Mitsubishi Materials Corporation

Business and Other Risks

The key risks that management believes may have a significant impact on the Group's performance and financial position are as follows.
The following is not an exhaustive list of all the risks facing the Group. This section contains forward-looking statements that are based on management's assumptions and beliefs in light of the information currently available to them as of May 14, 2021.

(1) International Situation, Overseas Economic Situation (Probability of Occurrence: Medium, Level of Impact: Large)

The Group has production and sales bases, etc. in 30 countries and regions overseas, and positions overseas business as an important foundation for the Group's business growth. Risks associated with global business development include political instability, economic conditions, and unexpected changes in policies and regulations in various countries and regions. There are also possible changes in business strategies and product deployment by business partners, which could hinder the Group's business activities and affect its business performance and financial position. The Group believes that these risks are always potentially present.
Thus, the Group periodically monitors the status of its businesses and reviews its business strategies and overseas investments in light of risks arising from changes in international and overseas economic conditions, etc. In addition, the Group responds appropriately to changes in these conditions by sharing information from local bases and by collaboration among its business units. In addition, the Group strives to collect, share, and disseminate information on individual country risks, such as overseas legal regulations, among the Group.
In particular, the Metals Business is at risk of being effected by events beyond the Group's control, such as intervention in resource projects by national and local governments in copper-producing countries, fluctuations in the global balance of supply and demand for copper concentrates, and declines in the grade of copper concentrates.
To address these issues, as part of its efforts to build a sustainable raw materials portfolio, the Group will diversify the countries and regions where the Group purchases copper concentrates and promote effective investment in quality mining projects, while at the same time securing a stable supply of raw materials by actively using recycled raw materials such as E-Scrap (waste boards from various electronic equipment).

(2) Market Trends (Probability of Occurrence: Medium, Level of Impact: Large)

The Group provides products and services to a variety of industries. However, market and customer trends are constantly changing, including changes in global economic conditions, rapid changes in customers' markets, changes in customers' market shares, changes in customers' business strategies or product development, etc. The Group assumes that the timing of the occurrence of the risks described below will vary, but believes that they are always potentially present.
Domestic demand for cement peaked at 86,286,000 tons in FY1991 and has been shrinking for a prolonged period of time, with current domestic demand at less than half of the peak level. Cement is an essential material for society, and the Group expects to secure a certain level of demand over medium to long term. However, if demand declines at an accelerated pace, the Group's earnings may deteriorate and it may become difficult to continue operations. To deal with this situation, the Group is considering such measures like strengthening the Kyushu Plant, which is the main plant of the Group, creating the effect of streamlining production, logistics, and sales functions through business integration with Ube Industries, Ltd, reorganizing the domestic business and optimizing the production system. The Group is also considering expanding and developing new business overseas in regions where future growth is expected.
The automobile industry is expected to experience a decrease in the number of internal combustion engines due to electrification and structural changes due to CASE (Connected, Autonomous, Shared & Services, Electric) and MaaS (Mobility as a Service). It is assumed that changes in needs related to mobility due to changes in lifestyles and society will cause a decrease in demand for products such as cutting tools. If the Group is unable to appropriately respond to such changes in the industry and customer market, the Group's business performance and financial position may be adversely affected.
To respond to this, the Group will aim to capture new demand through changes in automotive components and develop markets with a view to new industries such as medical care, while maintaining and expanding our market share by providing new value such as solutions in existing business areas that may be shrinking. In addition, with the aim of expanding sales of cutting tools used in the manufacture of undercarriage parts for which demand will continue to grow even with the progress of electrification, the Group is working to develop markets using cutting technologies that are compatible with new manufacturing methods and new materials.
Also, the Group supplies electronic materials, polycrystalline silicon, and other products to the semiconductor industry, and trends in the semiconductor market may have an impact on the Group's business performance and financial position. For this reason, the Group is looking at ways to strengthen its relationships with key customers by providing distinctive, high-quality products, and to expand its market share by developing high-value-added products, etc.

(3) Fluctuations in Raw Material and Utility Prices (Probability of Occurrence: Medium, Level of Impact: Large)

1) Raw Materials Prices

The procurement prices of non-ferrous metal raw materials for the Metals Business, the Metalworking Solutions Business, the Aluminum Business, and coal, etc. for the Cement Business are affected by fluctuations in international commodity prices for such non-ferrous metals and coal, foreign exchange rates, and ocean freight rates, etc. The Group's business performance and financial position may be adversely affected if procurement prices rise due to a sharp rise in these raw material prices.
Major fluctuations in international commodity prices and exchange rates have occurred in the past, and the Group assumes that such fluctuations may continue to occur once every few years in the future.
To prepare for this, the Group is working to increase the number of suppliers of non-ferrous metal raw materials, such as tungsten raw materials in the Metalworking Solutions Business and aluminum ingots in the Aluminum Business, and to increase the ratio of recycled raw materials.

2) Utility Prices

An increase in the cost of imported fossil fuels such as crude oil and natural gas, a sharp rise in energy prices, or a hike in electricity prices due to an increase in the levy on renewable energy could adversely affect the Group's business performance and financial position. The energy situations have fluctuated greatly in recent years, and the Group has determined that this is a risk to which it should always have a system in place to respond.
Accordingly, the Group is promoting measures such as reducing the amount of purchased electricity by introducing energy-saving equipment and self-consumption solar power generation systems.

(4) Procurement (Probability of Occurrence: Medium, Level of Impact: Large)

With regard to the procurement of materials, parts, and other components for the Group's production activities, if there is a shortage in the amount of materials procured due to poor quality, or if production is reduced due to depletion of resources used as raw materials and heat energy sources, equipment failure at utility companies, or damage to or bankruptcy of important suppliers, the Group's production activities may be disrupted, which may have a negative impact on its business performance and financial position. The timing of the occurrence of these risks is not clear, as they arise from a variety of factors, but the Group considers them to be risks that are always potentially present and should be prepared for.
For this reason, the Group lists important raw materials and equipment that may have a significant impact on the Group's production activities at each of its manufacturing bases, and examines and implements various measures to reduce procurement risks. In the event of a disaster or other emergency, the Group collects information on the status of damage at suppliers and transportation conditions, and shares this information among its bases.
Furthermore, in the field of the Cement Business, the Group is making efforts to save energy in the manufacturing process and to prevent the depletion of raw materials and resources by increasing the acceptance of waste and by-products, which are currently accepted as substitutes for natural resources.

(5) Climate Change (Probability of Occurrence: High, Level of Impact: Large)

In the event that policies and regulations against climate change are strengthened, and a carbon pricing system is introduced or strengthened, the Group's business performance and financial position may be adversely affected due to costs associated with GHG (Greenhouse Gas) emissions. In addition, if the Group is late in responding to the growing demand for a transition to a decarbonized society, it may experience a decline in corporate value due to loss of sales opportunities, etc., which may have a negative impact on the Group's business performance and financial position. With regard to climate change, there is a growing movement toward carbon neutrality throughout the world, and with Japan declaring its commitment to carbon neutrality by 2050, the Group has determined that it is necessary to take prompt action to prepare for the tightening of regulations that are expected in the near future.
For this reason, the Group has set a GHG reduction target for FY2031 and is working to steadily reduce GHG emissions from its business activities and to compress the carbon price burden by introducing energy-saving equipment and expanding the use of renewable energy. In addition, in order to improve the market competitiveness of the Group's products, the Group is promoting the improvement of manufacturing processes, the development of environmentally friendly products, and the development of technologies to reduce environmental load such as CCUS (Carbon Dioxide Capture, Utilization and Storage).
At the same time however, with the strengthening of policies and other measures related to climate change, demand for technologies, products, and services that will help to save energy and reduce GHG emissions is expected to increase, which could create more business opportunities. The Group takes initiatives including the development of materials, products, and technologies that contribute to decarbonization, the development and promotion of the use of renewable energy such as geothermal power generation, participation in projects pushing forward demonstration experiments or studies into suitable locations related to CO2 capture and storage, and activities to preserve the forests it owns.

(6) Natural Disasters and Abnormal Weather (Probability of Occurrence: Medium, Level of Impact: Medium)

The risks of abnormal weather and natural disasters are increasing every year, and the Group, which has many business locations in Japan and overseas, is working on various disaster prevention measures, etc. However, large-scale natural disasters such as earthquakes, typhoons, floods, and guerrilla rains, which are far beyond the expected level, may cause extensive damage to production facilities, etc., which may adversely affect the Group's business performance and financial position due to damage to production facilities, factory operations, and product shipments.
In order to cope with natural disasters and abnormal weather that have been occurring frequently in recent years, the Group is promoting the enhancement of its internal systems and is systematically implementing various measures, including the development and review of business continuity plans (BCPs), the increase in the number of items that can be manufactured at multiple locations, and countermeasures against floods, storm surges, and tidal waves, such as the construction of raised walls.
In addition, in January 2019, the Group introduced a crisis management system at all of its domestic and overseas bases in order to promptly ascertain the safety of employees and the damage to business bases in the event of a crisis due to a natural disaster. By sharing information on damage in real time within the Group, each business site and head office department can respond appropriately and quickly from their own standpoints. The Group has also established a system that facilitates prompt relief from head office departments and neighboring sites.

(7) Occurrence of Violations of Pollution and Environmental Laws and Regulations (Probability of Occurrence: Medium, Level of Impact: Large)

Against the backdrop of the global movement toward sustainable development, the legal and social sanctions against companies that cause pollution or environmental destruction in their business activities have never been heavier.
The Group's business activities are working to prevent pollution of air, water, soil, etc., in accordance with environmental laws and regulations at each of its business sites in Japan and overseas. In addition, the Group is complying with various environmental laws, regulations and rules related to climate change, air pollution, water pollution, hazardous substances, waste recycling, soil and groundwater pollution, etc. However, as environmental laws and regulations become stricter in Japan and overseas, delays in responding to legal revisions and changes in environmental standards, stricter standards for hazardous element content, changes in administrative guidance, and delays in responding to appointments, notifications, and reports could hinder the Group's business activities and adversely affect its business performance and financial position. Although the timing of occurrence is not clear, the Group considers it to be a risk that is always potentially present.
Therefore, in addition to sharing information on revisions to applicable laws and regulations and conducting thorough training and education, the Group is promoting measures to avoid, reduce, and transfer risks, including strengthening facilities, throughout the Group.

(8) Infection (COVID-19) (Probability of Occurrence: High, Level of Impact: Large)

Currently, due to the spread of COVID-19 in the area and the number of infected people, business activities such as plant operations and the movement of human resources and supplies are restricted, and the Group expects this situation to continue in the future.
Therefore, in late January 2020, when the spread of this infectious disease was recognized in China, the Group established a task force ("Novel Coronavirus Response Headquarters") at its head office and began to take a unified response. The task force formulates the Group's response policies and guidelines for preventive measures according to the prevalence of infectious diseases around the world, and disseminates them to all business sites. The task force also collects information centrally on the health status of employees, the situation in each country and region, policies and regulations, the impact on business sites, and the impact on the supply chain. It also shares this information with management, and monitors the situation in order to respond appropriately and swiftly as the situation changes.
As for measures to prevent infection and its spread in the workplace, the Group is implementing a full-scale operation of telecommuting in each department, restrictions on business trips and events, and the formulation of procedures to deal with an outbreak of infection in the workplace. In order to ensure that the provision of the Group's products and services, which support the social infrastructure, is not interrupted, the Group has formulated a business continuity plan for each of its business sites and is implementing various measures including measures to prevent the spread of infectious diseases in response to their prevalence.
Changes in the business environment of After-Corona need to be closely monitored in order to assess the impact of this infection on the business, and plan countermeasures such as a decrease in demand. Depending on the extent and content of such changes, in addition to the measures taken at present, the Group will consider adding or reviewing social issues that the Group should address, and reviewing strategies and changing measures in response to structural changes in the industry.

(9) Information Security (Probability of Occurrence: High, Level of Impact: Medium)

The Group considers information security to be one of the most critical issues in risk management, and in particular recognizes that the personal information of customers and business partners is one of the most important information assets, and is working to reduce the risk of leakage, loss, or damage. In the event of failure of critical information infrastructure and networks, cyber-attacks (cyber-terrorism) and other unforeseen events, as well as information leaks of personal information and other data due to unauthorized removal, inadequate or poorly managed computer systems, or involvement of computer viruses or malicious software, the Group's business performance and financial position may be adversely affected due to a loss of social credibility, which is always considered a latent risk.
With this background, the Group is making appropriate capital investments in critical information infrastructure and networks, and updates equipment as necessary. Furthermore, in order to effectively implement security measures, the Group is working to reduce risk by promoting measures and enhancements in each of the following four areas: governance, security improvement, detecting signs and early detection, and prompt response.

(10) Financial Risks (Probability of Occurrence: Medium, Level of Impact: Large)

The Group assumes the following potential financial risks. Although it is difficult to predict when any of these events will occur, the Group is pursuing various measures to ensure that it is always ready to respond.

1) Interest-Bearing Debt

In the fiscal year ending March 31, 2021, the Group's interest-bearing debt amounted to ¥629.4 billion (total of short-term borrowings, commercial papers, bonds, and long-term borrowings. Unless otherwise noted, the same applies below), and the ratio to total assets was 30.9%. Although the Group is striving to improve its financial position by reducing inventories, selling assets, etc., there is a possibility that the Group's business performance and financial position will be adversely affected if the cost of raising funds rises due to future changes in financial market condition.
Thus, the Group strives to maintain the outstanding balance of interest-bearing debt and the net debt-to-equity ratio at appropriate levels, secure a variety of funding methods, implement timely and appropriate funding, and reduce funding costs. The Group is also working to improve its capital efficiency mainly by introducing a cash management system to centrally manage surplus funds in each Group company.

2) Changes in the Market Value of Assets Held

Fluctuations in the market value of securities, land, and other assets held by the Group may affect its business performance and financial position.
Therefore, with regard to securities, the Group periodically monitors the market value and the financial position of the issuers, and continuously reviews the status of its holdings in consideration with the relationship with the issuers. With regard to the impairment of fixed assets, the Group is pursuing the sale of idle land and checking for signs of impairment of business assets by obtaining real estate appraisals as deemed appropriate.

3) Guarantee of Debts

In the fiscal year ending March 31, 2021, the Group assumed a guarantee of ¥13.3 billion for monetary obligations of non-consolidated affiliates and other companies.
In the event that the Group is required to fulfill these guarantees in the future, it may have an impact on the Group's business performance and financial position.
In order to avoid this, the Group monitors the business and financial conditions of its affiliates, etc., as deemed appropriate, and takes steps to reduce the impact

4) Retirement Benefit Expenses and Obligations

Employees' retirement benefit expenses and obligations are calculated primarily based on assumptions established in actuarial calculations. These assumptions take into account the average remaining service period of employees, the long-term yield of Japanese government bonds, and the investment status of pension assets, including shares contributed to trusts. However, a decline in the discount rate or losses incurred through the investment of pension assets could affect the Group's future expenses and recorded obligations.
To address this, the Group has introduced a retirement benefit system that combines a defined benefit plan and a defined contribution plan, as well as an appropriate investment allocation that takes into account safety and profitability in the management of pension assets.