Business and Other Risks

1. Procedure for identifying critical risks

The Group comprehensively identifies and evaluates significant management and operational risks each fiscal year at the head office management division, and finally prioritizes the risks to be addressed by the Strategic Management Committee based on social conditions, the business environment, and the Group's management issues. In addition, each fiscal year, the head office business divisions identify and evaluate the material risks inherent in the business and make decisions after the Business Review Meeting in which the business divisions explain to the head office management division, and then confirm the progress.

2. Risk Management system and operation status of the Group

In addition to the above critical risks, the Group identifies and evaluates the risks specific to each business location, and formulate implementation plans for each location and carry out risk management activities. The status of activities is monitored and reviewed on a semi-annual basis, and the results are reported to the Sustainable Management Office, the Strategic Management Committee, and the Board of Directors, etc., and the status of risks is monitored and reviewed by the upper management level (see Figure 1).

Major risks are defined as those for the entire Group, those inherent to business operations(the risk of having a material impact on the operation of the entire business), and those inherent to business locations(the risk of having a material impact on the operation of each business location), and the roles that each level(plan development, implementation, support, monitoring/review) should play are clearly defined(see Figure 2). In particular, management and business divisions at the head office communicate risk with each business location on a semi-annual basis, share implementation status and issues, and provide necessary support through consultation (see Figure 3).

In addition, each serious risk scenario is developed, and quantitative and qualitative assessments of impact and probability are conducted based on standardized assessment criteria, and images of risk occurrence are concretized and shared (see Figure 4).

With regard to the response to COVID-19, a task force headed by the director in charge of crisis management was established at the head office in January 2020. The task force has formulated, disseminated and implemented group-wide response guidelines according to the infection situation in Japan and overseas, and has reviewed the business continuity plan.

Figure 1: Risk Management System

Figure 2: Critical Risk Positioning

Figure 3: Risk management cycle

Figure 4: Risk assessment criteria

3. Business and other risks

The following are the principal risks that management believes may have a material effect on the Group's results of operations and financial condition.

The following does not cover all risks of the Group. Forward-looking statements are based on judgments made as of May 12, 2023.

1. (1) International situation, overseas economic situationProbability of occurrence: High, Impact: Large

   The Group has production and sales bases in 31 countries and regions overseas, and considers the overseas business to be an important basis for the Group's business growth.

   Due to the situation in Ukraine and accompanying economic sanctions imposed on Russia by other countries, military assistance to Ukraine, and bilateral relations between the United States, China, and other countries, the outlook for international relations remains uncertain. If geopolitical risks such as political instability, conflict between countries, unilateral invasion or political upheaval become apparent in the countries or regions in which the Group operates, the Group's business activities may be disrupted and its performance and financial position may be affected.

   In addition to the above risks, risks associated with global business development such as economic conditions in each country or region, unexpected policies or regulations, or changes in business strategies or product development of business partners may be assumed, which may hinder the Group's business activities and affect its business results and financial position.

   With regard to these risks, the Group will further thoroughly implement existing risk reduction workarounds, BCPs and other measures. The Group will also constantly monitor the situation and review our business strategies and overseas investments. The Group also responds appropriately to these changes by sharing information from our local offices and cooperating with each business. The Group collects information on individual country risks, such as legal regulations outside Japan, and share and disseminate information within the Group.

   In particular, the metals business is at risk of being affected by events beyond the control of the Group, such as intervention in resource businesses by national and local governments in copper producing countries, fluctuations in the global supply and demand balance of copper concentrate, and deterioration in the quality of copper concentrate. As part of our efforts to create a sustainable raw materials portfolio, the Group will promote the diversification of countries and regions where the Group purchases copper concentrate and invest in superior mine projects. At the same time, the Group will stably secure raw materials by actively using recycled raw materials such as E-Scrap (waste substrates for various electronic equipment).

2. (2) Market TrendsProbability of occurrence: Medium, Impact: Large

   The Group provides products and services to various industries. However, the market and customer trends may fluctuate constantly due to changes in the global economic situation, rapid changes in customers' markets and changes in customers' market share, and changes in customers' business strategies or product development. The Group assumes the risks mentioned below may occur at various times; however, the Group has determined that the risks potentially exist at any time.

   The automotive 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). Demand for cutting tools and other products is expected to decrease due to changing needs for mobility due to changes in lifestyles and society. Failure to respond accurately to these changes in industry and customer markets may affect the Group's results of operations and financial condition.

   For this reason, the Group aims to capture new demand through changes in automotive components, as well as market development in new industries such as healthcare, and to maintain and expand our share by providing new value such as solutions. The Group is also working to expand sales to demand for cutting tools used in the manufacture of undercarriage parts, which continue to be in demand even with the advance of electrification, by developing new machining methods and cutting technologies for new materials.

   The Group also supplies electronic materials & components and other materials to the semiconductor industry, and any changes in the semiconductor market may affect the Group's business results and financial position. For this reason, the Group is considering strengthening relationships of trust with important customers by providing distinctive high-quality products, and expanding market share by developing high-value-added products.

   Domestic demand for cement has been decreasing for a long time, and domestic demand is now less than half of its peak. As a material essential to society, demand is expected to rise above a certain level in the medium to long term. However, if demand decreases rapidly, it may become difficult to continue the cement business. For this reason, the Group aims to create the effects of streamlining the production, distribution and sales functions by transferring the business to Mitsubishi UBE Cement Corporation on April 1, 2022, and to expand our business overseas and develop new businesses in regions where future growth is expected.

3. (3) Fluctuations in raw material and utility pricesProbability of occurrence: High, Impact: Large

   1. Raw materials prices

      Procurement prices of non-ferrous metal raw materials, coal, etc. are affected by fluctuations in international commodity prices, exchange rates, ocean freight rates, etc. A rise in procurement prices due to a rise in raw material prices or other factors could affect the Group's business results and financial position. Large fluctuations in international commodity and exchange rates have occurred in the past, and it is assumed that they may occur once every few years.

      For copper concentrate in the metals business, the Group will work to minimize the impact on raw material prices by double-tracking the raw material procurement route, securing stable suppliers, and investing in overseas mines. For non-ferrous metal raw materials such as tungsten raw materials in the Metalworking Solutions Business, the Group will expand the number of suppliers, and increase the ratio of recycled raw materials used.

   2. Utility prices

      The significant increase in the procurement costs of crude oil, coal and natural gas has also caused energy prices to soar, affecting the Group's business performance and financial position. Any further increase or increase in these prices may affect the Group's financial performance and condition. In light of the risk of rising energy prices, the Group will continue to reduce the amount of electricity the Group purchases by promoting the installation of energy-saving equipment and the installation of self-consumption solar power generation systems.

4. (4) Procured GoodsProbability of occurrence: Medium, Impact: Large

   With respect to the procurement of materials, parts and other components for the Group's production activities, if a shortage of procurement quantity due to a rapidly expanding demand, a shortage of procurement quantity due to poor quality, depletion of resources that are sources of raw materials and thermal energy, a facility failure of a utility company, or the disaster or bankruptcy of an important supplier results in production reduction, it is possible that an impediment may be caused to the Group's production activities, which may affect its business performance and financial condition. Due to the risk arising from various factors, the timing of occurrence is not clear, but it is always considered to be a potential risk that should be prepared.

   In the cement business, the Group is also working to conserve energy in the manufacturing process and to prevent the depletion of raw materials and resources by expanding the acceptance of waste and by-products that are currently accepted as alternatives to natural resources.

5. (5) Climate changeProbability of occurrence: High, Impact: Large

   If policies and laws against climate change are strengthened, and carbon pricing systems (such as emission trading systems and carbon taxes) are introduced or strengthened, the incurrence of costs based on greenhouse gas (GHG) emissions may have an impact on the Group's business results and financial condition. In addition, with the transition to a decarbonized society, there are some areas in which the Company's conventional product market is expected to shrink. If the Company fails to respond to new areas of market expansion, the Group's business performance and financial position may be affected. With regard to climate change, there is a growing movement to become carbon neutral around the world, and with Japan declaring its commitment to carbon neutrality in 2050, the Group believes it is necessary to take prompt action to respond to the tightening of regulations that are expected in the near future.

   For this reason, the Group is working to reduce GHG emissions from its business activities by reviewing its GHG reduction targets for fiscal 2030 and increasing the use of energy-saving equipment and renewable energy. In addition, to improve the market competitiveness of the Group products, the Group is promoting the development of technologies that reduce the environmental impact, such as improvement of manufacturing processes, development of environmentally friendly products, and CO₂ capture, effective use, and storage (CCUS: Carbon Dioxide Capture, Utilization and Storage).

   On the one hand, the Group expects that the demand for technologies, products, and services that contribute to energy saving and GHG emission reduction will expand due to the strengthening of climate change policies, and business opportunities will increase. The Group is developing materials, products and technologies that contribute to decarbonization, promoting the development and use of renewable energy such as geothermal power generation, promoting demonstration tests and technological development related to CO₂ capture and use, and preserving the forests owned by the Group.

6. (6) Natural disasters and abnormal weatherProbability of occurrence: Medium, Impact: Large

   The risk of extreme weather and natural disasters is increasing year by year, and the Group, which has many business bases both in Japan and overseas, is taking various disaster prevention measures based on the latest hazard information. However, large-scale natural disasters far exceeding the assumed level, such as earthquakes, typhoons, floods, and torrential rains, may cause significant damage to production facilities. Damage to production facilities and the impact on plant operations and product shipments may affect the Group's business performance and financial position.

   In order to cope with the frequent natural disasters and extreme weather conditions that have occurred in recent years, the Group is systematically implementing various measures, including strengthening our internal management systems, developing and reviewing our business continuity plans (BCPs), increasing the number of products that can be manufactured at multiple locations, and constructing facilities to prepare for floods, storm surges, and high waves.

   In January 2019, the Group introduced a crisis management system at all of our domestic and overseas bases in order to promptly assess the safety of employees and the extent of damage to our business locations in the event of a natural disaster, including an earthquake directly under the Tokyo metropolitan area, which is expected to occur in the future. By sharing damage information within the Group in real time, each business site and head office division can respond appropriately and promptly from their respective positions, and the Group has also established a system that facilitates prompt rescue from head office divisions and neighboring sites.

7. (7) Occurrence of pollution and environmental laws violationsProbability: Medium, Impact: Medium

   With the background of the global movement to achieve sustainable development, legal and social sanctions against companies in the event of a violation of environmental laws in business activities have become more severe than ever.

   In accordance with environmental laws and regulations, the Group's business operations in Japan and overseas are working to prevent air, water, and soil pollution, and comply with various environmental laws and regulations concerning climate change, air pollution, water pollution, hazardous substances, waste recycling, and soil and groundwater pollution. However, as environmental laws are becoming stricter both in Japan and abroad, delays in responding to amendments of laws and regulations and changes in environmental standards, a tightening of standards on the content of hazardous substances, changes in administrative guidance, and a delay in responding to the appointment, notification, and report, etc., could hinder the Group's business activities and affect its business results and financial position. The timing of occurrence is not clear, but it is always considered as a potential risk.

   For this reason, the Group is promoting measures such as sharing information on amendments of laws and regulations, thorough training and education, as well as reinforcement of facilities for avoiding, reducing, and relocating risks.

8. (8) Infection (COVID-19)Probability: Medium, Impact: Medium

   The Group established a task force at its head office in late January 2020, when the spread of COVID-19 was recognized, and has implemented a unified response. Specifically, the Group has established policies for dealing with infectious diseases and guidelines for preventive measures, collected information on the health of employees, national and regional policies, and the impact on business bases and supply chains, shared such information with management, and conducted monitoring.

   In Japan, the treatment under the Infectious Disease Law has shifted to Category 5, but if the spread of infection due to the emergence of new variants or viruses causes delay in the recovery of market conditions or hindrance to the Group's production, logistics, or sales activities, there is a possibility that the Group's business results and financial condition may be affected in the future. The Group will continue to thoroughly implement measures to prevent infection and its spread of infectious diseases in the workplace and operate its business so as not to interrupt the provision of the Group products and services, etc., and monitor changes in the business environment caused by infectious diseases and continuously implement appropriate measures.

9. (9) Information SecurityProbability: High, Impact: Medium

   The Group considers information security as one of the most critical issues in terms of risk management. In particular, the Group recognizes the personal information of customers and business partners as one of the most important information assets, and the Group is working to reduce the risk of leakage, loss or damage. Unforeseen events such as breakdowns of important information infrastructures and networks, cyber-attacks (cyber-terrorism), as well as leakage of personal information due to unauthorized taking of personal information, failure of computer systems or inadequate management, or involvement of computer viruses or unauthorized software, may affect the business results and financial condition of the Group due to loss of social credibility, and the Group regards these risks exist at all times.

   For this reason, the Group makes appropriate capital investments in important information infrastructures and networks, and update equipment and install redundant equipment as needed. Furthermore, in order to effectively implement security measures, the Group is working on risk reduction by promoting measures and enhancements in each of the four areas of governance, security improvement, predictive and early detection, and prompt action.

10. (10) Human rightsProbability: Medium, Impact: Medium

    The Group has business bases both in Japan and overseas, and its suppliers of raw materials and supplies are located in many countries and regions. Any human rights violation (forced labor, child labor, harassment, discriminatory acts, etc.) occurring in our business or supply chain could lead to damage to the Group's social credibility and reputation and affect the Group's business results and financial condition, in addition to the impact on production and procurement. The timing of occurrence is not clear, but it is always considered as a potential risk to be prepared.

    With this background, on December 1, 2021, the Group established the Basic Sustainability Policy, which clearly states that respect for human rights is the foundation of our business activities and that the Group respects internationally proclaimed human rights principles. At the same time, the Group has established a Human Rights Policy to promote risk reduction. The Group is also working to ensure human rights-friendly procurement in accordance with the Mitsubishi Materials Group Procurement Policy and the Mitsubishi Materials CSR Procurement Guidelines.

11. (11) FinanceProbability of occurrence: Medium, Impact: Large

    1. Interest-bearing debt

       The Group's interest-bearing debt was \533.5 billion (total of short-term borrowings, commercial papers, corporate bonds and long-term borrowings. Unless otherwise noted, the same is applied below.), or 28.2% of total assets for the year ended March 2023. The Group strives to improve its financial position by reducing inventories and selling assets. If financing costs increase due to future changes in financial conditions, the business results and financial position of the Group may be affected.

       Therefore, the Group maintains the balance of interest-bearing debt and the net D/E ratio at appropriate levels, secure various funding methods, and implement timely and appropriate funding to reduce funding costs. The Group is also striving to improve cash efficiency by introducing a cash management system to centrally manage excess funds at the Group companies.

    2. Changes in the market value of assets held

       Changes in the market values of the Group's securities, land and other assets may affect its business results and financial position.

       Thus, we periodically monitor the market value of securities and the financial status of issuers, and review the holding status of securities on an ongoing basis in consideration of the relationship with the issuers. Regarding impairment of fixed assets, the Group proceeds with the sale of idle land and obtains appropriate real estate appraisals for business assets to check for signs of impairment.

    3. Guarantee of debt

       For the fiscal year ended March 2023, the Group has assumed ¥3.8 billion in guarantees with respect to affiliates and other entities that are not consolidated companies. If any circumstances arise in the future that require these guarantees to be performed, the Group's business results and financial condition may be affected.

       For this reason, the Group monitors the business and financial conditions of our affiliates as appropriate to reduce their impact.

    4. Retirement benefit expenses and obligations

       Retirement benefit expenses and obligations for employees are mainly calculated based on actuarial precondition. These precondition takes into account the average remaining service periods of employees, the long-term yields of Japanese government bonds and the management of plan assets, including shares contributed to in trust. However, a decrease in discount rates and the loss incurred as a result of the management of plan assets could affect the Group's future expenses and recognized obligations.

       To address this, the Group has introduced a retirement benefit plan combining a defined benefit plan and a defined contribution plan, and have made appropriate investment allocations in consideration of safety and profitability in the management of pension assets.