6 29.6 22.9 53.8 1.1 6.3 2.8 43.7 29.4 68.3 10.9 25.8 27.7 53.4 239.4 6.5 20.7 7.0 39.3 17.7 54.6 38.0 177.8 96.6 81.2 433.7 363.2 70.5 16.3% 39.8 30.7 0.8 0.9 5.1 1.6 0.6 29.6 0.0 29.6 8.9 2.9 17.8 28.8 0.0 59.6 13.7% 502.8 434.1 68.7 13.7% 44.8 24.0 1.1 0.1 5.2 0.2 10.0 10.2 0.0 10.2 0.9 3.5 5.7 29.8 0.0 53.8 10.7% FY11 1Q12 2Q12 3Q12 4Q12 31Mar11 30Jun11 30Sep11 31Dec11 31Mar12 1,858.6 1,570.8 287.8 15.5% 163.2 124.6 3.1 2.4 20.7 3.1 23.4 89.1 0.2 88.9 19.4 16.5 52.9 114.8 0.0 239.4 12.9% 471.4 402.5 68.9 14.6% 39.8 29.0 0.8 1.5 5.0 1.9 4.3 24.0 0.0 24.0 8.3 5.8 9.8 27.0 0.0 56.0 11.9% 488.7 423.3 65.4 13.4% 42.4 22.9 1.0 0.6 4.9 1.6 6.7 14.6 0.0 14.6 3.2 3.9 7.5 29.5 0.0 52.4 10.7% 6months 108.4 5.0 9.9 10.9 18.5 27.2 24.1 21.2 1.7 39.3 37.6 47.5 2.5 4.7 1.1 16.6 72.7 16.3 3.0 25.2 16.0 41.2 22.7 1.2 5.4 7.0 16.9 70.5 15.6 17.7 62.9 28.0 35.0 178.6 8.7 20.0 19.0 18.7 29.4 24.8 36.0 39.5 83.3 43.8 449.5 390.4 59.1 13.1% 41.9 17.1 1.1 0.8 4.7 1.1 3.8 11.6 13.9 2.2 1.1 1.4 4.8 30.4 0.0 47.5 10.6% 455.1 419.6 35.6 7.8% 44.1 8.6 1.2 0.2 5.1 3.3 7.4 16.4 7.9 8.5 15.5 2.8 26.8 31.2 0.0 22.7 5.0% FY12 1Q13 2Q13E 3Q13E 4Q13E 31Mar12 30Jun12 30Sep12 31Dec12 31Mar13 1,864.7 1,635.9 228.8 12.3% 168.3 60.6 4.1 3.3 19.8 7.9 22.2 33.8 6.0 27.8 28.0 14.0 14.2 118.0 0.0 178.6 9.6% 434.1 395.1 39.1 9.0% 41.9 2.8 1.0 1.4 5.2 1.7 6.6 10.5 14.1 24.6 5.9 1.7 32.2 25.4 0.0 22.6 5.2% 429.7 401.9 27.8 6.5% 40.8 13.0 1.0 0.5 4.8 1.3 5.3 20.3 1.9 22.2 7.8 2.5 16.9 27.0 0.0 14.0 3.3% 6months 36.6 3.9 10.0 0.0 9.3 7.5 12.5 17.5 16.2 65.0 81.2 36.8 1.8 5.0 0.0 4.6 3.8 6.3 8.8 10.2 16.0 5.8 42.4 2.8 5.0 0.0 4.6 3.8 6.3 8.8 16.8 49.0 32.2 115.9 8.5 20.0 0.0 18.5 15.0 25.0 35.0 10.9 130.0 119.1 422.0 373.2 48.9 11.6% 40.1 8.8 1.0 0.8 5.0 1.0 9.0 2.4 0.0 2.4 0.8 2.5 4.1 28.0 0.0 36.8 8.7% 447.6 394.6 53.0 11.8% 40.2 12.9 1.0 0.3 5.0 4.0 9.1 4.0 10.0 5.9 2.8 3.3 6.4 29.6 0.0 42.4 9.5% FY13E 31Mar13 1,733.5 1,564.6 168.8 9.7% 162.9 5.9 4.0 3.0 20.0 8.0 30.0 29.1 26.0 55.1 5.5 10.0 59.6 110.0 0.0 115.9 6.7%

188.3 0.6 157.2 491.6 28.4 249.8 0.0 927.0

131.9 79.8 167.9 525.2 48.1 213.4 0.0 954.6

166.1 0.0 159.1 522.7 43.0 213.3 0.0 938.1

169.6 99.8 141.0 508.5 43.0 213.3 0.0 905.8

175.3 99.7 137.7 505.9 43.0 213.2 0.0 899.8

145.9 43.8 170.7 441.1 42.9 213.2 0.0 867.8

145.9 43.8 170.7 441.1 42.9 213.2 0.0 867.8

150.4 0.0 190.8 437.6 42.0 213.1 0.0 883.5

128.9 16.0 194.9 427.1 42.0 213.1 0.0 877.1

110.5 16.0 206.6 416.5 42.0 206.1 0.0 871.2

95.4 6.5 204.7 394.6 42.1 207.3 0.0 848.8

95.4 6.5 204.7 394.6 42.1 207.3 0.0 848.8

99.8 0.0 248.0 391.6 42.0 232.3 0.0 914.0

84.9 0.0 248.0 391.6 42.0 232.3 0.0 914.0

78.6 0.0 248.0 391.6 42.0 232.3 0.0 914.0

94.3 6.5 328.3 394.6 42.1 197.3 0.0 962.3

94.3 6.5 328.3 394.6 42.1 197.3 0.0 962.3

3.0x 3.8x

4.5x 5.8x

3.5x 4.2x

2.5x 3.5x

2.4x 3.5x

2.8x 3.6x

2.8x 3.6x

3.3x 4.0x

3.3x 4.0x

3.7x 4.2x

4.2x 4.8x

4.2x 4.8x

5.6x 6.3x

7.8x 8.6x

8.7x 9.5x

7.4x 8.3x

7.4x 8.3x

Sources: Company reports and Fore Research & Management estimates

Operating cash flow fell sharply to Y39.5 bn in FY12 and FCF tuned negative. We expect additional cash burn in FY13.

29

Kobe Steel Segment Overview

(Yen, Bn)
NetSales EBITDA EBITDAMargin Segments Iron&Steel Welding Aluminum&Copper Machinery Natural Resources&Engineering KobelcoEcoSolutions KobelcoConstructionMachinery KobelcoCranes OtherBusinesses Adjustment Total Revenues Iron&Steel Welding Aluminum&Copper Machinery Natural Resources&Engineering KobelcoEcoSolutions KobelcoConstructionMachinery KobelcoCranes OtherBusinesses Adjustment Total RevenuesGrowth Iron&Steel Welding Aluminum&Copper Machinery Natural Resources&Engineering KobelcoEcoSolutions KobelcoConstructionMachinery KobelcoCranes OtherBusinesses Adjustment Total Ordinaryincome Iron&Steel Welding Aluminum&Copper Machinery Natural Resources&Engineering KobelcoEcoSolutions KobelcoConstructionMachinery KobelcoCranes OtherBusinesses Adjustment Total Ordinaryincome Margins 24.7 1.7 2.2 20.9 4.7 1.7 5.5 1.2 3.1 6.1 10.3 3.3% 2.3% 0.9% 12.0% 7.2% 2.0% 2.6% 2.2% 4.0% 7.8% 0.6% 742.1 76.2 261.8 173.8 65.6 82.9 214.6 55.2 77.8 78.8 1,671.0 203.4 18.4 78.2 33.9 13.2 13.9 85.7 11.3 14.6 15.2 457.4 23.0% 6.2% 35.8% 29.5% 21.4% 9.8% 75.9% 9.9% 11.2% 9.7% 21.1% 13.9 1.2 6.3 4.9 2.3 1.1 9.9 0.3 0.9 2.1 38.1 6.8% 6.4% 8.0% 14.5% 17.5% 7.9% 11.5% 2.7% 6.4% 13.8% 8.3% 210.1 18.7 76.8 37.8 7.9 16.1 90.0 12.1 15.6 20.3 464.6 16.1% 3.2% 21.3% 20.7% 43.5% 27.0% 60.0% 21.8% 34.9% 25.6% 13.2% 4.7 1.0 3.5 3.7 0.8 0.1 9.0 0.5 1.1 2.0 11.3 2.2% 5.4% 4.5% 9.7% 10.7% 0.4% 10.0% 4.1% 7.2% 10.0% 2.4% 209.2 20.9 74.5 32.7 9.1 15.6 65.7 7.2 15.6 16.9 433.7 10.5% 7.6% 10.7% 29.8% 37.3% 1.9% 25.9% 46.3% 10.1% 5.3% 3.7% 12.8 1.3 3.7 2.9 1.3 1.0 3.6 1.0 1.7 2.4 29.6 6.1% 6.0% 4.9% 8.8% 14.6% 6.3% 5.4% 13.7% 10.8% 14.1% 6.8% 217.7 19.8 74.5 50.1 34.0 24.0 71.8 10.4 19.8 19.3 502.8 5.4% 11.0% 1.3% 4.9% 30.1% 18.7% 25.0% 25.0% 1.2% 31.1% 8.2% 1.7 1.2 1.4 3.1 0.2 1.0 3.9 0.6 2.8 4.4 10.2 0.8% 6.0% 1.8% 6.1% 0.7% 4.1% 5.4% 5.5% 14.0% 23.0% 2.0% 840.4 77.8 304.0 154.5 64.3 69.6 313.1 41.0 65.6 71.7 1,858.6 13.2% 2.1% 16.1% 11.1% 2.0% 16.0% 45.9% 25.8% 15.7% 9.0% 11.2% 23.7 4.6 14.8 14.5 3.1 3.1 26.3 1.4 6.5 6.2 89.1 2.8% 5.9% 4.9% 9.4% 4.7% 4.5% 8.4% 3.3% 9.9% 8.6% 4.8% 195.7 21.6 79.4 41.2 12.5 12.4 97.7 11.8 14.7 15.6 471.4 3.8% 17.4% 1.5% 21.3% 6.0% 10.8% 14.1% 5.1% 0.5% 2.0% 3.1% 3.4 1.3 5.4 3.3 0.7 0.4 11.1 0.4 1.2 1.1 24.0 1.7% 6.1% 6.8% 8.1% 5.4% 3.4% 11.4% 3.5% 8.4% 7.3% 5.1% 224.5 20.6 76.0 39.0 17.8 17.5 82.5 11.1 16.4 16.7 488.7 6.8% 10.2% 1.0% 3.2% 125.9% 8.2% 8.3% 7.9% 5.3% 18.0% 5.2% 0.1 0.9 1.6 2.3 1.3 1.0 7.4 0.5 1.4 2.1 14.6 0.1% 4.2% 2.2% 5.9% 7.2% 5.9% 9.0% 4.7% 8.5% 12.3% 3.0% 222.3 20.7 69.4 32.8 13.0 18.8 61.6 11.6 15.8 16.4 449.5 6.2% 1.2% 6.9% 0.2% 42.5% 20.7% 6.3% 62.2% 1.0% 2.7% 3.6% 0.1 0.3 0.9 3.2 2.9 1.9 1.7 0.1 1.4 0.7 11.6 0.1% 1.6% 1.3% 9.9% 22.2% 10.1% 2.7% 0.8% 8.6% 4.4% 2.6% 211.8 21.5 65.2 39.9 12.6 22.5 65.4 13.4 22.3 19.5 455.1 2.7% 8.9% 12.6% 20.4% 62.9% 6.0% 8.9% 28.5% 12.9% 1.2% 9.5% 18.3 0.6 1.9 1.0 3.2 0.9 2.6 0.1 3.2 1.5 16.4 8.7% 2.8% 2.9% 2.6% 24.9% 4.0% 4.0% 1.1% 14.3% 7.9% 3.6% 854.2 84.4 289.9 152.8 55.9 71.2 307.2 48.0 69.2 68.1 1,864.7 1.6% 8.5% 4.6% 1.1% 13.1% 2.3% 1.9% 17.2% 5.5% 5.0% 0.3% 14.7 3.1 6.1 9.9 0.3 4.2 22.9 0.2 7.2 5.4 33.8 1.7% 3.7% 2.1% 6.5% 0.6% 5.9% 7.4% 0.3% 10.4% 8.0% 1.8% 192.2 21.3 71.9 39.7 7.1 13.6 80.1 9.5 13.9 15.6 433.7 1.8% 1.5% 9.4% 3.5% 43.0% 9.7% 18.0% 19.8% 5.5% 0.3% 8.0% 18.9 0.5 1.7 2.4 0.5 0.1 3.9 0.4 1.0 0.0 10.4 9.8% 2.3% 2.4% 6.0% 7.0% 0.7% 4.9% 4.2% 7.2% 0.0% 2.4% 179.6 21.6 67.6 40.9 14.3 18.5 70.1 9.5 15.1 7.5 429.7 20.0% 5.0% 11.0% 5.0% 20.0% 6.0% 15.0% 15.0% 8.0% 55.0% 12.1% 19.8 0.5 0.7 0.4 1.6 0.6 1.1 0.1 0.5 0.5 20.3 11.0% 2.3% 1.0% 1.0% 11.0% 3.5% 1.5% 0.7% 3.3% 6.8% 4.7% 184.5 21.0 65.9 35.9 13.6 19.5 64.7 12.8 18.1 13.9 422.0 17.0% 1.5% 5.0% 9.5% 5.0% 3.5% 5.0% 10.0% 15.0% 15.0% 6.1% 10.1 0.5 1.6 1.4 0.0 1.4 1.6 0.6 2.2 0.4 2.4 5.5% 2.3% 2.5% 4.0% 0.0% 7.0% 2.5% 4.5% 12.0% 3.0% 0.6% 186.9 21.8 64.2 43.9 12.5 22.1 76.9 15.3 25.9 21.5 448.0 11.8% 1.2% 1.5% 10.1% 0.8% 1.8% 17.7% 14.1% 16.0% 10.2% 1.6% 6.9 1.0 2.5 2.2 0.3 1.8 2.2 0.6 3.3 1.1 4.0 3.7% 4.6% 3.8% 5.0% 2.4% 8.0% 2.8% 4.0% 12.9% 5.2% 0.9% 743.2 85.7 269.6 160.5 47.5 73.7 291.8 47.0 73.0 58.5 1,733.5 13.0% 1.5% 7.0% 5.0% 15.0% 3.5% 5.0% 2.0% 5.5% 14.1% 7.0% 55.7 2.5 5.1 5.6 2.4 3.7 8.8 1.6 7.0 2.0 29.1 7.5% 2.9% 1.9% 3.5% 5.0% 5.0% 3.0% 3.5% 9.6% 3.5% 1.7% FY09 FY10 1Q11 2Q11 3Q11 4Q11 31Mar09 31Mar10 30Jun10 30Sep10 31Dec10 31Mar11 2,177.3 245.6 11.3% 1,671.0 164.9 9.9% 457.4 74.2 16.2% 464.6 51.8 11.1% 433.7 59.6 13.7% 502.8 53.8 10.7% FY11 1Q12 2Q12 3Q12 4Q12 31 Mar11 30Jun11 30Sep11 31Dec11 31Mar 12 1,858.6 239.4 12.9% 471.4 56.0 11.9% 488.7 52.4 10.7% 449.5 47.5 10.6% 455.1 22.7 5.0% FY12 1Q13 2Q13E 3Q13E 4Q13E 31Mar12 30 Jun 12 30Sep12 31Dec12 31Mar 13 1,864.7 178.6 9.6% 434.1 22.6 5.2% 429.7 14.0 3.3% 422.0 36.8 8.7% 447.6 42.4 9.5% FY13E 31 Mar13 1,733.5 115.9 6.7%

Sales in construction machinery business slowed down since 2Q12.

Steel ordinary income margin turned to negative in 4Q12.

Sources: Company reports and Fore Research & Management estimates

30

Kobe Steel Liquidity

We estimate 31% of total debt (Y283 bn) comes due in the current fiscal year. The company has Y100 bn of cash on hand as of June 30, 2012.

Estimated Debt Maturities (Yen, Bn)

300 250 200 150 100 50 0 FY13E FY14E FY15E FY16E FY17E Thereafter Cashpositionat June30,2012: Y99.8bn

Sources: Company reports and Fore Research & Management estimates

31

100

200

300

400

500

600

0 Jan08 May 08 Sep 08 Jan09 May 09 Sep 09 Jan10 May 10 Sep 10 Jan11 May 11 Sep 11 Jan12 May 12 Sep 12

Kobe Steel Trading Performance

Sources: Bloomberg, as of September 13, 2012

CDS (bps)

100 50 0

150

200

250

300

350

400

Jan08 May 08 Sep 08 Jan09 May 09 Sep 09 Jan10 May 10 Sep 10 Jan11 May 11 Sep 11 Jan12 May 12

Stock (Yen)

32

Sep 12