20-F 1 d20f.htm ANNUAL REPORT Annual Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 20-F

 


 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2006

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

Commission file number 0-9929

 


MITSUI BUSSAN KABUSHIKI KAISHA

(Exact name of Registrant as specified in its charter)

MITSUI & CO., LTD.

(Translation of Registrant’s name into English)

JAPAN

(Jurisdiction of incorporation or organization)

2-1, OHTEMACHI 1-CHOME, CHIYODA-KU, TOKYO 100-0004, JAPAN

(Address of principal executive offices)

 


Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of Each Class   Name of Each Exchange On Which Registered
Common Stock   Nasdaq Stock Market

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

 


Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

As of March 31, 2006, 1,722,954,068 shares of common stock were outstanding including

7,301,180 shares represented by an aggregate of 365,059 American Depositary Shares.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

    Yes  x    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x                         Accelerated filer  ¨                     Non-accelerated filer   ¨

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17  ¨    Item 18  x

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

    Yes  ¨    No  x

 



Certain References and Information

As used in this report, “Mitsui” is used to refer to Mitsui & Co., Ltd. (Mitsui Bussan Kabushiki Kaisha), “we”, “us”, and “our” are used to indicate Mitsui & Co., Ltd. and subsidiaries, unless otherwise indicated. “Share” means one share of Mitsui’s common stock, “ADS” means an American Depositary Share representing 20 shares, and “ADR” means an American Depositary Receipt evidencing one or more ADSs. Also, “dollar” or “$” means the lawful currency of the United States of America, and “yen” or “¥” means the lawful currency of Japan.

All financial statements and information contained in this annual report have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, except where otherwise noted.

A Cautionary Note on Forward-Looking Statements

This annual report includes forward-looking statements based on our current expectations, assumptions, estimates and projections about our business, our industry and capital markets around the world. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “may”, “expect”, “anticipate”, “estimate”, “plan” or similar words. The forward-looking statements in this annual report are subject to various risks, uncertainties and assumptions. These statements discuss future expectations, identify strategies, contain projections of results of operations or of our financial position, or state other forward-looking information. Known and unknown risks, uncertainties and other factors could cause our actual operating results to differ materially from those contained or implied in any forward-looking statement. Our expectations expressed in these forward-looking statements may not turn out to be correct, and our actual results could materially differ from and be worse than our expectations.

Important risks and factors that could cause our actual results to differ materially from our expectations are discussed in this “Item 3.D. Risk Factors” or elsewhere in this annual report and include, without limitation:

 

  Ÿ   changes in economic conditions that may lead to unforeseen developments in markets for products handled by us;

 

  Ÿ   fluctuations in currency exchange rates that may cause unexpected deterioration in the value of transactions;

 

  Ÿ   adverse political developments in the various jurisdictions where we operate, which among things, may create delays or postponements of transactions and projects;

 

  Ÿ   changes in laws, regulations or policies in any of the countries where we conduct our operations; and

 

  Ÿ   significant changes in the competitive environment.

We do not assume, and specifically disclaim, any obligation to update any forward-looking statements which speak only as of the date made.

 

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PART I

Item 1.    Identity of Directors, Senior Management and Advisers.

Not applicable.

Item 2.    Offer Statistics and Expected Timetable.

Not applicable.

Item 3.    Key Information.

 

A. Selected Financial Data.

The selected consolidated income statement data and the selected consolidated cash flow statement data for the years ended March 31, 2006, 2005 and 2004 and the selected consolidated balance sheet data as of March 31, 2006 and 2005 below are derived from our audited consolidated financial statements prepared in accordance with U.S. GAAP, which are included elsewhere in this annual report. The selected consolidated income statement data and the selected consolidated cash flow statement data for the years ended March 31, 2003 and 2002 and the selected consolidated balance sheet data as of March 31, 2004, 2003 and 2002 are derived from our previously published audited consolidated financial statements prepared in accordance with U.S. GAAP, which are not included in this annual report. The consolidated financial statements as of March 31, 2006 and 2005 and for the years ended March 31, 2006, 2005 and 2004 have been audited by Deloitte Touche Tohmatsu, independent auditors, whose report is filed as part of this annual report.

The selected consolidated financial statements have been prepared in accordance with U.S. GAAP and should be read in conjunction with, and are qualified in their entirety by reference to “Item 5. Operating and Financial Review and Prospects,” and our consolidated financial statements and notes thereto included elsewhere in this annual report.

 

     In Billions of Yen, Except Amounts per Share and Common Stock Data
     As of or for the Years Ended March 31,
             2006                  2005                2004                2003                2002      

Consolidated Income Statement Data:

              

Results of Operations:

              

Revenues(1)

   ¥ 4,115    ¥ 3,495    ¥ 2,970    ¥ 2,778    ¥ 2,475

Gross Profit(1)

     817      709      611      566      537

Equity in Earnings of Associated Companies(1)

     94      64      40      15      24

Income from Continuing Operations(1)

     201      114      79      39      61

Net Income

     202      121      68      31      55

Income from Continuing Operations per Share(1):

              

Basic

     125.49      72.00      50.21      24.42      38.25

Diluted

     118.13      67.86      47.42      23.09      35.89

Net Income per Share:

              

Basic

     126.26      76.55      43.25      19.68      34.97

Diluted

     118.85      72.12      40.89      18.69      32.85

Cash Dividends Declared per Share

     20      9      8      8      8

Cash Dividends Declared per Share in U.S. Dollars(2)

   $ 0.17    $ 0.09    $ 0.07    $ 0.07    $ 0.06

 

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     In Billions of Yen, Except Amounts per Share and Common Stock Data  
     As of or for the Years Ended March 31,  
             2006                   2005                 2004                 2003                 2002        

Consolidated Balance Sheet Data:

          

Financial Position at Year-End:

          

Total Assets

   ¥ 8,574     ¥ 7,593     ¥ 6,716     ¥ 6,541     ¥ 6,668  

Total Shareholders’ Equity

     1,678       1,123       963       862       915  

Long-term Debt, less Current Maturities

     2,911       2,905       2,541       2,500       2,619  

Return on Equity

     14.5 %     11.6 %     7.5 %     3.5 %     6.3 %

Common Stock

     296       192       192       192       192  

Other Information at Year-End:

          

Common Stock:

          

Number of Shares Outstanding
(in Thousands)

     1,722,954       1,582,211       1,581,013       1,581,377       1,583,180  

Number of Shareholders

     121,503       107,034       109,722       115,267       118,700  
     In Billions of Yen  
     For the Years Ended March 31,  
     2006     2005     2004     2003     2002  

Consolidated Cash Flow Statement Data:

          

Cash Flows:

          

Net Cash Provided by Operating Activities

   ¥ 146     ¥ 200     ¥ 100     ¥ 52     ¥ 134  

Net Cash Used in Investing Activities

     (347 )     (224 )     (134 )     (4 )     (83 )

(1) In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the prior year figures relating to discontinued operations have been reclassified.
(2) The U.S. dollar amounts represent translations of the Japanese yen amounts at the rates in effect on the respective dividend payment dates.

Exchange Rate Information

The information set forth below with respect to exchange rates is based on the official noon buying rates for Japanese yen of the Federal Reserve Bank of New York. These rates are provided solely for the convenience of the reader and are not the exchange rates used by us in the preparation of our consolidated financial statements included in this annual report.

The official exchange rate on September 20, 2006 was ¥117.29 = U.S.$1.00. The following table sets forth the high and low official noon buying rates for Japanese yen of the Federal Reserve Bank of New York in each month of the previous six months.

 

     Yen per U.S. Dollar  
     High      Low  

August 2006

   ¥ 117.35      ¥ 114.21  

July 2006

     117.44        113.97  

June 2006

     116.42        111.66  

May 2006

     113.46        110.07  

April 2006

     118.66        113.79  

March 2006

     119.07        115.89  

 

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The following table sets forth the average exchange rate for each of the last five fiscal years. We have calculated these average rates by using the rate on the official noon buying rates for Japanese yen of the Federal Reserve Bank of New York on the last business day of each month during the relevant fiscal year.

 

Year Ended March 31,

   Yen per U.S. Dollar
     Average Rate

2006

   ¥ 113.67

2005

     107.28

2004

     112.75

2003

     121.10

2002

     125.64

Fluctuations in the exchange rate between the yen and the U.S. dollar will affect the U.S. dollar equivalent of the yen-denominated prices of Mitsui’s shares and, as a result, will affect the market prices of Mitsui’s ADSs in the United States.

 

B. Capitalization and Indebtedness.

Not required.

 

C. Reasons for the Offer and Use of Proceeds.

Not applicable.

 

D. Risk Factors.

You should carefully consider the risks and uncertainties described below and the other information in this annual report, including the discussion in “Item 5. Operating and Financial Review and Prospects,” as well as our consolidated financial statements and related notes included elsewhere in this annual report.

The decrease in the volume of trade and the flow of goods and materials resulting from the worldwide economic downturn may adversely impact our business, results of operations and financial condition.

We provide global import and export services for our customers in various countries in a wide range of business transactions. We are also involved in financing of and investment in various business activities worldwide including, but not limited to, procuring raw materials and industrial equipment, manufacturing a wide range of commodities and providing logistics services.

Our global business activities, including our trading activities, are affected by economic conditions both globally and regionally. Among other locations, we are particularly vulnerable to downward economic trends in Japan and China. An economic downturn may cause a reduction in the flow of goods and materials, a decline in private consumption and fixed investment, and subsequently a decrease in demand from our customers for our products and services, which may have an adverse impact on our business, results of operations and financial condition.

Fluctuations in commodity prices can adversely affect our results of operations and financial condition.

We are engaged in trade and, as the case may be, production of a variety of commodities in the global commodities market including metal, energy, chemical and agricultural products. Our activities in these commodities in particular, have a significant impact on our business operations. Commodity prices are highly volatile and subject to cyclical fluctuations due to factors beyond our control, including periods of excess supply due to increased industrial production, decreased demand due to weakening economic conditions, inventory cutbacks by customers, and exchange rate movements. As a result, unexpected movements in commodity prices may adversely affect our business, operating results and financial condition. For example:

 

  Ÿ  

declines in commodity prices may result in a decrease in sales of those commodities in which we act as a principal or a decrease in sales of services in which we act as an agent. For instance, the operating results of the Energy Segment, which reflect annual production from our oil and gas activities, are sensitive to the price

 

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of crude oil. A decline of U.S.$1 per barrel in the price of crude oil will adversely affect the revenues and equity in earnings of associated companies of this segment and result in a decrease in the segment’s annual net income of approximately ¥1.6 billion for the year ending March 31, 2007;

 

  Ÿ   because we are engaged in spot and derivative trading of commodities, unexpected changes in price may result in trading losses; and

 

  Ÿ   as we invest a substantial amount of money in the production of commodities, a prolonged or cyclical decline in the price of commodities can have a long term adverse effect on our results of operations and financial condition and make it increasingly difficult for us to recover our capital investments or to divest our interests at prices acceptable to us, if at all.

For further information about the impact by commodity price fluctuations on our business and results of operations for the year ended March 31, 2006 and in the future, see “Item 5.A. Operating Results.”

Exchange rate fluctuations may adversely affect our operating results.

We are exposed to risks associated with foreign currency exchange rate fluctuations. Although our reporting currency is the Japanese yen, a significant portion of our business operations, consolidated revenues and operating expenses is denominated in currencies other than the Japanese yen. As a result, appreciation or depreciation in the value of other currencies as compared to the Japanese yen could result in material transactional gains or losses. As most of revenues, costs of revenues, and selling, general and administrative expenses incurred from regular business activities at overseas subsidiaries and associated companies are quoted in the U.S. dollar, the Australian dollar, the Euro, or other currencies, our net income may be affected by the fluctuations of these currencies and we are exposed to translation risk in our assets and liabilities denominated in foreign currencies. In addition, exchange rate fluctuations may reduce the value of investment in overseas subsidiaries and associated companies and adversely affect our accumulated other comprehensive income. As a result, exchange rate fluctuations may negatively affect our operating results.

See “Item 3.A. Selected Financial Data—Exchange Rate Information”, “Item 5.A. Operating Results” and “Item 5. B. Liquidity and Capital Resources.”

We are subject to significant counterparty credit risk from various companies or projects with which we do business or to which we lend.

We are exposed to significant counterparty credit risks. For example:

 

  Ÿ   We provide vendor financing services and also act as guarantors to banks that provide financing to our customers. In addition, many of our customers purchase products and services from us on credit. At March 31, 2006, current trade receivable (less unearned interest and allowance for doubtful receivables—current) was ¥2,579.3 billion, representing 30.1% of our total assets and recognized losses for doubtful receivables—current for the year ended March 31, 2006 and balance of the allowance for doubtful receivables—current were ¥2.0 billion and ¥26.7 billion, respectively;

 

  Ÿ   We engage in significant project financing activities as a lender or guarantor whereby we assume repayment risk; and

 

  Ÿ   We have counterparty payment risk from various derivative transactions we enter into as part of our hedging activities.

Our management policy for credit exposure cannot eliminate entirely risks relating to the possibility of our customers experiencing financial difficulties. Moreover, we may experience difficulty in collecting payment from our counterparties if:

 

  Ÿ   liquidity crises arise in Japan or elsewhere in the world;

 

  Ÿ   real estate prices or stock prices in Japan or other markets decline sharply, thereby adversely affecting the liquidity of our counterparties; or

 

  Ÿ   the number of corporate bankruptcies in Japan increases.

 

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Changes in interest rates could have an adverse effect on our operating results.

We are exposed to risks associated with interest rate fluctuations, which may affect our overall operational costs and the value of our financial assets and liabilities, particularly, our debt obligations, which primarily consist of debt raised in the capital markets and bank loans. We utilize various financial and derivative instruments which are sensitive to interest rate changes. An increase in interest rates, especially in Japan and the United States, may adversely affect our results of operations.

See “Item 5.B. Liquidity and Capital Resources—Funding Sources.”

If the value of assets for which we act as lessor, such as real property and equipment, aircraft, ocean transport vessels and rolling stock decline, we may record a significant impairment loss.

Assets for which we act as lessor, such as real property, aircraft, ocean transport vessels, rolling stock and equipment, are exposed to potential significant impairment losses due to the decline in the value of these assets. As of March 31, 2006, the value of these assets in which we act as lessor, presented on our Consolidated Balance Sheets as “Property leased to others—at cost, less accumulated depreciation,” was ¥218.6 billion. The carrying amounts of these assets in which we act as lessor are affected by certain factors which are beyond our control such as their global supply and demand, prevailing interest rates, prices of relevant products and services and regional and/or global cyclical trends. There can be no assurance that adjustments for impairment losses with respect to such assets will not be made. Any adjustments may have an adverse effect on our financial condition and results of operations.

For information on our accounting policies and estimates with respect to impairment on long-lived assets, see “Critical Accounting Policies and Estimates” of “Item 5.A. Operating Results.”

Declines in the market value of equity and/or debt securities in Japan may decrease the value of our pension assets which in turn may increase the cost of satisfying our unfunded pension obligations.

Declines in the market value of Japanese government bonds, other debt securities and marketable equity securities in Japan would reduce the value of our pension plan assets. Decline in the value of our pension plan assets or increase in our unfunded pension obligations could adversely affect our results of operations and financial condition.

See “Item 5.A. Operating Results” and Note 14, “PENSION COSTS AND SEVERANCE INDEMNITIES,” to our consolidated financial statements.

Our liquidity could be adversely affected by a downgrade in our credit ratings, significant changes in the lending or investment policies of our creditors or investors.

A downgrade in our credit ratings or a significant change in the lending or investment policies of our creditors or investors could result in an increase in our interest expense and could adversely impact our ability to access the debt markets, and could have an adverse effect on our financial position and liquidity.

For information on our funding sources and credit ratings, see “Item 5.B. Liquidity and Capital Resources.”

Due to our significant investments in marketable equity securities of Japanese issuers, a substantial decline in the Japanese stock market, as experienced in the past, could negatively affect our investment portfolio.

A significant portion of our investment portfolio consists of marketable equity securities of Japanese issuers. At March 31, 2006, our marketable equity securities were carried at a fair value of ¥574.5 billion. Among others, Mitsui’s marketable equity securities of Japanese issuers amounted to ¥509.2 billion, representing 74.8% of the fair value of our total available-for-sale securities and 5.9% of our total assets. The Japanese equity securities

 

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market has experienced a decline in recent years. For the year ended March 31, 2006, 2005 and 2004, losses on available-for-sale securities were not significant, but for the year ended March 31, 2003 our Statements of Consolidated Income reflected valuation losses on available-for-sale securities of ¥15.6 billion, principally on the stocks of banking institutions reflecting the overall decline in stock prices in Japan. While we periodically review our equity portfolio, volatility and decline in the Japanese equity securities market could negatively impact the value of our investment portfolio and our results of operations and financial condition.

For information on our accounting policies and estimates with respect to impairment on marketable securities, see “Critical Accounting Policies and Estimates” of “Item 5.A. Operating Results.”

Some of our operations are concentrated in a limited number of regions or countries, which could harm our business and results of operations if activity levels in these regions or countries decline.

We are engaged in various types of businesses worldwide which expose us to risks associated with fluctuations in commodity prices, the supply and demand of commodities, foreign exchange rates and interest rates, in addition to risks associated with regional political and economic instabilities. Furthermore, some of our business activities may be exposed to concentration risk in particular industries located in specific regions or countries. For example:

 

  Ÿ   In Russia and Brazil, our interests in the exploration, development and production of mineral resources and energy are increasing.

 

  Ÿ   In Indonesia, we actively participate in infrastructure projects, including the operation of power plants, and maintain a nationwide motorcycle retail finance business.

As a result, declining levels of trading activities or asset volumes in specific sectors in certain regions or countries could have a disproportionately negative effect on our business, financial condition and results of operations.

For more information, see “Energy Segment”, “Iron & Steel Raw Materials and Non-Ferrous Metals Segment” and “Machinery & Infrastructure Projects Segment” of “Item 4.B. Business Overview.”

We may not be able to successfully restructure or eliminate unprofitable or underperforming subsidiaries or associated companies in a timely manner and any efforts to do so may not lead to improved results of operations.

We are continuously restructuring our underperforming businesses. To implement this procedure, we have introduced a quantitative monitoring system to assess the performance of our subsidiaries and associated companies. If we fail to successfully eliminate or restructure our underperforming subsidiaries and associated companies in a timely manner or if these efforts fail to improve our business operations as contemplated, we may become less efficient compared to our competitors who are mainly other major Japanese general trading companies, and our results of operations may be adversely affected.

Our alliances by forming joint ventures with, and strategic investments in, third parties may not result in successful operations.

We participate in various businesses directly or indirectly through joint ventures or by making strategic investments in other companies and business enterprises. The outcome of these joint ventures and strategic investments is unpredictable because:

 

  Ÿ   the operational success is critically dependent on factors that are beyond our control such as the financial condition and performance of the partner companies or the strategic investees; or

 

  Ÿ   with respect to certain associated companies, we may fail to exercise adequate control over the management, operations and assets of the companies in which we invested or may fail to make major decisions without the consent of other shareholders or participants due to lack of common business goals and strategic objectives with our alliance partners.

 

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Any occurrence of these events could have a material adverse effect on our business, results of operations or financial condition.

Our businesses in exploration, development and production of mineral resources and oil and gas may not develop in line with assumed costs and schedules, and are subject to the risks associated with estimating reserves and the operating performance of third party operators.

Reflecting rising prices of mineral resources and oil and gas in recent years, exploration, development and production of mineral resources and oil and gas are gaining in importance to our operating results. Mining and oil and gas projects involve risks, for example:

 

  Ÿ   development of projects may face schedule delays or cost overruns due to difficulties in technical conditions, procurement of materials, financial conditions and government regulations;

 

  Ÿ   reserves are estimated based on available geological, technical, contractual and economic information, therefore actual development and production may significantly differ from originally estimated reserves; and

 

  Ÿ   reserve replacement, on which future production will depend, may not be successfully implemented due to uncertainties such as failures in exploration or negotiations for acquisitions of known reserves with their owners.

We participate as a non-operator in many of these projects. Under these circumstances, we carefully consider the business potential and profitability of projects based on the information and data provided by third party operators, who substantially control operations of such projects, including decision-making in the course of development and production. In addition to the above-mentioned risks, third party operators’ failure in managing those projects may adversely affect our operating results and financial condition.

For more information, see “Iron & Steel Raw Materials and Non-Ferrous Metals Segment” and “Energy Segment” of “Item 4.B. Business Overview.”

Intense competition from other Japanese general trading companies could have an adverse effect on our results of operations.

The markets for many of the products and services we provide are highly competitive. Our primary competition is with other Japanese general trading companies which engage in similar business activities in various fields. Our competitors may have:

 

  Ÿ   stronger business associations and relationships with our customers, suppliers and business partners in both domestic and global markets; or

 

  Ÿ   stronger global network and regional expertise, diversified global customer bases, greater financial engineering skills and market insights.

Unless we can successfully continue to meet the changing needs of our customers by providing them with innovative and integrated services in a cost effective manner, we may lose our market share or relationships with our existing customers in certain of our operating segments. Failure to successfully compete with our competitors may have an adverse effect on our business, financial condition and results of operations.

We may lose the opportunities for entry into new business areas because of the limitation of required human resources.

In response to the maturation of consumption in Japan and other developed countries, we have been focusing on entering new consumer oriented businesses. Additionally, we are undertaking a reorganization of our traditional businesses in industrial products and raw materials to better reflect the globalization of the economy

 

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and the rapid progress of information technology. To meet these goals, we have been investing human resources in these new business areas, focusing on employees who are most capable of carrying out business plans and managing other personnel. However, in certain business areas, we may have a shortage of required human resources which can cause a loss of opportunities to start new businesses, which in turn may adversely affect our future business, operating results and financial condition.

Restrictions under environmental laws and regulations and any accidents relating to our use of hazardous materials could negatively affect our business, results of operations and financial condition.

We are involved in various projects and business transactions worldwide that are subject to extensive environmental laws and regulations. In particular, our Iron & Steel Raw Materials and Non-Ferrous Metals Segment and Energy Segment may be adversely affected by present or future environmental regulations or enforcement in connection with our exploration, development and production activities. For example, we are subject to complex sets of environmental regulations in Australia, Brazil, Russia, and the Middle East. These laws and regulations may:

 

  Ÿ   require us to perform site clean-ups;

 

  Ÿ   require us to curtail or cease certain operations;

 

  Ÿ   impose fines and payments for significant environmental damage;

 

  Ÿ   require us to install costly pollution control equipment; and

 

  Ÿ   require us to modify our operations.

Newly enacted environmental laws and regulations or changes therein and protests by environmental groups may materially impact the progress of these projects.

We are a shareholder of Coronet Industries Inc. (“Coronet”), a former manufacturer of animal feed supplements, with 30% share interest. Coronet has been working with the U.S. Environmental Protection Agency (“EPA”) and the State of Florida on an investigation of environmental conditions and prior operations at its facility in Florida. In addition, Coronet has been named as a defendant in two civil actions initiated by residents living near the plant. Mitsui, as well as its United States subsidiary, Mitsui & Co. (U.S.A.), Inc., have been named as defendants in one of these actions. These actions are both in their early stages.

We are subject to extensive laws and regulations in Japan and other countries throughout the world. Changes in these laws and regulations could adversely affect our results of operations.

Our business operations are subject to extensive laws and regulations in Japan and other countries throughout the world. Our operations are subject to laws and regulations governing, among other things, tariffs, business and investment approvals, import and export (including restrictions from the viewpoint of national and international-security), antitrust, consumer and commercial restrictions, currency exchange control, and environmental protection. Moreover, many of our infrastructure projects in developing countries are subject to less developed legal systems. As a result, our costs may increase due to factors such as the lack of a comprehensive set of laws and regulations, an unpredictable judicial system based on inconsistent application and interpretation of laws and regulations, and changing practices of regulatory and administrative bodies. For example, we are subject to sudden and unpredictable changes to:

 

  Ÿ   tariffs for products and services that we provide;

 

  Ÿ   technical specifications with respect to environmental regulations;

 

  Ÿ   income tax and duty rates; and

 

  Ÿ   foreign exchange controls with respect to repatriation of investments and dividends.

Furthermore, many of our oil and gas and mining operations are located in politically or economically unstable parts of the world, including Russia. Although we are involved in the exploration, development and

 

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production activities through various contractual arrangements in these regions, there is no assurance that the contracts will be upheld or extended when they expire. Moreover, there can be no assurance that the regulatory bodies of these areas will not unilaterally interfere and alter the contractual terms of our oil and gas operations involving production rates, pricing formulas, royalties, environmental protection cost, land tenure or otherwise. If these regulatory bodies unilaterally alter such contractual terms or if we are unable to comply with any new laws and regulations, our business, operating results and financial condition could be adversely affected. Furthermore, we could incur substantial additional costs to comply with any new laws and regulations.

See “Item 4.B. Business Overview—Government Regulations.”

Employee misconduct could adversely affect our results of operations and reputation.

Due to our size, as well as the operational and geographic breadth of our activities, our day-to-day operations are necessarily de-centralized. As a result, we cannot fully ensure that our employees comply with all applicable laws and regulations as well as our internal policies. For example, our employees may engage in unauthorized trading activities and exceed the allotted market risk exposure for various commodities or extend an unauthorized amount of credit to a client, which, in either case, may result in unknown losses or unmanageable risks. Moreover, our employees could engage in various unauthorized activities prohibited under the laws of Japan or other jurisdictions to which we are subject, including export regulations, anticorruption laws, antitrust laws and tax regulations. There can be no assurance that the efforts we undertake to ensure employees’ compliance with applicable laws and regulations as well as our internal policies will succeed in preventing misconduct by our employees. Depending on its nature, employees’ misconduct could have negative effects on our results of operations and reputation.

See “Compensation and Other Charges Related to DPF Incident” of “Item 5.A. Operating Results.”

Because of daily price range limitations under Japanese stock exchange rules, you may not be able to sell your shares of our common stock at a particular price on any particular trading day, or at all.

Stock prices on Japanese stock exchanges are determined on a real-time basis by the equilibrium between bids and offers. These exchanges are order-driven markets without specialists or market makers to guide price formation. To prevent excessive volatility, these exchanges set daily upward and downward price range limitations for each stock, based on the previous day’s closing price. Although transactions may continue at the upward or downward limit price if the limit price is reached on a particular trading day, no transactions may take place outside these limits on these exchanges. Consequently, an investor wishing to sell at a price above or below the relevant daily limit on these exchanges may not be able to effect a sale at such price on a particular trading day, or at all.

See “Item 10.B. Memorandum and Articles of Association—Daily Price Fluctuation Limits under Japanese Stock Exchange Rules.”

As holders of ADSs, you will have fewer rights than a direct shareholder and you will have to act through the depositary to exercise those rights.

The rights of shareholders under Japanese law to take actions, including exercising voting rights, receiving dividends and distributions, bringing derivative actions, examining our accounting books and records and exercising appraisal rights are available only to holders recorded on our register of shareholders. Because the depositary, through its custodian agents, is the recorded holder of the shares underlying the ADSs, only the depositary can exercise those rights in connection with the deposited shares. The depositary will make efforts to vote the shares underlying your ADSs as instructed by you and will pay to you the dividends and distributions collected from us. However, as ADS holders, you will not be able to bring a derivative action, examine our accounting books and records or exercise appraisal rights except through and with the consent of the depositary.

 

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Item 4.    Information on the Company.

 

A. History and Development of the Company.

History

Mitsui Bussan Kabushiki Kaisha (“Mitsui & Co., Ltd.” in English) was incorporated on July 25, 1947, as Daiichi Bussan Kabushiki Kaisha, a corporation (Kabushiki Kaisha) under the Commercial Code of Japan with common stock of ¥195,000. We were originally listed on the Tokyo Stock Exchange in May 1949.

Our registered office is located at 2-1, Ohtemachi 1-chome, Chiyoda-ku, Tokyo 100-0004, Japan. Mitsui’s telephone number is +81-3-3285-1111.

Since our establishment, our business lines have involved trading in a variety of commodities, including the import of raw materials and the export of industrial products. As we grew in tandem with the Japanese postwar economic recovery, we expanded into overseas activities, such as the establishment of Mitsui & Co. (Australia) Ltd. in 1956. During the 1950s, Daiichi Bussan Kabushiki Kaisha was formed through the merger of various trading companies. On February 16, 1959, that entity took our present name, after having attained the status of being one of the largest general trading companies, and a history closely connected to the development of foreign trade in postwar Japan. An example of a business activity which introduced innovative industrial systems to Japan in our early days was the establishment of Nippon Remington Univac Kaisha Ltd. (currently Nihon Unisys Ltd.), a domestic computer related joint venture with Sperry Rand Corporation of the United States, in 1958.

During the 1960s, the Japanese government promoted trade with foreign countries and deregulated Japanese capital markets, which led to high growth of the Japanese economy. We played a pivotal role in promoting the growth of certain basic industries by supplying foods, industrial raw material and energy such as oil and coal from abroad. This included the development of mineral resources overseas, nurturing markets for Japanese exports and introducing various new technologies. We established Mitsui & Co. (U.S.A.), Inc. in April 1966, and Mitsui Knowledge Industry Co., Ltd. in October 1967. In May 1963, we issued American Depositary Shares which were subsequently listed on The NASDAQ National Market in February 1971.

In the 1970s, as the world economy weathered two oil crises, we began to diversify the supply source of natural resources including development of liquefied natural gas (“LNG”) resources. During this time, the export of industrial plant from Japan, mainly to oil producing countries, drastically increased and we organized and supported projects by arranging finance and on occasion establishing markets for products.

During this period, we suffered losses with respect to a joint venture project we entered into in connection with Iranian petrochemicals. These losses were a result of the petrochemical manufacturing complex being damaged by military attacks, causing the project to finally be dissolved in 1991.

Also during the 1970s, we entered into new industries. For example, in 1971 we established Mitsui Leasing & Development, our associated company in the leasing industry, and in 1972 we purchased an equity interest in Mikuni Coca-Cola Bottling Co., Ltd. in the beverage industry.

In the 1980s, Japan’s industrial structure moved increasingly towards the production of high-value-added products such as products related to information technology (“IT”) and new materials used for high tech products. Consequently, we began extending our business field to target these new markets. Most notable were the semiconductor materials and carbon fiber fields promoted mainly by our chemical related divisions.

In the late 1990s, the Asian economies experienced a financial crisis. Although the appreciation in real estate and stocks prior to the crisis created a temporary economic boom in Japan, their eventual collapse resulted in a wide-ranging economic slowdown. These conditions necessitated the reorganization of our profit structures and the development of new businesses.

At the same time, however, there was also a rapid development of information infrastructure worldwide, reflecting the deregulation of the communication sector proceeding from the 1980s in Japan and other countries,

 

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and the spread of new technology, such as the Internet, accelerated communication among market participants in real time and at reduced costs. From the late 1980s, we made investments in IT and communication businesses, including in common carriers such as Tokyo Telecommunication Network Co., Inc (currently KDDI Corporation), JSAT Corporation, a communications satellites company, and broadcasting companies, such as SKY Perfect Communications Inc.

Medium-Term Strategic and Financial Plan to March 2006

In May 2004, Mitsui announced the Medium-Term Strategic and Financial Plan for the two years to March 31, 2006. The key elements of the plan which aimed at creating a solid foundation for sustainable longer-term growth were as follows:

Continuous Review of Business Portfolio and Investment Plan

The Medium-Term Strategic and Financial Plan called for investments in the amount of ¥500 billion (including ¥100 billion in fixed assets) over the two year period to March 2006, mainly in our core areas of strength, namely mineral resources, including expansion of iron ore and coal mines in Australia, and energy, including the Sakhalin II LNG and oil development project in Russia and the Enfield oil project in Western Australia, and infrastructure project businesses, including our power producing business.

The plan also called for developing or strengthening other key areas, such as consumer products and services businesses and automotive-related businesses. Consequently, the investing activities resulted in net cash outflows of ¥347.3 billion and ¥224.0 billion for the years ended March 31, 2006 and 2005, respectively. For more information, see the discussion of “Capital Expenditures” in this item; and “Cash Flows from Investing Activities” of “Item 5.B. Liquidity and Capital Resources—Cash Flows” for the years ended March 31, 2006 and 2005.

Evolution of Business Models Leveraging Business Engineering Capabilities

Anticipating structural changes in the diversified markets, we intended to take the lead in developing new business opportunities. For example, we increased our involvement in media-related businesses and the outsourcing business in diverse areas. See “Item 4.B. Business Overview—Lifestyle, Consumer Service and Information, Electronics & Telecommunication Segment.”

We also intended to generate growth by strengthening our existing core businesses. Development and improvement of supply chain management (“SCM”) system by making use of IT and logistics expertise to meet the customers’ requirement have been crucial. See “Iron & Steel Products Segment” and “Chemical Segment” of “Item 4.B. Business Overview.” Another example was in our automotive-related businesses, where we expanded operations into growth areas such as automotive related retail finance and logistics. See “Item 4.B. Business Overview—Machinery & Infrastructure Projects Segment—Machinery Business Unit.”

Implementation of Global Strategies Focusing on Emerging Markets

In response to the development of unified regional economies in Asia, Europe and the Americas, we have been strengthening operations in growing areas such as Greater China, Central and Eastern Europe, Russia and Brazil, forming strategic alliances with leading domestic and international companies, as appropriate. In parallel with increased involvement in these regions by business units in our headquarters, Mitsui reorganized the structure of operating segments abroad. See “Asia Segment” and “Europe Segment” of “Item 4.B. Business Overview.”

Medium-Term Management Outlook Announced in May 2006

Following the completion of the period covered by the Medium-Term Strategic and Financial Plan to March, 2006, Mitsui established and announced a new Medium-term Management Outlook in May 2006, based on a company-wide consideration of the business activities that we should develop over the next three-to-five years, along with the necessary initiatives as below:

 

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Development of Strategic Business Portfolio

We developed key policies based on dividing our business into the four areas outlined below. In working toward our vision for the next three to five years, we intend to make investments of approximately ¥800 billion over two years ending March 2008.

 

  Ÿ   In mineral resources and energy, we intend to complete the development of large-scale projects such as Sakhalin II, and to expand existing projects such as our LNG project in Western Australia and iron ore and coal production in Australia, while investing selectively in high-quality new projects.

 

  Ÿ   In the area of global marketing networks, particularly in steel products, chemical products and machinery, we provide and refine SCM and other sophisticated functions. We will focus on the automobile, IT and energy businesses, and focus on developing areas through collaboration among operating segments outside Japan, particularly Asia.

 

  Ÿ   In the consumer service area, we plan to create closer collaboration by bringing together the Lifestyle, Consumer Services and Information, Electronics & Telecommunication business units, and to focus on developing businesses that have the potential to become future earnings sources.

 

  Ÿ   In the infrastructure area, we plan to invest selectively in high-quality projects, mainly in power generation, water supply, energy and transportation.

For information, including funding and treasury policies, also see “Item 5.B. Liquidity and Capital Resources.”

Evolution of business models leveraging business engineering capabilities

We seek to leverage our strengths in marketing, finance and logistics, and actively promote joint operations between business units. Furthermore, we continue to make efforts to develop new business opportunities, for example:

 

  Ÿ   We plan to focus on consumer-oriented services in Japan that show great potential for growth, including: media and information, health, medical and senior care, retail support and outsourcing.

 

  Ÿ   We plan to pursue business development in environment-related businesses, such as emission rights trading and recycling, along with new energy businesses, such as biomass ethanol and solar power.

Implementation of global strategies

We will focus the allocation of human resources on growth sectors in Asia, and align our strategy with our customers. We will employ and foster the development of a diverse group of personnel at overseas trading and other subsidiaries and associated companies around the world.

Capital Expenditures

Our capital expenditures, including investments in debt securities, property and equipment and leased assets, amounted to ¥613 billion, ¥526 billion and ¥491 billion for the years ended March 31, 2006, 2005 and 2004, respectively. A breakdown of our capital expenditures is provided below.

 

     Billions of Yen  
     Years Ended March 31,  
         2006            2005            2004      

Investments in and advances to associated companies

   ¥ 176    ¥ 190    ¥ 203  

Acquisitions of available-for-sale securities

     121      91      131  

Acquisitions of held-to-maturity debt securities

     2      2      0  

Acquisitions of other investments

     67      68      47  

Additions to property leased to others and property and equipment

     247      170      113  

Acquisitions of subsidiaries, net of cash acquired

     —        5      (3 )
                      

Total

   ¥ 613    ¥ 526    ¥ 491  
                      

 

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See “Item 5.B. Liquidity and Capital Resources—Cash Flows” for further information.

Of additions to property leased to others and property and equipment, the following were our most significant expenditures with respect to property and equipment:

 

  Ÿ   development of the Enfield crude oil project in Western Australia in the Energy Segment for ¥22 billion and ¥64 billion for the years ended March 31, 2006 and 2005, respectively; and

 

  Ÿ   expansion of our iron ore and coal mines in Australia in the Iron & Steel Raw Materials and Non-Ferrous Metals Segment for ¥36 billion, ¥17 billion and ¥17 billion for the years ended March 31, 2006, 2005 and 2004, respectively.

See “Energy Segment” and “Iron & Steel Raw Materials and Non-Ferrous Metals Segment” of “Item 4.B. Business Overview.”

Additions to property leased to others included rolling stock leased to railway companies mainly in the United States and European countries, aircraft leased to global carriers and ocean vessels chartered to global shipping companies as follows:

 

  Ÿ   ¥54 billion of rolling stock and ¥8 billion of aircraft for the year ended March 31, 2006;

 

  Ÿ   ¥9 billion of rolling stock and ¥7 billion of ocean vessels for the year ended March 31, 2005; and

 

  Ÿ   ¥10 billion of aircraft and ¥7 billion of ocean vessels for the year ended March 31, 2004.

Investments in and advances to associated companies, and acquisitions of subsidiaries include the following capital expenditures:

 

Years

Ended
March 31,

 

Investee

 

Country

  Investment
Amount
(Billions of Yen)

2006

  Sakhalin Energy Investment Company Ltd.   Associated company   Bermuda (United Kingdom)   84
  IPM Eagle LLP   Associated company   United Kingdom   13
  Thai Tap Water Supply
Co. Ltd.
  Associated company   Thailand   11

2005

  Sakhalin Energy Investment Company Ltd.   Associated company   Bermuda (United Kingdom)   81
  IPM Eagle LLP   Associated company   United Kingdom   62
  Quintiles Transnational Japan K.K.   Associated company   Japan   9
  CornerStone Research & Development, Inc.   Subsidiary   United States   9

2004

  Valepar S.A.   Associated company   Brazil   97
  Sakhalin Energy Investment Company Ltd.   Associated company   Bermuda (United Kingdom)   57

For more information, see “Item 5.B. Liquidity and Capital Resources—Cash Flows.” Also see “Item 4.B. Business Overview” of “Energy Segment” for Sakhalin Energy Investment Company Ltd., “Machinery & Infrastructure Projects Segment” for IPM Eagle LLP and “Iron & Steel Raw Materials and Non-Ferrous Metals Segment” for Valepar S.A.

 

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Acquisitions of available-for-sale securities included the acquisition of shares in Seven & i Holdings Co., Ltd in the amount of ¥50 billion. See “Item 4.B. Business Overview—Foods & Retail Segment” and “Item 5.B. Liquidity and Capital Resources—Cash Flows” for further information.

Capital expenditures are usually financed by external sources, such as commercial banking institutions.

Divestitures including those of matured debt securities amounted to ¥251 billion, ¥287 billion and ¥333 billion for the years ended March 31, 2006, 2005 and 2004, respectively. A breakdown of our divestitures is provided below.

 

     Billions of Yen
     Years Ended March 31,
         2006            2005            2004    

Sales of investments in and collection of advances to associated companies

   ¥ 38    ¥ 53    ¥ 68

Proceeds from sales of available-for-sale securities

     37      22      51

Proceeds from maturities of available-for-sale securities

     52      57      110

Proceeds from maturities of held-to-maturity debt securities

     2      3      15

Proceeds from sales of other investments

     48      73      29

Proceeds from sales of property leased to others and property and equipment

     74      79      60
                    

Total

   ¥ 251    ¥ 287    ¥ 333
                    

With respect to the sales of available-for-sale securities for the years ended March 31, 2006, 2005 and 2004, the table below provides a list of some of our significant investees in which we sold our equity interests.

 

Years Ended March 31,

  

Investee

   Country   

Amount

(Billions of Yen)

2006

   KDDI CORPORATION    Japan    3

2005

   Vodafone K.K.    Japan    15

2004

   SKY Perfect Communications Inc.    Japan    12

For the year ended March 31, 2005, cash inflows of ¥15 billion was provided from the sale of shares in Vodafone K.K., a Japanese cell-phone carrier, in response to a tender offer. For the year ended March 31, 2004, we obtained U.S.$426 million from the sale of our investment in Caemi Mineração e Metalurgia S.A., an associated company.

Sales of property leased to others and property and equipment included the sales of rolling stock leased to railway companies mainly in the United States, aircraft leased to global airline carriers and ocean vessels chartered to worldwide shipping companies as follows:

 

  Ÿ   ¥26 billion of aircraft and ¥18 billion of rolling stock for the year ended March 31, 2006;

 

  Ÿ   aggregately ¥17 billion of aircraft, ocean vessels and rolling stock for the year ended March 31, 2005; and

 

  Ÿ   ¥21 billion of aircraft and ¥6 billion of ocean vessels for the year ended March 31, 2004.

Furthermore, for the year ended March 31, 2006, we sold property and equipment and obtained proceeds of ¥6 billion from the sale of Mitsui’s corporate welfare facilities. For the year ended March 31, 2005, we sold property and equipment and obtained proceeds of:

 

  Ÿ   ¥11 billion from the sale of our office building in the United Kingdom; and

 

  Ÿ   ¥13 billion from the sale of Mitsui’s corporate residences and dormitories in Japan.

Proceeds from maturities of available-for-sale securities and held-to-maturity debt securities were used for general corporate purposes. See “Item 5.B. Liquidity and Capital Resources—Finance and Liquidity Management.”

 

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B. Business Overview.

Throughout this section “B. Business Overview,” we describe the domicile of our subsidiaries and associated companies, in parentheses following names of those companies. For example, Mitsui Iron Ore Development, Pty. Ltd. (Australia) means that the company’s name is Mitsui Iron Ore Development, Pty. Ltd. and that it is domiciled in Australia.

Nature of Our Operations and Principal Activities

We are a general trading company engaged in a range of global business activities including general worldwide trading of various commodities, arranging financing for customers and suppliers in connection with our trading activities, organizing and coordinating industrial projects, participating in financing and investing arrangements, assisting in the procurement of raw materials and equipment, providing new technologies and processes for manufacturing, and coordinating transportation and marketing of finished goods. Our trading activities include the sale, distribution, purchase, marketing and supply of a wide variety of products including iron and steel, non-ferrous metals, machinery, electronics, chemicals, energy-related commodity and products, food products, textiles, general merchandise and real estate. We also participate in the development of natural resources such as oil, gas, iron and steel raw materials. In addition, we engage in strategic business investments whereby we invest our own capital and provide management expertise in the development of joint ventures and new enterprises in certain industries such as information technology (“IT”) and biotechnology. We also provide financial services whereby we assist our customers in minimizing the risk exposure associated with their businesses through the use of derivatives and other hedging instruments.

While we continue to diversify our activities, the provision of services remains one of our core activities. Specifically, we act as an intermediary between buyers and sellers engaged in import, export, and offshore and domestic trading activities. For example, we develop markets overseas for exporters and locate raw materials or product sources that meet the needs of importers. To facilitate smooth customer transactions, we draw upon our various capabilities such as market information analysis, credit supervision, financing and transportation logistics.

In addition to our Head Office, Mitsui had 18 branches and offices located in Japan and 153 branches, offices and trading subsidiaries located in other parts of the world as of July 1, 2006. They provide market information to each other and cooperate in developing various business opportunities. Each of our subsidiaries has its own marketing strategy based on its particular business activities and customer relationships.

Seasonality of Our Business Activities

The trading of individual products such as heating oil, foods and textiles is influenced by seasonal factors. For example, heating oil is traded more frequently in winter than in summer months. In addition, revenues of MITSUI FOODS CO, LTD., our food wholesale subsidiary, increases from October to December and decreases from January to March, reflecting seasonal demand in Japan. However, the seasonality of any product either individually or in the aggregate does not significantly affect our consolidated financial position and results of operations.

Dependence on Patents and Licenses and Industrial, Commercial or Financial Contracts

We have various patents and licenses as well as industrial, commercial and financial contracts (including contracts with customers or suppliers) to conduct our business. These patents, licenses or contracts either individually or in the aggregate are not material to our business operations or results of operations.

Marketing Channels

Marketing channels vary by commodity, customer and region. We have established subsidiaries and associated companies for promotion and distribution in response to specific business environments.

 

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See “Products and Services and Principal Activities by Reportable Operating Segments” below. Special sales methods, including financial arrangements, provided by our Machinery & Infrastructure Projects Segment and development of SCM systems conducted by various operating segments are also described therein.

Competitive Position

Our main competitors are other Japanese general trading companies. Moreover, all of our potential business partners could also be competitors. To ensure our competitiveness, we strive to continue to successfully meet the changing needs of our customers worldwide. Analysis of competitive position by operating segment is provided in “Products and Services and Principal Activities by Reportable Operating Segments” below and also see “Item 3.D. Risk Factors.”

Government Regulations

Our business activities are subject to various governmental regulations in the countries in which we operate. These regulations generally relate to obtaining business and investment approvals, and meeting the requirements of export regulations, including those related to national security considerations, tariffs, antitrust, consumer and business taxation, exchange controls and environmental laws and regulations. Certain of our business transactions such as our activities in the energy, mining, telecommunications, financing, food, consumer products, machinery, chemicals, etc. are regulated and subject to the relevant laws and regulations. See “Item 3.D. Risk Factors.”

Regulations with Respect to the Exploration and Production of Oil, Gas, and Mineral Resources

We are involved in various projects involving exploration for and production of crude oil, natural gas, iron raw material and non-ferrous metals in many different countries in which we participate as a minority stakeholder and non-operator. These exploration and production activities are subject to a broad range of local laws and regulations, which affect virtually all aspects of these activities. Contractual arrangements in connection with our oil, gas and mining activities, such as leases, licenses and production agreements are generally entered into with a government entity or a government owned company. See “Iron & Steel Raw Materials and Non-Ferrous Metals Segment” and “Energy Segment” of “Item 4.B. Business Overview.”

To date, changes in governmental laws and regulations have not had a material adverse effect on our oil, gas and mining projects. Some of our oil, gas and mineral projects are located in politically and economically stable regions, such as Australia, where the legal systems are relatively developed. However, we also hold interests in oil, gas and mineral resources in regions where legal systems are less developed. These investments may be adversely impacted by factors such as a lack of comprehensive sets of laws and regulations, an unpredictable judicial system based on inconsistent application and interpretation of laws and regulations, and constantly changing practices of regulatory and administrative bodies.

Governmental Regulations with Respect to Infrastructure Projects

We are engaged in various infrastructure projects worldwide. These include construction of power plants, oil and gas pipelines, telecommunications and broadcasting systems, cargo transportation systems, and public transit systems in developing countries. In these projects, we are subject to extensive laws and regulations with respect to technical specifications, environmental protection, pricing, labor, taxation, foreign exchange and other matters. We commonly enter into contractual arrangements with government owned companies that are subject to their own sets of laws and regulations. Changes in laws and regulations after the commencement of projects may result in lengthy delays which can negatively impact our cash flows and hinder the repatriation of capital from such projects.

Governmental Regulations with Respect to Human Health and Environment

We are subject to extensive laws and regulations worldwide with respect to human health and the environment. Regulations governing food products for human consumption are complex, detailed and stringent.

 

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For instance, in Japan, our food related operations are under the supervision of the Ministry of Agriculture, Forestry and Fisheries, and the Ministry of Health, Labor and Welfare. We are subject to the Food Safety Basic Law, which codifies the safety standard for food products. For example, it determines the threshold amount at which harmful substances such as pesticide residues are considered to be unacceptable. We must expend significant resources to comply with these regulations not only in Japan but in all jurisdictions where we engage in food-related operations.

We are also subject to complex environmental laws and regulations worldwide. For example, in Japan, when trading, storing or transporting chemical products or disposing of wastes and by-products from our industrial plants, we are required to notify the local regulators and/or obtain approvals or licenses. Any violation of laws and regulations may not only result in severe fines and penalties, but the regulators may require us to curtail or even cease operations, install expensive pollution control systems, and comply with enhanced notification obligations.

Products and Services and Principal Activities by Reportable Operating Segments

For the year ended March 31, 2006, we had twelve reportable operating segments which consisted of eight products and services focused reportable operating segments and four region-focused reportable operating segments listed as below:

Our eight products and services focused operating segments were:

 

  Ÿ   Iron & Steel Products

 

  Ÿ   Iron & Steel Raw Materials and Non-Ferrous Metals

 

  Ÿ   Machinery & Infrastructure Projects

 

  Ÿ   Chemical

 

  Ÿ   Energy

 

  Ÿ   Foods & Retail

 

  Ÿ   Lifestyle, Consumer Service and Information, Electronics & Telecommunication

 

  Ÿ   Logistics & Financial Markets

Our four region-focused operating segments were:

 

  Ÿ   Americas

 

  Ÿ   Europe

 

  Ÿ   Asia

 

  Ÿ   Other Overseas Areas

For information on the composition of our products and services focused reportable segments and region-focused reportable operating segments, also see “Item 5.A. Operating Results—Operating Results by Operating Segment.”

 

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Gross Profit, Operating Income (Loss) and Net Income (Loss) by reportable operating segment for the years ended March 31, 2006, 2005 and 2004 were as follows(1)(2)(3)(4)(5):

Gross Profit:

 

     In Billions, Except Percentages  
     Years Ended March 31,  
     2006     2005     2004  

Iron & Steel Products

   ¥ 54.4     6.7 %   ¥ 47.3     6.7 %   ¥ 34.7     5.7 %

Iron & Steel Raw Materials and Non-Ferrous Metals

     110.8     13.6       74.2     10.5       42.3     6.9  

Machinery & Infrastructure Projects

     90.6     11.1       82.9     11.7       80.3     13.1  

Chemical

     97.8     12.0       87.1     12.3       91.1     14.9  

Energy

     84.7     10.4       72.6     10.2       54.6     8.9  

Foods & Retail

     79.9     9.8       85.3     12.0       73.7     12.1  

Lifestyle, Consumer Service and Information, Electronics & Telecommunication

     128.4     15.7       121.7     17.2       110.6     18.1  

Logistics & Financial Markets

     51.4     6.3       46.7     6.6       32.3     5.3  

Americas

     61.6     7.5       49.9     7.0       40.7     6.7  

Europe

     22.4     2.7       20.6     2.9       20.0     3.3  

Asia

     27.4     3.4       21.8     3.1       19.9     3.3  

Other Overseas Areas.

     4.9     0.6       4.0     0.6       4.2     0.7  
                                          

Total

     814.3     99.8       714.1     100.8       604.4     99.0  
                                          

All Other

     7.1     0.9       12.4     1.7       10.4     1.7  

Adjustments and Eliminations

     (4.8 )   (0.7 )     (17.6 )   (2.5 )     (3.8 )   (0.7 )
                                          

Consolidated Total

   ¥ 816.6     100.0 %   ¥ 708.9     100.0 %   ¥ 611.0     100.0 %
                                          

Operating Income (Loss)*:

 

     In Billions, Except Percentages  
     Years Ended March 31,  
     2006     2005     2004  

Iron & Steel Products

   ¥ 26.5     10.0 %   ¥ 16.3     8.6 %   ¥ 6.9     5.3 %

Iron & Steel Raw Materials and Non-Ferrous Metals

     87.2     32.8       51.9     27.2       21.8     16.9  

Machinery & Infrastructure Projects

     21.7     8.2       21.6     11.3       22.1     17.1  

Chemical

     34.0     12.8       24.6     12.9       31.4     24.3  

Energy

     52.0     19.6       35.4     18.6       21.7     16.8  

Foods & Retail

     9.1     3.4       17.8     9.3       13.4     10.4  

Lifestyle, Consumer Service and Information, Electronics & Telecommunication

     25.0     9.4       24.0     12.6       17.2     13.3  

Logistics & Financial Markets

     17.6     6.6       18.5     9.7       10.4     8.1  

Americas

     21.7     8.2       14.7     7.7       8.5     6.6  

Europe

     4.1     1.5       2.4     1.3       3.0     2.3  

Asia

     10.7     4.0       7.8     4.1       5.7     4.4  

Other Overseas Areas.

     1.0     0.4       0.4     0.2       0.9     0.7  
                                          

Total

     310.6     116.9       235.4     123.5       163.0     126.2  
                                          

All Other

     (3.0 )   (1.1 )     (0.5 )   (0.3 )     (1.9 )   (1.5 )

Adjustments and Eliminations

     (41.8 )   (15.8 )     (44.4 )   (23.2 )     (32.1 )   (24.7 )
                                          

Consolidated Total

   ¥ 265.8     100.0 %   ¥ 190.5     100.0 %   ¥ 129.0     100.0 %
                                          

* Operating income (loss) reflects our (a) Gross Profit, (b) Selling, general and administrative expenses, (c) Provision for doubtful receivables and (d) Government grant for transfer of substitutional portion of EPF, as presented in the Statements of Consolidated Income.

 

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Net Income (Loss):

 

     In Billions, Except Percentages  
     Years Ended March 31,  
     2006     2005     2004  

Iron & Steel Products

   ¥ 19.3     9.5 %   ¥ 11.6     9.6 %   ¥ 5.5     8.0 %

Iron & Steel Raw Materials and Non-Ferrous Metals

     54.7     27.0       35.4     29.2       18.7     27.3  

Machinery & Infrastructure Projects

     30.6     15.1       20.9     17.3       11.0     16.1  

Chemical

     12.1     6.0       (6.8 )   (5.6 )     11.4     16.7  

Energy

     40.9     20.2       42.8     35.3       24.4     35.7  

Foods & Retail

     (3.2 )   (1.6 )     10.6     8.8       10.6     15.5  

Lifestyle, Consumer Service and Information, Electronics & Telecommunication

     17.5     8.6       11.8     9.7       3.2     4.7  

Logistics & Financial Markets

     13.4     6.6       11.8     9.7       4.8     7.0  

Americas

     12.6     6.2       12.3     10.2       0.2     0.3  

Europe

     4.9     2.4       2.9     2.4       0.7     1.0  

Asia

     9.3     4.6       8.0     6.6       6.3     9.2  

Other Overseas Areas.

     14.3     7.1       5.8     4.8       4.1     6.0  
                                          

Total

     226.4     111.7       167.1     138.0       100.9     147.5  
                                          

All Other

     11.2     5.5       4.4     3.6       1.9     2.8  

Adjustments and Eliminations

     (35.2 )   (17.2 )     (50.4 )   (41.6 )     (34.4 )   (50.3 )
                                          

Consolidated Total

   ¥ 202.4     100.0 %   ¥ 121.1     100.0 %   ¥ 68.4     100.0 %
                                          

Notes:

(1) The figures for “Consolidated Total” for the years ended March 31, 2005 and 2004 have been reclassified to conform to the change in current year presentation for discontinued operations, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
(2) “All Other” includes business activities which primarily provide services, such as financing services, and operations services to external customers, and/or to us and associated companies.
(3) Net loss of “Adjustments and Eliminations” includes income and expense items that are not allocated to specific reportable operating segments, such as certain expenses of corporate departments, and eliminations of intersegment transactions.
(4) Transfers between operating segments are made at cost plus a markup.

Iron & Steel Products Segment

The Iron & Steel Products Segment consists of one business unit, the Iron & Steel Products Business Unit, which has:

 

  Ÿ   21 subsidiaries including Mitsui Bussan Construction Materials Co., Ltd. (Japan), SINTSUDA CORPORATION (Japan) and Regency Steel Asia Pte Ltd. (Singapore) ; and

 

  Ÿ   19 associated companies including Shanghai Bao-Mit Steel Distribution Co., Ltd. (China), Nippon Steel Trading Co., Ltd. (Japan) and Thai Tinplate Manufacturing Co., Ltd. (Thailand).

Gross profit and net income for this segment for the year ended March 31, 2006 were ¥54.4 billion or 6.7% and ¥19.3 billion or 9.5% of our consolidated total, respectively.

Iron and steel products are used in a wide range of industries including the automobile, electronics, transportation, construction and energy sectors. We have served our customers in these industries worldwide and

 

21


provided support services for Japanese steel mills. The Iron & Steel Products Business Unit conducts manufacturing, trading, marketing, processing and distribution of:

 

  Ÿ   steel sheet for automobile and electric appliances, steel plates for shipbuilding and heavy electric machinery, galvanized steel products and tin material and products;

 

  Ÿ   steel products for oil and gas projects including oil well tube and line pipe;

 

  Ÿ   wire rod, specialty steel and bearing;

 

  Ÿ   steel bars and other steel construction materials; and

 

  Ÿ   semi-finished items including steel slabs to be processed into steel plates and steel billets to be processed into steel bars and wire rods.

To expand beyond the above-mentioned activities, this business unit has also made investments in subsidiaries and associated companies including coil centers as bases for processing and distribution, steel makers as manufacturing bases and steel product trading companies.

In the steel products business, both manufacturers and users are large-scale and sophisticated organizations. As simple intermediation between these entities is no longer sufficient to serve their needs, the business unit has developed its services based on SCM by making use of our IT and logistics expertise. By working closely with manufacturers and users, we optimize distribution and inventory control, thus sharing with customers the benefit of associated cost reductions. For example:

 

  Ÿ   We have established steel service centers, galvanized steel plants and tin-plating facilities at our subsidiaries and/or joint ventures with Japanese and overseas business partners in order to meet the rising demand from manufacturers of automobiles, electric appliances and heavy electric machinery that have transplanted their production centers to the United States, Southeast Asia and China. For example, we participated in Shanghai Bao-Mit Steel Distribution Co., Ltd. (China), a joint venture with Shanghai Baosteel Group Corporation, a Chinese iron and steel manufacturing company, in order to build a network of steel products service centers in China. Through this associated company, we have been promoting the integration of service centers within China in order to improve operational efficiency, and we are actively pursuing additional investments.

 

  Ÿ   We frequently draw upon the unit’s logistics expertise in delivering a wide range of materials and products in large volume under optimized schedule along with expertise in project financing. We also take advantage of the business relationships and marketing channels of other business units in the fields of energy, industrial plants, shipping and machinery. This enabled us to be involved in various industrial projects including the construction of oil and gas pipeline projects such as the Sakhalin project for steel structure supply and Yemen LNG project operated by TOTAL (46km transfer line) through high grade steel pipe delivery.

During the year ended March 31, 2004, we acquired Regency Steel Asia Pte Ltd. (Singapore), a steel products wholesaler. This acquisition was made with the aim to expand global wholesale operations in the rapidly growing steel products markets in Asia.

As mentioned above, the businesses of the Iron & Steel Products Business Unit are highly sensitive to worldwide demand for steel products, especially in Asia, including China. At the same time, this business unit concentrates on achieving low-cost operations in the domestic market which is already mature, through spin-off and other business reorganizations. In addition, we have been strengthening our ties with domestic steel makers and wholesalers through collaboration in sales of products, procurement of raw materials and equity investments.

Our major competitors in Japan and overseas are other Japanese trading companies. In their efforts to achieve low-cost operations through economy of scale, some of our competitors have consolidated and established joint ventures, such as Marubeni-Itochu Steel Inc. and Metal One Corporation. In order to remain

 

22


competitive as well as pursue our strategic goals, we utilize the Iron & Steel Products Business Promotion Division which specializes in making investments in steel-related enterprises in response to the need for joint investment amongst steel users and steel manufacturers in Japan and overseas, and with the aim of participating in the development of new products.

In July 2006, Mittal Steel Company N.V. and Arcelor S.A., both of which were one of the world largest steel mills, agreed to merge. We are watching carefully such reorganizations of global steel companies. So far as we have observed, operational optimization through reorganization of steel mills tends to contribute to the stabilization of steel prices. In newly developing countries such as China and India, an increase in local steel demand and an increase in local steel production are occurring in tandem, therefore it is not so easy to forecast the supply-demand situation precisely. In Europe, we have been supplying Arcelor S.A. steel sheets to European plants of Japanese carmakers on a “just-in-time” delivery basis. We commit ourselves to continue to be involved in the steel logistics business after such worldwide reorganizations of steel companies, by offering efficient SCM services. We also focus on business opportunities in Russia and in India, by setting up joint ventures with leading industrial players there and creating our service networks, such as coil centers, in these regions.

Iron & Steel Raw Materials and Non-Ferrous Metals Segment

The Iron & Steel Raw Materials and Non-Ferrous Metals Segment consists of one business unit, the Iron & Steel Raw Materials and Non-Ferrous Metals Business Unit. This segment has:

 

  Ÿ   20 subsidiaries, including Mitsui Bussan Raw Materials Development Corp. (Japan), Mitsui Iron Ore Development Pty. Ltd. (Australia), Mitsui Itochu Iron Pty. Ltd. (Australia), Sesa Goa Limited (India), Mitsui Coal Holdings Pty. Ltd. (Australia), Japan Collahuasi Resources B.V. (Netherlands) and Mitalco Inc. (the United States); and

 

  Ÿ   17 associated companies, including Valepar S.A. (Brazil) and BHP Mitsui Coal Pty., Ltd. (Australia).

Gross profit and net income for this segment for the year ended March 31, 2006 were ¥110.8 billion or 13.6% and ¥54.7 billion or 27.0% of our consolidated totals, respectively.

The Iron & Steel Raw Materials and Non-Ferrous Metals Business Unit is engaged in various business activities including:

 

  Ÿ   trading, investment, logistics management and transportation services related to iron and steel raw materials, such as iron ore, coal, steel scrap, ferro-alloys and other minerals; and

 

  Ÿ   trading, investment, transportation and processing of non-ferrous metal ores and ingots such as copper, lead, zinc, tin, nickel, aluminum, magnesium, cobalt, titanium, other non-ferrous metals; sales and marketing of semi-fabricated non-ferrous products such as construction materials; and agent activities in the nuclear fuel import business.

In the field of iron and steel raw materials, since 1960s we have invested in raw materials sourcing projects based on concept of “develop-and-import”, aiming at stable procurement of those raw materials through diversified channels.

We participate in joint ventures with various iron ore and coal mining companies located in Australia, Brazil and India in order to secure stable supplies of those materials. For example:

 

  Ÿ   In August 2002, we completed the construction of the West Angelas iron ore mine in Australia (as a part of the Robe River Joint Venture with Rio Tinto), which began shipments of iron ore to customers worldwide. In Australia, we also have a participating interest in Mount Newman Joint Venture and other joint ventures with BHP Billiton.

 

  Ÿ   In September 2003, we purchased a 15% ownership interest (or 18.24% in terms of voting shares as of March 31, 2006), of Valepar S.A. (Brazil), the controlling shareholder of Companhia Vale do Rio Doce (“CVRD”) in Brazil. CVRD is a mining enterprise with operations that include mining of iron ore and other raw non-ferrous metals.

 

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  Ÿ   We own a 51% interest in Sesa Goa Limited (India), which produces iron ore and coke in India.

 

  Ÿ   In April 2002, we entered into a strategic alliance with Anglo American Plc to develop the Moura and German Creek coal mines in Australia, which provides us with a solid foundation for future growth in the coal business. We also have participating interests in other coal mining joint ventures with BHP Billiton and Rio Tinto.

We are also engaged in steel scrap stock inventory operations by Pacific Coast Recycling, LLC in the West Coast of the United States. Reflecting the demand growth, especially from Asia, this steel scrap export terminal has been an increasingly important facility. Pacific Coast Recycling, LLC is wholly owned by our subsidiary, Raw Materials Development Co. (United States).

Revenues from mineral producing activities accounts for a significant portion of this business unit. The table below sets forth the break down of revenues of the Iron & Steel Raw Materials and Non-Ferrous Metals Business Unit.

 

     Revenues
     Billions of Yen
     Revenues from Sales of Products   

Revenues from

Sales of Services

  

Total Revenues

Years Ended March 31,

   Revenues from Mineral
Producing Activities
   Revenues from Sales of
Other Products(*)
  

Commissions and

Trading Margins on

Intermediary Services

  

2006

   ¥ 141.3    ¥ 142.0    ¥ 22.0    ¥ 305.3

2005

     88.0      134.3      18.5      240.8

2004

     49.9      136.4      16.9      203.2

(*) Revenues from sales of other products mainly consist of sales of scrap metals and non-ferrous metals such as copper and aluminum.

We participate in a joint venture which produces Silico-Manganese in Inner Mongolia, China, together with Erdos Electrical Power and Metallurgical Co., Ltd. and JFE Steel Corporation, a major Japanese steel mill. This project started production of Silico-Manganese in July 2006 with an annual production capacity of 75,000 tons at its initial stage.

We have entered into new joint venture projects to meet the increasing demand for iron and steel raw materials in Japan and abroad. For example, in January 2003, we established POSCO Terminal Co., Ltd., a joint venture with POSCO (a steel maker in Republic of Korea), providing logistics services related to transactions involving iron and steel raw materials for various customers in Asia.

We are actively seeking to develop new business areas. Additional activities we are promoting include trading in carbon credits based on the Kyoto Protocol and implementing Clean Development Mechanism (“CDM”) projects. CDM is an arrangement under the Kyoto Protocol allowing industrialized countries with a greenhouse gas reduction commitment to invest in emission reducing projects in developing countries as an alternative to what is generally considered more costly emission reductions in their own countries.

The following tables provide information on our investments in iron ore and coal resource projects. In September 2003, we sold our interest in Caemi Mineração e Metalurgia S.A., which had been our associated company until the year ended March 31, 2003. Accordingly, in the table below, we do not include mining information attributable to Caemi Mineração e Metalurgia S.A. For information on our production and reserve amounts in connection with our mining activities, See “Item 4.D. Property, Plants and Equipment—Mining Activities.”

 

24


IRON ORE

 

Joint Venture or
Investee(1)

 

Mitsui’s Subsidiary or
Associated Company(2)

 

Name of Mines(3)

 

Location

  Mitsui’s
Percentage of
Ownership
   

Other Major Participants
and Their Percentages of
Ownership

 

Robe River Iron Associates

  Mitsui Iron Ore Development Pty. Ltd.   Pannawonica West Angelas   Pilbara Region, Western Australia   33.00 %  

Rio Tinto

Nippon Steel

  53.00
10.50
%
%
          Sumitomo Metal Industries   3.50 %

Mount Newman Joint Venture

  Mitsui Itochu Iron Pty. Ltd.   Mount Whaleback   Pilbara Region, Western Australia   7.00 %   BHP Billiton Itochu   85.00
8.00
%
%

Yandi Joint Venture

  Mitsui Iron Ore Development Pty. Ltd.   Marillana Creek   Pilbara Region, Western Australia   7.00 %   BHP Billiton Itochu   85.00
8.00
%
%

Mount Goldsworthy Joint Venture

  Mitsui Iron Ore Development Pty. Ltd.   North Area (Yarrie) (Nimingarra) Area C   Pilbara Region, Western Australia   7.00 %   BHP Billiton Itochu   85.00
8.00
%
%

Sesa Goa Limited

  Sesa Goa Limited   Codli Sonshi Chitrandurga Hospet   Goa, India Karnataka India   51.00 %   (publicly listed company)  

 

COAL

 

           

Joint Venture or
Investee(1)

 

Mitsui’s Subsidiary or

Associated Company(2)

 

Name of Mines(3)

 

Location

  Mitsui’s
Percentage of
Ownership
   

Other Major Participants
and Their Percentages of
Ownership

 

BHP Mitsui Coal Pty. Ltd. 

  BHP Mitsui Coal Pty. Ltd.   Poitrel South Walker Creek   Queensland, Australia   20.00 %   BHP Billiton   80.00 %

Bengalla Joint Venture

  Mitsui Coal Holdings Pty. Ltd.   Bengalla   New South Wales, Australia   10.00 %   Rio Tinto Wesfarmers Taiwan Power   40.00
40.00
10.00
%
%
%

Kestrel Joint Venture

  Mitsui Coal Holdings Pty. Ltd.   Kestrel   Queensland, Australia   20.00 %   Rio Tinto   80.00 %

Dawson Joint Venture

  Mitsui Coal Holdings Pty. Ltd.   Dawson   Queensland, Australia   49.00 %   Anglo American   51.00 %

German Creek Joint Venture

  Mitsui Coal Holdings Pty. Ltd.   German Creek   Queensland, Australia   30.00 %   Anglo American   70.00 %

(1) The term “Investee” refers only to Sesa Goa Limited and BHP Mitsui Coal Pty. Ltd.
(2) “Mitsui’s Subsidiary or Associated Company” indicates names of the companies through which we own our interests in the joint ventures or the investee. Sesa Goa Limited is a Mitsui’s subsidiary in which we own a 51% voting share. BHP Mitsui Coal Pty. Ltd. is a Mitsui’s associated company in which it directly owns a 20% voting share.
(3) “Name of Mines” indicates the names of principal producing mines.
(4) In addition to the above-mentioned coal mining projects, through Mitsui Coal Holdings Pty. Ltd., we have small interests in two projects in Australia mainly promoted by Anglo American, namely, Moranbah North Joint Venture in Queensland and Drayton Joint Venture in New South Wales. Our ownership percentage and annual production capacity of Moranbah North Joint Venture and Drayton Joint Venture are 4.75%, 4 million tons and 3.83%, 5 million tons, respectively.

 

25


In non-ferrous metals field, we have been engaged in trading of copper, nickel, cobalt, aluminum ingots and other non-ferrous metal materials. We are also expanding and promoting our investments and participation in various non-ferrous metals mining and smelting projects to secure stable sources of supply. For example:

 

  Ÿ   We participate in Compania Minera Dona Ines de Collahuasi SCM (Chile), a copper mine development project, in which we hold a 7.43% interest. The project, which commenced commercial production in 1998, has been developed jointly with Anglo American Plc and Falconbridge Ltd. and has annual production capacity of about 500,000 tons of copper per annum. In addition, we have a 1.25% interest in Minera Los Pelambres in Chile whose production capacity is about 360,000 tons of copper per annum.

 

  Ÿ   We participate in a nickel-cobalt mining and refining project at Rio Tuba area in the Republic of Philippines which has been developed jointly with Sumitomo Metal Mining Co., Ltd., Sojitz Corporation (formerly Nissho Iwai Corporation) and a local partner. This project started commercial production of nickel-cobalt mixed sulfide in April 2005 using a high-pressure acid leaching process, an advanced processing technology for nickel production, and has already reached its design capacity in March 2006. In addition, in April 2005, we, jointly with Sumitomo Metal Mining Co., Ltd., concluded an agreement for participation in the Goro Nickel Development Project in New Caledonia, which had been promoted by Inco Limited. This project is expected to be completed by the end of 2007 and to produce in total about 60,000 tons of nickel and about 5,000 tons of cobalt per annum.

 

  Ÿ   We have a 15.04% interest in Nippon Amazon Aluminum Co., Ltd.(Japan) which has invested in aluminum smelting and refining business in Brazil. On June 30, 2006, our subsidiary Mitalco Inc. (United States) reached an agreement to sell its 32 percent stakes in Intalco and Eastalco aluminum smelters to Alcoa Inc. However, our strategy of being proactively involved in aluminum investments as one of our core business activities remains unchanged, and we will continue to pursue new investment opportunities as well as expand current investments in aluminum.

Machinery & Infrastructure Projects Segment

The Machinery & Infrastructure Projects Segment consists of the Infrastructure Projects Business Unit and the Machinery Business Unit.

Gross profit and net income for this segment for the year ended March 31, 2006 were ¥90.6 billion or 11.1% and ¥30.6 billion or 15.1% of our consolidated totals, respectively.

The Machinery & Infrastructure Projects Segment holds 67 subsidiaries, including:

 

  Ÿ   Mitsui Bussan Plant & Project Corp. (Japan) and Mitsui Rail Capital Holdings, Inc. (United States) in the Infrastructure Projects Business Unit; and

 

  Ÿ   Lepta Shipping Co., Ltd. (Liberia), Toyota Chile S.A. (Chile), Mitsui Automotive Europe B.V. (Netherlands), P.T. Bussan Auto Finance (Indonesia) in the Machinery Business Unit.

Additionally it has 53 associated companies such as:

 

  Ÿ   IPM Eagle LLP (United Kingdom), P.T. Paiton Energy (Indonesia) and, Toyo Engineering Corporation (Japan) in the Infrastructure Projects Business Unit; and

 

  Ÿ   Toyota Canada Inc. (Canada), United Auto Group, Inc. (United States) and Komatsu Australia Pty. Ltd. (Australia) in the Machinery Business Unit.

Infrastructure Projects Business Unit

The business activities of the Infrastructure Projects Business Unit (formerly the Power, Transportation & Plant Projects Business Unit) together with 27 subsidiaries and 14 associated companies cover a wide range of involvement in project implementation and related services, including:

 

  Ÿ   electric power projects such as power plants, power transmission and substation facilities;

 

26


  Ÿ   energy related projects such as oil and gas development projects, oil refineries, LNG manufacturing facilities and pipelines;

 

  Ÿ   water supply projects such as desalination plants, wastewater processing facilities and water supply and sewerage facilities;

 

  Ÿ   railway transportation-related business such as rolling stock and railway facilities and systems;

 

  Ÿ   social infrastructure projects such as construction of airport, port facilities, road and other public facilities;

 

  Ÿ   basic industry projects such as iron, non-ferrous metals, chemical plants; and.

 

  Ÿ   environment-related projects such as waste disposal and recycling plants.

We are undertaking a number of projects that may stimulate economic growth in developing countries and countries rich in natural resources. We focus on the needs of those countries and apply our project engineering capabilities and expert knowledge in financing, logistics, taxation and legal affairs, so as to devise optimal solutions that address the complex and diverse issues that those nations are facing. This business unit often arranges financing for projects by international financial institutions and export credit agencies worldwide. Moreover, it from time to time provides loans or issues guarantees on behalf of the project owners.

The following are examples of the types of projects and the activities in which this unit renders services, mainly as an agent in securing the contract, arranging financing and executing the contract:

 

  Ÿ   In the Commonwealth of Independent States (“CIS”), the Middle East, Brazil and Indonesia, we have been engaged in the structuring and the arrangement of debt and equity project financing for various natural gas energy or oil product projects. Together with export credit agencies and commercial banks, we also extended loans to project participants.

 

  Ÿ   We have acted as the Engineering, Procurement and Construction (“EPC”) contractor for various oil and gas production projects and for the construction of infrastructure facilities including power plants and petrochemical plants in which we procured manufacturing equipment from Japanese and overseas subcontractors.

 

  Ÿ   For the Taiwan High Speed Rail project, we are a commercial leader of a consortium consisting of Japanese railway car manufacturers and general trading companies, which supplied rolling stock and transportation facilities.

This business unit is increasing activities which facilitate the implementation of projects. These activities go beyond the conventional EPC approach of acting as an intermediary between project owners and sub-contractors. Instead, these activities often involve arrangement of sophisticated financing schemes, risk sharing through equity participation and operation and maintenance of plant and facilities after their construction completion. Based on this concept, the unit is promoting investments in certain related infrastructure projects including the acquisition of independent power producer (“IPP”) overseas. For example:

 

  Ÿ   In December 2004, we, together with International Power plc, completed the acquisition of the international power generation portfolio (nine power plants in total 4,514 megawatt as of March 2005) of MEC International BV, a Dutch holding company owned by Edison Mission Energy, and in July 2005 also acquired the Saltend 1,200 megawatt combined cycle power plant from Calpine Corporation. We established IPM Eagle LLP (United Kingdom) jointly with International Power plc to hold and manage these power generation businesses.

 

  Ÿ   We have formed a joint venture with Calpine Corporation to construct, own and operate the 1,005 megawatt combined cycle power plants called Greenfield Energy Center which has secured a 20 year Clean Energy Supply contract with Ontario Power Authority, Canada.

 

27


  Ÿ   We own a 36.3% voting interest in P.T. Paiton Energy (Indonesia), an Indonesian power producer, which owns a 1,230 megawatt coal fired power plant in East Java, Indonesia. P.T. Paiton Energy sells electricity to P.T. Perusahaan Listrik Negara, an electric utility company owned by the Indonesian government, under a power purchase agreement. P.T. Paiton Energy was originally established in 1994 by Mitsui and other partners, including Edison Mission Energy.

Reflecting these developments, the combined power generation capacities for the unit’s equity share in various power projects as of the end of June 2006 in operation and under construction were 2,643 megawatt and 618 megawatt, respectively. As well as the above-mentioned projects, these power generation capacities included those of Umm Al Nar in the United Arab Emirates, Loy Yang A and Tarong North Power Station in Australia and Valladolid III in Mexico.

This business unit is also engaged in the following projects:

 

  Ÿ   In January 2005, Mitsui acquired a 25% interest in the LNG terminal in Altamira, Mexico which had been owned by Royal Dutch Shell (75%) and Total (25%). The facility is expected to start operations in late 2006, supplying up to 5 billion cubic meters per annum of natural gas for 25 years to Comisión Federal de Electricidad, a state power company.

 

  Ÿ   In March 2006, Mitsui acquired a 35% interest in Thai Tap Water Supply Company Limited, to supply tap water to the provincial authorities near Bangkok, Thailand under 30-year water supply agreement.

 

  Ÿ   In April 2006, Mitsui acquired 100% share of Gás Participações Ltda. (Brazil), which participates in seven local gas distribution companies with a 24.5% interest in each, with other shareholders, Petrobras Gas S.A., and the respective state governments in Brazil.

This business unit runs railway wagon and electric locomotive leasing subsidiaries, Mitsui Rail Capital Holdings, Inc. (United States) established in 1996 and Mitsui Rail Capital Europe B.V. (Netherlands) established in 2004.

Environmental issues are a worldwide concern. Our initiatives in this field include creating and implementing recycling systems for automobiles, electric appliances and plastic bottles made from polyethylene terephthalate. Also, we are engaged in the construction of wind power facilities and other environment-related projects such as greenhouse gas emission reduction.

Our major competitors include other Japanese general trading companies, international financial institutions, global engineering companies, construction companies and multi-national IPP’s.

Machinery Business Unit

The Machinery Business Unit, together with 40 subsidiaries and 39 associated companies, is engaged in the following business activities:

 

  Ÿ   import and export, assembly and manufacturing, distribution and dealership of motor vehicles, motor cycles and their parts; retail finance and automobile auction business;

 

  Ÿ   sales and trading of tankers, LNG carriers, container vessels, cargo vessels; operation of own vessels; chartering vessels; and ocean vessel related finance;

 

  Ÿ   trading of aircraft and helicopters, leasing of aircraft, and trading of other products such as defense related equipment, aerospace system and aircraft engines; and

 

  Ÿ   trading of industrial machinery including mining and construction equipment, production equipment and machining tool.

 

28


Our motor vehicles business is a major part of operations in this business unit. This business unit has a long track record of exporting and marketing Japanese automobiles and has developed networks of our subsidiaries and associated companies as import wholesalers, dealers and assembler for Japanese vehicles in many regions of the world. For example, we have been exporting Toyota, Subaru and motor vehicles of other Japanese manufacturers to various countries worldwide including Canada (Toyota), Chile (Toyota), Peru (Toyota), Italy (Subaru), Germany (Subaru and Yamaha), Thailand (Hino) and Malaysia (Daihatsu).

In recent years, the relocation of Japan’s automobile production centers from domestic locations to other countries has been accelerating, and we have diversified our activities with the strategic allocation of our financial and human resources to prioritized areas of our motor vehicles business worldwide, such as logistics services for manufacturing components, retail operations, retail finance and auction businesses. For example:

 

  Ÿ   We have operated a subsidiary P.T. Bussan Auto Finance (Indonesia), a retail finance company for Yamaha motorcycles since 1997;

 

  Ÿ   We have ownership in United Auto Group, Inc. (“UAG”), an automobile dealership group in the United States, with 15.4% voting share. By combining what we learned from our involvement in UAG with our knowledge of the global market, we continue to explore other opportunities to expand into retail dealership operations in developing markets such as Russia, China and India; and

 

  Ÿ   We have been handling the logistics operations of automobile parts for Toyota’s manufacturing operations in North America, Europe, India and China.

Our vessel and marine project related activities include marketing newly built commercial vessels to ship owners and operators in Japan and overseas, operating vessels, acting as broker for the sale and purchase of second hand vessels and for chartering vessels, and marketing equipment for vessels to shipbuilding companies.

Along with these operations, we are engaged in energy-related marine projects, including the joint ownership and operation of Floating Storage and Offloading (“FSO”) and Floating Production Storage and Offloading (“FPSO”) facilities, and LNG vessels. In addition, we arrange various types of financing for our customers, such as syndicated loans involving international financial institutions, export credit agencies and other financial institutions for large scale transactions. We also provide direct loans to some of our clients.

In connection with our other business activities, we own and operate commercial vessels.

In our aerospace systems related activities, we provide and arrange operating leases and finance leases to various airlines worldwide and are engaged in the sale and purchase of aircraft through our subsidiary Tombo Aviation Inc. (United States).

With respect to distribution activities in our industrial system business, we are engaged in distribution and leasing of construction machinery and mining equipment such as dump trucks and hydraulic shovels through Komatsu Australia Pty Ltd. (Australia) and Komatsu Australia Corporate Finance Pty Ltd. (Australia), associated companies acquired in 2001, crucial operations in this field. Furthermore, we are also pursuing construction machinery and mining equipment distribution in other regions such as North America, including through Road Machinery, LLC (United States), and South America. Furthermore, in 2005 we acquired such operations in Russia as well. We are also engaged in trading and distribution of high-precision machine tools, manufacturing equipment and control systems supplied by Japanese manufacturers such as FANUC LTD. In 2005, we established Fanuc Roboshot Europe Gmbh (Germany) and several representative offices in China of our subsidiary MMK Co. Ltd. (Japan), in order to enhance sales of injection machines and machine tools. The other important business is distribution of outdoor power equipment and utility equipment in North America.

The business sectors in which the above divisions are engaged are highly competitive. Competitors include, but are not limited to, other Japanese general trading companies, international financial institutions and manufacturers.

 

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Chemical Segment

The Chemical Segment consists of the First Chemicals Business Unit (formerly the Organic Chemicals Business Unit) and the Second Chemicals Business Unit (formerly the Plastics & Inorganic Chemicals Business Unit).

Gross profit and net income for this segment for the year ended March 31, 2006 were ¥97.8 billion or 12.0% and ¥12.1 billion or 6.0% of our consolidated totals, respectively.

The Chemical Segment has 40 subsidiaries, including:

 

  Ÿ   Novus International, Inc. (United States), P.T. Kaltim Pasifik Amoniak (Indonesia), Mitsui Bussan Solvent & Coating Co., Ltd. (Japan), Fertilizantes Mitsui S.A. Industria e Comercio (Brazil) in the First Chemicals Business Unit; and

 

  Ÿ   Mitsui Bussan Plastics Co., Ltd. (Japan), Nippon Trading Co., Ltd.(Japan), Daito Chemical Co., Ltd. (Japan), Mitsui Electronics Asia Pte. Ltd. (Singapore) in the Second Chemicals Business Unit.

It has 31 associated companies, including:

 

  Ÿ   Honshu Chemical Industry Co., Ltd. (Japan) and Agro Kanesho Co., Ltd. (Japan) in the First Chemicals Business Unit; and

 

  Ÿ   Advanced Composites Inc. (United States) in the Second Chemicals Business Unit.

First Chemicals Business Unit

Together with 20 subsidiaries and 16 associated companies, the First Chemicals Business Unit is engaged in trade, sales, distribution and production of the following commodities and related activities:

 

  Ÿ   Gas Chemicals: Methanol, Ammonia

 

  Ÿ   Basic Petrochemicals: Olefins, Aromatics, Ethylene Dichloride (“EDC”), Vinyl Chloride Monomer (“VCM”), Caustic Soda

 

  Ÿ   Petrochemicals & Fiber Intermediates: Para-Xylene (“PX”), Purified Terephthalic Acid (“PTA”), Monoethylene Glycol (“MEG”), Acrylonitrile (“AN”), Acetyls, Styrene Monomer (“SM”).

 

  Ÿ   Industrial Chemicals: Phenol, Acetone, Bis Phenol A, Methyl Methacrylate (“MMA”), Nylon, Acrylates Intermediates

 

  Ÿ   Specialty Chemicals: Detergent Intermediates and Oleochemicals, Polyurethanes, Colors & Functional Chemicals, Rosin, Aroma Chemicals

 

  Ÿ   Life Science: pharmaceutical, medical, animal health and nutrition, food science, bio-business

 

  Ÿ   Agri Science: crop protection chemicals (Herbicide, Insecticide, Fungicide, intermediates for these chemicals)

 

  Ÿ   Fertilizer: Urea, Ammonium Sulfate, Phosphate Rock, Diammonium Phosphate, Fused Magnesium Phosphate, Potash

In petrochemical products areas, the unit’s main activities involve trading of the above-mentioned products in Japan and worldwide through extensive business relationships with manufacturers and customers such as Mitsui Chemicals, Inc., Toray Industries, Inc., Tosoh Corporation, Dow Chemical Company, BP p.l.c., and Bayer Aktiengesellschaft.

 

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We have invested in manufacturing facilities and logistic facilities such as tank terminals in Houston, the United States, Ningbo, China, Bangkok, Thailand, Johor, Malaysia, and Merak, Indonesia. For example, we have:

 

  Ÿ   a 19.25% equity share in a joint venture, International Methanol Company (Saudi Arabia), which commenced commercial operation with a production capacity of 1 million ton per annum of methanol at the end of 2004;

 

  Ÿ   an ammonia producing subsidiary, P.T. Kaltim Pasifik Amoniak (Indonesia), which has a production capacity of 0.7 million ton per annum of ammonia; and

 

  Ÿ   a shipping subsidiary, Daiichi Tanker Co., Ltd. (Japan), which has special type chemical tanker fleets.

This business unit has been successful in earning revenues by increasing market share in certain products such as Olefins, Aromatics and other Plastic Monomers. Moreover, the steady growth of demand for petrochemicals in the world, particularly in China and other Asian countries, is driving earnings for this unit.

During the past several years, most worldwide petrochemical companies have been struggling to survive through drastic restructurings which include the reorganization of their sales structures and mergers and acquisitions. However, despite the difficult environment for participants in the petrochemical market, we believe that we remain competitive with other Japanese general trading companies and plan to strengthen our market position by expanding our trade volume and market share. Our sales channels to various customers in diverse geographic areas enable us to make geographical and/or time swap arrangements. Our global logistics services network functions as a competitive advantage over other Japanese general trading companies in gaining more business transactions.

In the field of life science, this business unit handles pharmaceutical products, pharmaceutical intermediate and raw materials, food and feed additives such as amino acids and enzymes. Novus International, Inc. (United States), a feed additive manufacturing subsidiary, produces and sells amino acids. In addition, we focus on pharmaceutical manufacturing processes through Beta-Chem, Inc. (Japan), as well as on research, development and marketing in the field of biotechnology and agricultural chemicals.

This business unit has extended the distribution of agricultural chemical products worldwide through subsidiaries such as Mitsui Agri Science International sa/nv (Belgium) and Mitsui Agri Science International, Inc. (United States).

This business unit is engaged in import, export and offshore transactions involving various types of fertilizers and phosphoric acid derivatives. In addition, this business unit runs a fertilizer manufacturing subsidiary, Fertilizantes Mitsui S.A. Industria e Comercio (Brazil).

We look to expand our operations in China, which is strategically important for the future of this business unit. For example, in the field of food additives, we started commercial production of Sorbitol in October 2005, and Crystallized Glucose in February 2006 at the joint venture in Chang Chun together with Hong Kong’s Global Bio-chem Technology Group Co., Ltd.

Second Chemicals Business Unit

The Second Chemicals Business Unit has 20 subsidiaries and 15 associated companies and is engaged in sales, trade and production of the following commodities and related activities:

 

  Ÿ   basic inorganic materials such as sulfur, sulfuric acid, salt, titanium ore and iodine;

 

  Ÿ   inorganic products such as soda ash, caustic soda, catalyst, industrial gas and titanium oxide;

 

  Ÿ   electronic materials such as electrolytic copper foil, optical fiber, and high-purity chemicals employed in semiconductor production;

 

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  Ÿ   plastic materials and products such as polyvinyl chloride, elastomers, polyolefin, ABS resin, engineering plastics, polystyrene, plastic food containers, wrapping materials, industrial films and carbon fiber;

 

  Ÿ   additives of plastic such as elasticizer, stabilizer and pigment; and

 

  Ÿ   SCM related businesses for production and distribution of office automation equipment, cell phone and electric appliances.

In the inorganic raw materials field, this business unit operates logistics systems and SCM systems for various industries in Japan and overseas. For example, we export sulfur, a byproduct of petroleum refining, to Asian countries, by operating specialized tankers.

In order to overcome various unfavorable economic conditions such as depletion in the supply of mineral resources or an increase in acquisition cost of raw materials from our existing suppliers, we have been seeking opportunities to participate in new supply sources. We reallocated resources by restructuring logistics operations, and built up our capabilities in sulfur, soda ash, and fiberglass materials in Asia, primarily in China.

While we have been expanding the logistics network of our salt business in China which complements our existing sea salt joint venture business in Shark Bay, Australia, Mitsui acquired a major share in the Onslow salt field in Australia in 2006. As a result, our annual salt production capacity increased to 3.8 million tons, which enable us to secure a stable supply for the chlor-alkali industry in Japan and other Asian countries.

This business unit produced and sold proprietary diesel particulate filters (“DPF”s) for buses and trucks, which were later found out to be non-conforming to the regulatory standards of the Tokyo Metropolitan Government and seven other municipal governments. With regard to DPF data falsification discovered during the year ended March 31, 2005 and Mitsui’s responsive measures, see “Item 5.A. Operating Results- Compensation and other charges related to DPF incident.”

In the plastics field, this business unit has traditionally handled various kinds of raw plastic materials and plastic products in domestic and overseas markets. This business unit has also handled newly developed electronic materials and products as well as SCM services. We expanded SCM services for printers and liquid crystal display panels as well as reinforced our resin compound operations in China, Southeast Asia, the United States and Europe.

With the focus of economic activity shifting to Asia, this business unit enhanced its business in China.

 

  Ÿ   In 2003, this business unit established Mitsui Plastics Trading (Shanghai) Co., Ltd., an engineering plastics sales company.

 

  Ÿ   In 2004, this business unit established Mitsui International Logistics and Trade (Suzhou) Co., Ltd., which provides logistics services as an export/import trading company in the Suzhou Industrial Zone, one of China’s national development regions. It handles specialty chemicals, gases, parts, and other materials used in semiconductors and liquid crystal displays.

This business unit has been making efforts in research and development activities. For example, with respect to development and commercialization of carbon nanotube and zeolite membranes, see “Item 5.C. Research & Development.”

In the plastic materials and products market where the scope of their usage is expanding, other Japanese general trading companies are our competitors. To maintain our competitiveness, specialized knowledge for each market and the capability to find the best technological and logistical solutions is essential.

Energy Segment

The Energy Segment is engaged in the trading, manufacturing, development and distribution of various energy-related products including: crude oil and petroleum products such as gasoline, naphtha, jet fuel, kerosene, diesel oil, fuel oil, asphalt, petroleum coke, lubricants and liquefied petroleum gas (“LPG”), as well as natural gas and LNG.

 

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This segment consists of one business unit, the Energy Business Unit, which has

 

  Ÿ   22 subsidiaries, including Mitsui Oil Co., Ltd. (Japan), Mitsui Liquefied Gas Co., Ltd. (Japan), Kokusai Oil & Chemical Co., Ltd. (Japan) and Mitsui Oil (Asia) Pte. Ltd. (Singapore), Mitsui LNG Nederland B.V. (Netherlands), Mitsui E&P Middle East B.V. (Netherlands), Mitsui E&P Australia Pty Limited (Australia), Mitsui E&P New Zealand Limited (New Zealand), Mitsui Gas Development Qatar B.V. (Netherlands), Wandoo Petroleum Pty. Ltd. (Australia), and Mittwell Energy Resources Pty., Ltd (Australia); and,

 

  Ÿ   10 associated companies, including Mitsui Oil Exploration Co., Ltd. (Japan), Kyokuto Petroleum Industries, Ltd. (Japan), Japan Australia LNG (MIMI) PTY. Ltd. (Australia) and Sakhalin Energy Investment Company Ltd. (Bermuda).

Gross profit and net income for this segment for the year ended March 31, 2006 were ¥84.7 billion or 10.4% and ¥40.9 billion or 20.2% of our consolidated totals, respectively.

We are one of the world’s major oil traders based on our total trading volume of crude oil and petroleum products (excluding derivative products) which for the year ended March 31, 2006 amounted to approximately one fourth of Japan’s total imports of 5 million barrels per day on a consolidated basis. These trading operation are conducted by Mitsui, Mitsui Oil (Asia) Pte. Ltd. (Singapore) and Mitsui Oil (Asia) Hong Kong Ltd. (Hong Kong, China). This business unit has a 35% minority share in Westport Petroleum, Inc. (United States). In March 2006, we sold its entire shareholding in Arcadia Petroleum Ltd. (United Kingdom), formerly a subsidiary which had been actively engaged in crude oil trading, to a third party.

We are also engaged in domestic marketing and refining of oil and gas related products through Kyokuto Petroleum Industries, Ltd. (Japan), a refinery jointly owned (50:50) by the ExxonMobil Corp. Group and our oil sales subsidiary, Mitsui Oil & Gas Co., Ltd. (Japan).

The Energy Business Unit is engaged in numerous LNG, natural gas and oil development projects which require long lead-times for their development and implementation. We are involved in four LNG projects currently in operation:

 

  Ÿ   Abu Dhabi Gas Liquefaction Limited in Abu Dhabi, in which we hold a 15% interest in LNG production and exporting activities, and which has some 5 million tonnes per annum LNG production capacity;

 

  Ÿ   Northwest Shelf JV (“NWS JV”) in Australia, in which we hold an 8.33% interest in LNG production and exporting activities, and which has some 11.7 million tonnes per annum production capacity;

 

  Ÿ   Qatar Liquefied Gas Company Ltd. in Qatar, in which we hold a 7.5% interest in LNG production and exporting activities, and which has some 9.6 million tonnes per annum production capacity. We also hold a 1.5% interest in Qatar Liquefied Gas Company Ltd. 3, which is expected to start production in mid 2009 with some 7.8 million tonnes per annum production capacity; and

 

  Ÿ   Oman LNG L.L.C. in Oman, in which we hold a 2.77% interest in LNG production and exporting activities, and which has some 6.6 million tonnes per annum production capacity.

We participate in oil and gas related joint venture activities, typically as a “non-operator” minority equity holder. We have yet to accumulate sufficient technical knowledge and expertise to act as an operator of oil and gas projects. Operators are generally responsible for all operational aspects, which include the exploration, development and production of oil and gas resources. Therefore, given our non-operator status, we have limited or no control over the manner in which operations are conducted, including the timing and scheduling of the development, capital expenditures, production of the reserves, and the safety and environmental standards used in connection with these joint ventures.

However, it is our strategy as a general trading company to seek to diversify our investments in various countries and in a broad range of projects rather than acting as operators on few specific projects. Also see the discussion on our exploration, development and production of mineral resources and oil and gas in “Item 3.D. Risk Factors.”

 

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In May 2006, the NWS JV delivered its first cargo to the LNG terminal in Guangdong, China. Also with respect to NWS JV, we made a final investment decision for the fifth train in June 2005 following the successful production start-up of the fourth LNG producing train in 2004. The capacity of this fifth train is planned to be 4.2 million tonnes per annum and is scheduled to begin in the latter half of 2008. As of June 2006, construction of the fifth-train project is progressing as scheduled. In Qatar, the debottlenecking work on the existing LNG facilities was completed in May 2005 and production capacity has increased to 9.6 million tonnes per annum in 2006. These new LNG producing capacities will supply both existing and new customers. An “LNG producing train” is a set of facilities in a liquefaction plant to produce LNG from natural gas. “Debottlenecking” refers to additional investment and modification work on the existing LNG producing plants or trains to increase their production capacity by eliminating the bottleneck in existing plants or trains that restrict production capacity.

In the Sakhalin II project, we hold a 25% interest in Sakhalin Energy Investment Company Ltd. (Bermuda). Since 1999, seasonal oil production continued from the Molikpaq facility on the Astokhskoye field, offshore Sakhalin Island. In addition, Sakhalin Energy Investment Co., Ltd. announced on May 15, 2003, that it would begin the Phase II development of the Sakhalin II Project. This announcement marked the beginning of the full-scale development of the Piltun-Astokhskoye oil field aimed at year-round crude oil production, and the Lunskoye gas field, including construction of a two-train LNG plant in the south of Sakhalin Island for export to the Asia Pacific LNG markets based on long-term contracts. At its peak, the facility is expected to produce 60 million barrels per annum of crude oil and 9.6 million tonnes per annum of LNG.

The total required funds for the Phase II development of the Sakhalin II Project is now estimated to be US$20 billion, double the original budget of US$10 billion, due to increased expenses related to changes in facility design and construction delays, as well as the rising procurement costs of labor and materials. Sakhalin Energy Investment Company has been making every effort to achieve the earliest possible start of LNG shipments, which is now scheduled in summer 2008, and to contain costs. Up to August 2006, we have seen the following developments:

 

  Ÿ   The actual progress rate of the total project was about 76% as of end of June 2006.

 

  Ÿ   Sakhalin Energy Investment Company also continued to progress the sale of the remaining unsold volumes of LNG. In June 2006, Tokyo Gas Co, Ltd. committed to purchasing additional volumes, taking overall sales of Sakhalin II LNG to 90% of designed production capacity.

On September 18, the Ministry of Natural Resources of the Russian Federation announced that it had made the decision to revoke its order issued in 2003 pertaining to the environmental approval of the Phase II Development of the Sakhalin II Project. While we can not definitely predict future development of this situation, Sakhalin Energy Investment Company Ltd. will continue to work with the relevant authorities to resolve the issue.

This business unit holds interests in other LNG projects which are under construction. We hold 8.5% interest in Equatorial Guinea LNG in Equatorial Guinea, which is expected to start production in the middle of 2007 with a production capacity of 3.4 million tonnes per annum. Through our subsidiary, Overseas Petroleum Corporation (Japan), we own a 1% interest in the Tangguh LNG project in Indonesia, which is expected to start production in 2008 with production capacity being 7.6 million tonnes per annum.

Identifying, exploring and developing oil and gas reserve prospects are key factors to success in this area. Our principal strategic region for this business are Australia, South East Asia and the Middle East.

During the year ended March 31, 2006, continuous near field exploration activities, together with water-flood operations, resulted in higher than budgeted oil production at the Block 9 oil fields in Oman by Mitsui E&P Middle East B.V. (Netherlands), and commercial production started at the Casino gas & condensate field offshore South Australia during February 2006 operated by Mittwell Energy Resources Pty. Ltd. (Australia), and a final investment decision to develop the Tui area oil fields offshore North Island of New Zealand by Mitsui E&P New Zealand Limited (New Zealand) was made by the joint ventures. Mitsui E&P New Zealand Limited subsequently increased its participating interest in the joint venture from 12.5% to 35%.

 

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In March 2004, Mitsui E&P Australia Pty Limited (Australia) acquired a 40% interest in each of WA-28-L and exploration block WA-271-P located in the North West Shelf area in Australia, which together contained three undeveloped oil fields, Enfield, Vincent, and Laverda. The development of Enfield Oil Field has progressed according to schedule and budget and commercial production started in July 2006 with designed capacity of 100,000 barrel per day. The final investment decision for Vincent Oil Field located in the same block as Enfield was made in March 2006 with total development cost of approximately U.S. $720 million, which is expected to start production in 2008.

In April 2006, MitEnergy Upstream LLC (United States) was established by Mitsui, Mitsui & Co. (U.S.A.) Inc. and Mitsui Oil Exploration Co., Ltd., to acquire from Pogo Producing Company (“Pogo”) 50% share of an undivided interest in Pogo’s oil and gas leasehold assets offshore in the Gulf of Mexico. The purchase price amounted to ¥53.2 billion. More than half of total 85 blocks are currently producing oil and gas, with an approximate daily production capacity of up to 12,000 barrels of oil equivalent, thus we expect a relatively short payback period.

In May 2006, commercial production started at the Cliff Head oil field offshore Western Australia, and commissioning work started at the BassGas project (Yolla gas & Condensate field, offshore Victoria) both by Wandoo Petroleum Pty. (Australia).

Together with our associated company Mitsui Oil Exploration Co., Ltd. (Japan), we continue putting a high priority on expanding our oil and gas equity reserves. In March 2006, Mitsui agreed with Mitsui Engineering & Shipping Co., Ltd. to purchase 6% of the total issued shares of Mitsui Oil Exploration Co., Ltd. of which Mitsui held a 44.35% share prior to concluding the agreement. Mitsui initially purchased a 3% share at that time, and will purchase the remaining 3% share by March 2007, making Mitsui’s share in Mitsui Oil Exploration Co., Ltd. 50.35% of the total issued shares.

Mitsui Oil Exploration Co., Ltd. has been actively engaged in oil and natural gas exploration, development and production projects in Thailand and neighboring Southeast Asian countries as well as in the Middle East. For example, in June 2005, Mitsui Oil Exploration Co., Ltd. acquired Pogo’s Thailand assets, a 46.34% interest in the B8/32 Concession and the adjacent Block 9A Concession located in the Gulf of Thailand, jointly with a partner in Thailand. The purchase price was U.S.$820 million, of which Mitsui Oil Exploration Co., Ltd. contributed approximately 40%.

As a result, our oil and gas reserves increased to 688 million barrels of oil equivalent (“BOE”) at the end of March 2006, after offsetting the decrease through production of 32 million BOE during the year ended March 31, 2005. As of March 31, 2006, the proportion of proved developed reserves to proved developed and undeveloped reserves is approximately 28%, a relatively low level. See “Item 4.D. Property, Plants and Equipment—Oil and Gas Producing Activities” and “Supplemental Information on Oil and Gas Producing Activities” to the consolidated financial statements included elsewhere in this annual report on Form 20-F.

We are also exploring various emerging business opportunities in the energy industry. Mitsui expects bio-ethanol to be a crucial renewable fuel in the future, and we expect world demand to rise. In April 2006, Mitsui reached an agreement with Petróleo Brasileiro SA (“Petrobras”) to jointly carry out a feasibility study for promoting the production of bio-ethanol and related products in Brazil and for the marketing of such products in the international market. In the same context, we are involved in the electricity retail business in Japan through our wholly owned subsidiary, GTF Green Power Co., Ltd. (Japan), which has succeeded the business from our associated company, GTF Institute Co., Ltd. (Japan). We are exploring new business opportunities, including biomass energy, and intend to attempt power generation using renewable biomass fuel under GTF Green Power. Furthermore, we are promoting an oil sand production venture through a 4% share in Canada Oil Sands Co., Ltd.

The international markets for crude oil and petroleum products are highly competitive and volatile, as these commodities are traded on exchanges such as NYMEX in New York, IPE in London, and TOCOM in Tokyo. In

 

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the worldwide trading business, we compete with international oil companies, national oil companies in oil producing countries and oil trading companies, including Japanese trading companies. In maintaining our competitive edge under these circumstances, it is critical for us to maintain good relationships with suppliers and customers as well as to mitigate price risks by utilizing hedging tools such as the futures markets. We are also active in seeking to secure long-term offtake contracts of petroleum and gas products such as fuel oil and condensate to be sold to Japanese utility and refining companies. Long-term offtake contracts are sales and purchase contracts for various commodities, such as crude oil and petroleum products, entered into by suppliers and buyers, or “offtakers”, of such commodities for one or more years. Concurrent with the offtake contracts, the sellers of such commodities usually enter into financing arrangements whereby the sales proceeds from such commodities are used to finance a related project. For example, on March 25, 2003, the Energy Business Unit entered into an offtake contract with PERUSAHAAN PERTAMBANGAN MINYAK DAN GAS BUMINEGRA (“PERTAMINA”), the national oil and gas company of Indonesia, and committed itself to “lift and pay” for petroleum products for a period of time. Concurrently, our Infrastructure Projects Business Unit was engaged in the structuring and the arrangement of debt financing with various lenders to provide a U.S.$200 million loan to PERTAMINA which would be utilized to build a facility at its existing Balongan Refinery to produce about 50,000 barrels per day of unleaded gasoline. PERTAMINA will supply us with the petroleum products from its existing refineries and the proceeds from the sales of these products will be used as the source of debt service for the U.S.$200 million loan.

In the domestic refining and marketing business for oil and gas related products, we have faced severe competition from domestic oil refining and distributing companies due to the structural surplus situation for refining capacity in Japan. Kyokuto Petroleum Industries, Ltd. (Japan), Mitsui Oil Co., Ltd. (Japan) and Mitsui Liquefied Gas Co., Ltd. (Japan), our core associated company and subsidiaries for domestic oil and gas refining and marketing business activities are in relatively sound financial situations owing to the extensive restructuring of inefficient assets and work force, and are pursuing efficient and competitive operations.

Japanese Government environmental regulations stipulate that sulfur content must be reduced to 10 parts per million (“ppm”) beginning in 2007 for diesel oil and in 2008 for gasoline. Major Japanese oil refineries and distributors voluntarily started to supply 10 ppm standard products beginning in January 2005, before the restriction came into effect. To maintain a competitive position in the market, Kyokuto Petroleum Industries, Ltd. elected to invest in new equipment to strengthen its sulfur removal capabilities. Transformation of its diesel oil equipment was completed in April 2005 and gasoline equipment is scheduled to be completed in March 2007.

With respect to oil and gas exploration and production (“E&P”) business, in our view, the key to success is to constantly increase, or at a minimum maintain, certain volumes of oil and gas reserve prospects as is the common practice for international oil and gas companies. However, despite our management’s intensive focus on expanding our E&P business activities, our oil and gas reserves are still far less than that of the national oil companies of oil producing countries and major oil and gas companies. Other Japanese companies that participate in E&P activities do not commonly disclose their proved oil and gas reserves. Based on the limited proved oil and gas reserves information of other Japanese E&P companies that are publicly available, we believe that we generally have higher amounts of proved oil and gas reserves as compared to most Japanese E&P companies. Accordingly, we believe that we are competitive with other Japanese E&P companies.

With respect to our LNG related operations, we have entered into various long term sales contracts, based on “take or pay” conditions, with customers such as Japanese utility companies. We believe the worldwide LNG business has been undergoing gradual structural changes since the late 1990’s as follows:

 

  Ÿ  

Exploration and development of natural gas and production of LNG require significant capital and financial commitments. Moreover, this involves a broad range of logistical and technological expertise, including linking suppliers to distributors and consumers while developing plants in order to efficiently extract and liquefy the natural gas for transportation and then re-gasifying the LNG. Up until the mid-1990’s, purchase commitments by buyers with full “take or pay” obligations for a period of 20 years or more had been an essential element for equity holders, distributors and sellers of LNG

 

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projects to make the capital and financial commitment to build LNG production facilities. These equity investors had resisted making a capital and financial commitment without being able to fully secure stable long-term purchase commitments. In recent years, however, equity holders of several LNG projects have been making investments without fully securing long-term purchase commitments from buyers.

 

  Ÿ   Due to technological innovations in the last decade, LNG producers have successfully reduced capital costs with respect to the construction of LNG production plants and LNG vessels. Technological innovation has also enabled the producers to increase the design capacities of LNG production plants and LNG vessels allowing them to benefit from economies of scale. These technological developments allow LNG to be more competitive with other types of energy sources.

 

  Ÿ   In response to the needs of LNG buyers, the LNG spot market has been expanding, whereby the percentage of spot trades in worldwide LNG contracts rose to 10.6% in 2005 from 1.3% in 1992.

 

  Ÿ   In addition to the traditional core LNG markets in Japan, the Republic of Korea and Taiwan, the market is rapidly expanding in Europe and the United States. At the same time, new markets have been emerging in countries such as China and India due to an increasing demand for electricity. Considering the sizable economies of these countries and the increasing popularity of LNG as a “clean energy” source, the LNG market has been developing rapidly worldwide.

The recent structural changes in the LNG industry, including those mentioned above, continue to have a mixed effect on our business operations. For example, due to the reduction in capital costs from technological innovations, the emergence of the spot LNG market and other factors, not only has the LNG industry become more competitive among existing energy-related companies, but it has also seen an increase of new entrants.

Foods & Retail Segment

The Foods & Retail Segment consists of one business unit, the Foods & Retail Business Unit, which has 29 subsidiaries including MITSUI FOODS CO., LTD. (Japan), Wilsey Foods Inc. (United States), Mitsui Norin Co., Ltd. (Japan), DAI-ICHI BROILER CO., LTD. (Japan), Hokushuren Company Limited (Japan) and Retail System Service Co., Ltd. (Japan); and 14 associated companies including Mikuni Coca-Cola Bottling Co., Ltd. (Japan), Mitsui Sugar Co., Ltd. (Japan) and KADOYA SESAME MILLS INCORPORATED (Japan).

Gross profit for this segment for the year ended March 31, 2006 was ¥79.9 billion or 9.8% of our consolidated totals. This segment recorded a net loss of ¥3.2 billion or minus 1.6% of our consolidated total.

The Foods & Retail Business Unit engages in:

 

  Ÿ   Import and domestic/offshore trade of wheat, barley, soybeans, corn, fats and oils, raw sugar, and rice;

 

  Ÿ   Import and domestic/offshore trade of processed foods such as canned products, frozen foods and condiments, liquor, beverages such as coffee, tea and juice, dairy products, and foodstuffs such as marine products, animal products and vegetables;

 

  Ÿ   Import and domestic trade of packaging, wrapping materials, and miscellaneous daily goods;

 

  Ÿ   Manufacturer of beverages, beverage ingredients, boilers, and sugar-based products;

 

  Ÿ   Domestic distribution and sales through the nationwide wholesaler subsidiary MITSUI FOODS CO., LTD. (Japan); and

 

  Ÿ   Support services, such as supply chain management including logistics management, and product planning and development for retailers.

The Foods & Retail Business Unit is involved in a wide range of fields in a value chain of foods, from the global procurement of food material and production of food products to the traffic and wholesale of foods, packaging materials, and sundry goods.

 

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To secure a source of foodstuffs and a stable supply we purchase grain, oilseeds, and raw sugar from the United States, Canada, Brazil, and Australia and sell them in Japan and other Asian countries. We sell coffee to Japan and the United States from production areas primarily in Brazil. We purchase raw materials for beverages, such as tea leaves and juice, marine products, animal products, and dairy products from major supply sources around the world and deliver them primarily to Japan. We are also engaged in domestic broiler chicken raising, processing, and sales through a subsidiary DAI-ICHI BROILER CO., LTD. (Japan).

We have positioned the United States as our main base of operations and the core of our global food supply strategy. In collaboration with Mitsui & Co. (U.S.A.), Inc., this business unit has developed and maintained the following buinesses:

 

  Ÿ   In the cereals and grains area, we have formed a joint venture, United Harvest, LLC, with CHS Inc., an agricultural cooperative in the United States. Our exports of wheat from the United States are among the best, amounting to approximately four million tons per annum.

 

  Ÿ   Ventura Foods, LLC, another joint venture formed with CHS Inc., is one of the largest suppliers of cooking oils for the institutional market in the United States. We invest in this company through WILSEY FOODS, INC.

In food-manufacturing operations, during the year ended March 31, 2004, we increased our equity stake in Mitsui Norin Co., Ltd. (Japan), which is one of the major manufacturers of tea leaves in Japan, and made it our subsidiary with the intention of positioning it as a core company in our beverage business, realizing synergies with our existing network for procurement of raw materials and domestic distribution.

Competition varies depending on products in the upstream areas of grain, feed, sugar and food materials, but is generally based on price or quality of products. Many Japanese general trading companies, international producers, and traders are competitors to varying degrees with respect to most of the food products we handle.

MITSUI FOODS CO., LTD. (Japan) plays a vital role in this unit’s wholesale operations. It is expanding its business activities to include general merchandise stores, supermarkets, convenience stores, and catering and restaurant chains throughout Japan, focusing on processed food and liquor transactions. The Foods & Retail Business Unit is developing and strengthening its nationwide distribution chain focused on MITSUI FOODS CO., LTD., including investments and business tie-ups from the parent company with regional wholesalers.

In the foodstuffs distribution field, the needs for reduced distribution costs, secure temperature-controlled supply, and faster delivery are becoming more sophisticated and diverse. To meet these changes, the Foods & Retail Business Unit is engaging in wholesale transactions with and providing support services to retailers. These include:

 

  Ÿ   inventory management and procurement of foodstuffs, processed foods, and packaging based on sales information obtained from retailers; and

 

  Ÿ   proposals for developing new products and services, and support in the form of traceability for securing food safety.

In April 2006, MITSUI FOODS CO., LTD. and Mitsui agreed with KOKUBU & CO., LTD., a major Japanese food wholesaler, to form a business alliance, which includes support by KOKUBU & CO., LTD. for improvement of management and operations of MITSUI FOODS CO., LTD. and cooperation in product categories to be reinforced by both companies.

Mitsui maintains a comprehensive alliance with Seven & i Holdings Co., Ltd., Japan’s nationwide diversified retailer. Seven & i Holdings Co., Ltd. operates shopping malls, general merchandise stores, supermarkets, convenience stores such as 7-Eleven, restaurant chains such as Denny’s, and financial service companies such as the IYBank, and opened SEVEN-ELEVEN (BEIJING) in April 2004.

 

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Mitsui offers the following supply services to Seven & i Holdings Co., Ltd. through our domestic subsidiaries, such as MITSUI FOODS CO., LTD., Retail System Service Co., Ltd. and VENDOR SERVICE CO., LTD.

 

  Ÿ   supply sundry goods and consumables, such as processed food, liquor, fast food, toys, and games, to more than ten thousand 7-Eleven stores in Japan;

 

  Ÿ   supply food materials, containers, and packaging materials to vendors who supply boxed lunches, pre-cooked meals, and processed food to 7-Eleven stores in Japan;

 

  Ÿ   supply various temperature-controlled products to 7-Eleven stores in Japan; and

 

  Ÿ   supply cold products through the affiliate company Beijing Sanxin Refrigeration Logistics Co., Ltd. to 7-Eleven stores in Beijing.

To strengthen our business ties, the Foods & Retail Business Unit purchased ¥10 billion of Ito-Yokado Co., Ltd. shares and ¥40 billion of Seven-Eleven Japan Co., Ltd. shares. The Ito-Yokado Group established a new holding company, Seven & i Holdings Co., Ltd., on September 1, 2005, and the shares that we acquired are equal to roughly 1.2% of Seven & i Holdings Co., Ltd. outstanding shares.

Our competitors in the wholesale and retail businesses are mainly general trading companies in Japan. In the traffic area, our competitors are also traffic companies that operate third-party logistics. In domestic wholesaling, there is fierce competition among suppliers, and we are making efforts to increase revenues and reduce logistics costs by achieving better economies of scale through mergers and acquisitions from time to time.

Lifestyle, Consumer Service and Information, Electronics & Telecommunication Segment

This segment is comprised of the Lifestyle Business Unit; the Consumer Service Business Unit; and the Information, Electronics and Telecommunication Business Unit.

Gross profit and net income for this segment for the year ended March 31, 2006 were ¥128.4 billion or 15.7% and ¥17.5 billion or 8.6% of our consolidated total, respectively.

This segment owns 44 subsidiaries including:

 

  Ÿ   Mitsui Bussan Inter-fashion Ltd. (Japan) in the Lifestyle Business Unit;

 

  Ÿ   Bussan Real Estate Development Co., Ltd. (Japan), MBK Real Estate Ltd. (United States), Mitsui Bussan House-Techno, Inc. (Japan) and CABLENET SAITAMA CO., LTD. (Japan) in the Consumer Service Business Unit; and

 

  Ÿ   Telepark Corp. (Japan), NextCom K.K. (Japan), TOYO Officemation, Inc. (Japan) and Mitsui Electronics Inc. (Japan) in the Information, Electronics and Telecommunication Business Unit.

And it has 42 associated companies including:

 

  Ÿ   ALCANTARA S.p.A. (Italy), Nippon Brunswick Co., Ltd. (Japan) in the Lifestyle Business Unit;

 

  Ÿ   QVC JAPAN INC. (Japan), AIM Services Co., Ltd. (Japan) and Sumisho & Mitsuibussan Kenzai Co., Ltd. (Japan) in the Consumer Service Business Unit; and

 

  Ÿ   Nihon Unisys, Ltd. (Japan), Moshi Moshi Hotline, Inc. (Japan) in the Information, Electronics and Telecommunication Business Unit.

Lifestyle Business Unit

Effective April 1, 2004, the former Textile & Fashion Unit and the former General Merchandise Unit were integrated into a single business unit named the Lifestyle Business Unit.

Together with 11 subsidiaries and 18 associated companies, the Lifestyle Business Unit is engaged in domestic, import, export and offshore trading and manufacturing of the following materials and products, as well as related services and investments:

 

  Ÿ   apparel products, including development and manufacturing of those products; and brand merchandize-related businesses including equity participation in joint ventures with brand owners and brand licensing;

 

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  Ÿ   textile raw materials and fabrics; and technical collaboration in these products field;

 

  Ÿ   non-apparel products such as interior and living items and consumer goods; and

 

  Ÿ   industrial materials such as pulp and paper.

In the fashion field, we actively provide innovative services to accommodate new developments in the fashion and apparel markets. Our main business activities are divided into two categories:

 

  Ÿ   original equipment manufacturing (“OEM”) business for domestic apparel manufacturers; and

 

  Ÿ   business transactions involving branded luxury and accessible luxury products from Europe and the United States for the Japanese market as well as brand licensing businesses in Japan.

 

In the field of apparel and OEM, we play active roles at various stages in the value chain, including design, planning and procurement of materials as well as sewing and processing. To meet our goals of minimizing costs and enhancing quality, we work with apparel makers and related companies to select the optimal materials and processing centers from the wide variety of choices available in Japan, Europe, the Americas, Asia and other areas.

We regard China as an important manufacturing base and also a significant consumer market as well. To further strengthen our OEM business capabilities and our provision of support services, we utilize our subsidiaries and associated companies such as Mitsui Bussan Inter-Fashion Ltd. (Japan) and Alta Moda International Ltd. (Hong Kong), both of which offer well-organized manufacturing process management led by experts hired specially for that role.

With respect to brand businesses in Japan, we are engaged in both license and import business transactions involving internationally well-known branded merchandise from Europe and the United States such as Burberry, Paul Stuart, Trussardi, Valentino, Max Mara, Etro and Juicy Couture. In the case of license agreements we enter into with the respective European and American licensors, we sublicense certain rights including, but not limited to, marketing and manufacturing rights to apparel makers and wholesalers, while we retain the exclusive distributorship rights. We, if necessary, establish joint venture subsidiaries with such European and American brand owners to control license arrangements or to distribute imported products in order to establish well controlled nationwide sales network composed of wholesalers, department stores, specialty-stores or our own retail outlets.

In brand businesses, our competitors are other general trading companies and apparel specialty traders including Itochu Corporation and Mitsubishi Corporation. The keys to maintain our competitiveness are to raise the value of the brand which we promote in the market and to increase the number of valuable brands we deal with.

In consumer goods fields, this business unit is engaged in the trading, production, processing and distribution of various goods such as general household and consumer goods, light industrial machinery and supplies, medical equipment and office automation systems as set forth below:

 

  Ÿ   We supply a wide range of top-quality consumer goods imported from around the world, which include high-quality Sonicare ultrasonic toothbrushes, Brunswick bowling equipment and systems, MAGLITE handy flashlights, and top-of-the-line Lladro porcelain;

 

  Ÿ   We trade woodchip and pulp, furthermore, we develop several afforestation projects in Australia, some of which are jointly promoted with several Japanese partners including paper manufacturing companies; and

 

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  Ÿ   As for paper and ceramic products, we closely partner with Japanese manufacturers and participate in joint venture operations in China to sell products there and export them from China, as well as handling products in and from Japan.

In the business area of consumer goods such as sporting and leisure goods, continuous changes in lifestyles require new business models which reflect such changes. Accordingly, we seek to locate new materials and new suppliers, arrange effective distribution methods and develop attractive brand names. Such efforts are realized through a combination of our human and organizational network and industrial expertise.

Consumer Service Business Unit

Major business areas of this business unit, including 18 subsidiaries and 16 associated companies, consist of the following:

 

  Ÿ   real estate development including construction, sale and leasing of houses, condominiums, commercial facilities, senior housing and office buildings and related construction material businesses;

 

  Ÿ   media-related service business including broadcasting, content service, television shopping channels, software service, amusement business and Internet-based marketing service;

 

  Ÿ   outsourcing services including catering, uniform rental, building maintenance, and temporary personnel service, child care service;

 

  Ÿ   medical service and health care related businesses such as nursing care-related services, clinic facilities and medical related information service.

Real estate development businesses include the following activities:

 

  Ÿ   Mitsui engages in development of condominium and commercial property in the Tokyo metropolitan area. Mitsui Bussan House-Techno, Inc. (Japan) has been engaged in construction and marketing of high-end home units under the Mitsui House brand, however, due to shrinking market in Japan, it decided to withdraw from the business in July 2006.

 

  Ÿ   MBK Real Estate Ltd. (United States) handles the development and sale of unit houses and senior housing properties in the California market, as well as commercial properties on the West Coast of the United States.

 

  Ÿ   Our associated company Sumisho & Mitsuibussan Kenzai Co., Ltd. (Japan) supplies construction materials in the domestic market.

 

  Ÿ   In March 2005 we jointly established Mall & SC Development, Inc. (Japan) with Ito-Yokado Co., Ltd. to pursue the development and management of shopping malls and shopping centers.

In the media-related service business, as a consumer service and content provider, we provide television shopping services operated by an associated company, QVC Japan, Inc. (Japan), which was established jointly with QVC Inc. of the United States; and an entertainment and educational channel for children and parents operated by Kids Station Inc. (Japan), our subsidiary, both of which are delivered over cable or digital satellite broadcast networks.

In the outsourcing businesses, AIM Services Co., Ltd. (Japan), an associated company jointly established with ARAMARK Corporation in the United States, has provided a variety of service in Japan since 1976. Major parts of its businesses are food service and support services for companies and schools as well as those for hospitals and social welfare facilities. In December 2005, it acquired a 100% share of MEFOS Ltd, a provider of hospital food services, which strengthened its business base in the market where competition is increasingly fierce. Moreover, it is engaged in refreshment and support services for offices, and provides services of design, cleaning and facilities management, linen supply, uniform rental and contract staffing to dining facilities.

We are in the process of cultivating new opportunities in medical services through our subsidiary, Medivance Co. (Japan), Ltd. In August 2005, we also founded an associated company venture with

 

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Recruit Co., Ltd., which provides a healthcare information service on the Internet. This segment also made 5% equity participation in and formed an alliance with Duskin Co., Ltd., which is engaged in cleaning services, food services and nursing care services nationwide.

Information, Electronics and Telecommunication Business Unit

The Information, Electronics and Telecommunication Business Unit is involved in information technology services and solutions. These are delivered through the unit’s 15 subsidiaries and 8 associated companies established in the following five major fields:

 

  Ÿ   network and systems integration (“NI/ SI”) businesses;

 

  Ÿ   mobile communication businesses including sales agency of mobile handset and telecommunications lines; and development and sales of mobile content;

 

  Ÿ   business process outsourcing services including enterprise information management and call-center services;

 

  Ÿ   semiconductors related businesses including sales agency for semiconductor chips, semiconductor manufacturing equipments and semiconductor inspection equipments; and

 

  Ÿ   display related businesses including export and trading of flat-panel displays and parts.

In the field of NI/SI businesses, NextCom K.K. (Japan), a subsidiary and Nihon Unisys, Ltd. (Japan), an associated company both listed on the Tokyo Stock Exchange, provide integrated solutions to a wide range of customers.

 

  Ÿ   NextCom K.K. provides services, such as consultation, designing, building and operation of network systems including self-developed systems, to a wide range of business enterprises including telecommunications carriers, government offices, local municipalities and public bodies engaged in healthcare and education. NextCom K.K. is also engaged in planning and development of network systems which are equipped with voice recognition technology and typically used by call centers. It is also involved in high-secruity systems, for example automatic billing systems used by pay-TV broadcasters. In December 2004, following the merger of NextCom K.K., a former associated company, BSI Co., Ltd., a software development and marketing subsidiary, and ADAM NET Ltd., a data telecommunications equipment marketing subsidiary, NextCom K.K. remained as the surviving company among them and became a subsidiary.

 

  Ÿ   Nihon Unisys, Ltd. is engaged in designing and building of computer systems, business process outsourcing services, support services and other peripheral services as well as sales of computer systems, including both hardware and software. These services are provided to business enterprises in the financial, manufacturing and distribution and public sectors. Mitsui owns a 32.4% voting interest in Nihon Unisys, Ltd. as of March 2006. Unisys Corporation in the United States, which formerly held the same equity stake as Mitsui, sold its entire shareholding in Nihon Unisys, Ltd. in March 2006, and Mitsui has since been its single largest shareholder.

We are promoting various mobile communication businesses through alliances with domestic cell phone service providers and manufacturers. Telepark Corp. (Japan) is a core subsidiary in this field. Telepark Corp. is one of the major agencies in Japan for cell phone subscription as well as a retailer and distributor of cell phone handsets. It sold 3.2 million cell phones for the year ended March 31, 2006. It has also acted as agent for subscription of fixed telecommunications lines, including broadband connections. Telepark Corp. is listed on the Tokyo Stock Exchange. Telepark Corp. was established in 2001 following the merger of three Mitsui subsidiaries that were established in 1990s and engaged in sales agency of telecommunications lines and related businesses.

The market for business process outsourcing services has been expanding in Japan. We have positioned this market as a crucial business field and have promoted businesses through a subsidiary, TOYO Officemation, Inc. (Japan), and an associated company, Moshi Moshi Hotline, Inc. (Japan). TOYO Officemation, Inc. (Japan),

 

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which has been engaged in distribution of information processing devices such as optical character readers (“OCR”) and information input devices, has recently focused on enterprise information management such as customer information input, management and operation. Moshi Moshi Hotline, Inc. (Japan) is one of the Japan’s major providers of call centers and related outsourcing services. It had been our subsidiary when we established it along with contributions from other eleven investors. Moshi Moshi Hotline, Inc. later went public on the over-the-counter market and is now listed on the Tokyo Stock Exchange. Our voting interest is 34.3%.

In the field of electronics products, Mitsui Electronics Inc. (Japan) acts as a sales agent for semiconductor related devices, semiconductor manufacturing equipment and semiconductor inspection equipment. In recent years, particularly, Mitsui Electronics Inc. (Japan) has focused on providing semiconductor related products and services to Japanese customers who are shifting their production bases to China. We have also been engaged in export and trading of flat-panel displays and parts. We set up a joint venture company in Shanghai to market the strategic products of SVA (GROUP) CO., LTD., a Chinese electronics manufacturer, in China and worldwide.

This business unit is dependent on the operating results of our subsidiaries and associated companies, most of which are located in Japan, where technological development is rapid and competition is fierce. Our important function involves business incubation of IT related products and services, which is ordinarily promoted along with market development and expansion as is the case with Telepark Corp. and Moshi Moshi Hotline, Inc.

This business unit acknowledges that businesses represented by the concepts of “convergence of telecommunication and broadcasting” and “outsourcing services” are gaining importance on the back of advancing communications technology and increasing demand for more sophisticated content. From this viewpoint, the business strategies of this business unit include such ones close to those extended by the Consumer Service Business Unit.

Logistics & Financial Markets Segment

The Logistics & Financial Markets Segment is engaged in transportation and logistics services, insurance and financial business in Japan and abroad.

Gross profit and net income for this segment for the year ended March 31, 2006 were ¥51.4 billion or 6.3% and ¥13.4 billion or 6.6% of our consolidated totals, respectively.

This segment is composed of the Financial Markets Business Unit and the Transportation Logistics Business Unit, and has 36 subsidiaries including:

 

  Ÿ   in the Financial Markets Business Unit, Mitsui & Co. Energy Risk Management Ltd. (United Kingdom), Mitsui & Co. Precious Metals, Inc. (United States), Mitsui Bussan Futures Ltd. (Japan); and

 

  Ÿ   in the Transportation Logistics Business Unit, Nitto Logistics Co., Ltd. (Japan), Mitsuibussan Insurance and Consulting Co., Ltd. (Japan), Tri-Net (Japan) Inc. (Japan).

This segment has 5 associated companies including Mitsui Leasing & Development, Ltd. (Japan) and Quintiles Transnational Japan K.K. (Japan) in the Financial Markets Business Unit.

Financial Markets Business Unit

This business unit has 24 subsidiaries and 2 associated companies and is engaged in the following business activities:

 

  Ÿ   dealing in derivative financial instruments such as foreign exchange and financial futures, and trading of and investment in debt and equity securities;

 

  Ÿ   trading in precious metals, non-ferrous metals listed on the London Metal Exchange and derivative commodity instruments for energy, agricultural foods and other commodities;

 

  Ÿ   financial equity investments including principal investment and venture capital operation;

 

  Ÿ   real estate investment trust (“REIT”) related businesses;

 

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  Ÿ   development, origination and sales of financial products, investment in and portfolio management of financial products; and

 

  Ÿ   leasing businesses

Mitsui and its subsidiaries such as Mitsui & Co. Precious Metals, Inc. (United States) are engaged in trading and brokerage in precious metals, non-ferrous metals listed on the London Metal Exchange and derivative commodity instruments for energy, agricultural foods and other commodities. We are also engaged in sales and marketing of various derivative and financial instruments of our own development to investors and market participants. Mitsui & Co., Energy Risk Management Ltd. (United Kingdom), which we established in March 2002, enjoyed growth in derivative trading operations, mainly of crude oil and natural gas related commodities. Japan Alternative Investment Co., Ltd. (Japan) began operations in April 2002, acting as placement agent for alternative investment products, such as hedge funds, private equity funds and commodity funds. Mitsui Bussan Futures Ltd. (Japan) is a domestic subsidiary engaged in the future commodities brokering including precious metals and other commodities such as foods and oil products.

In June 2004, Mitsui and Quintiles Transnational Corp. agreed on Mitsui taking a 20% shareholding in Quintiles Transnational Japan K.K. (Japan), in a transaction designed to accelerate the growth of Quintiles Transnational Japan K.K. Quintiles Transnational Corp. is a major worldwide company, providing outsourcing services in the pharmaceutical industry. This transaction fit well with our goal of investing in first-class international companies in the healthcare and outsourcing service industries and, in particular, enhancing those companies’ Japanese operations. This business unit is also engaged in venture capital business through subsidiaries such as MVC Corporation (Japan).

In July 2004, this business unit formed Mitsui & Co., Logistics Partners Ltd. (Japan), as an asset management company for REITs that specialize in the management of investments in warehouses and distribution centers. In May 2005, we completed the listing of Japan’s first logistics facilities related REIT, Japan Logistics Fund Inc. on the Tokyo Stock Exchange.

This business unit has 40.63% participating interest in Mitsui Leasing & Development, Ltd. (Japan), a leasing company with its strengths in leasing of information-processing equipments and large scale equipment, as well as industrial machinery, aircrafts and ocean vessels.

Transportation Logistics Business Unit

The Transportation Logistics Business Unit provides sophisticated, high value added logistics services to customers leveraging its longstanding experience in offering such services groupwide. This business unit also seeks the development of new business domains through integrating logistics, financial and information technology.

Together with 12 subsidiaries and 3 associated companies, this business unit is engaged in the following business activities:

 

  Ÿ   international and domestic transport services including transportation of plants and other special cargos, tramper shipping, and airfreight;

 

  Ÿ   warehousing and port services; operation, construction and management of warehouses and harbor facilities;

 

  Ÿ   insurance agency and insurance consultation;

 

  Ÿ   solutions services for logistics, including SCM; and

 

  Ÿ   establishment and operation of REITs which invest in logistics facilities.

In the international and domestic transport services field, we have established 5 core subsidiaries including Tri-Net (Japan) Inc., which cover our operations in Japan, the Americas, Europe, South East Asia, and China, respectively. Each of those subsidiaries collaborates with the Head Office and overseas trading subsidiaries

 

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worldwide, and provides international transportation services mainly using marine containers. They also provide international combined transportation services by integrating land, sea and air transportation . In the tramper business, they provide transportation services for power and chemical plant projects and bulky cargoes such as coal, grain and fertilizers.

We have been making investments to expand our logistics businesses in the BRICs countries, the Middle East and other emerging markets. For example, in January 2006 we acquired a 25% equity stake in BALtrans Holdings, Ltd. (Hong Kong, China) which is listed in Hong Kong Stock Exchange and maintains 14 distribution bases in Main Land China.

In the field of warehousing, distribution and port service related business within Japan, this business unit has Mitsui Bussan Logistics Co., Ltd. as a holding company for three domestic subsidiaries, KYOGI WAREHOUSE CO., LTD. (Japan), Nitto Logistics Co., Ltd. (Japan) and TOSHIN SOKO KAISHA, LTD. (Japan). For example, Nitto Logistics Co., Ltd. conducts joint operations with a domestic specialty store retailer of private label apparel for outsourced production and inventory management. It provides information processing functions so that its customers optimize their logistics transactions.

This business has a subsidiary, Mitsuibussan Insurance and Consulting Co., Ltd. (Japan), as an insurance agency. In addition, the business unit has acquired insurance companies for captive insurance and operates subsidiaries which are engaged in this business field, including Insurance Company of Trinet (USA), Inc. This business unit also maintains consulting services on a variety of insurance issues, by taking advantage of the experience and know-how in risk management of this business unit.

In collaboration with the Financial Markets Business Unit, this business unit promotes logistics-related real estate property REITs. This unit intends to increase the assets for such REIT programs, seeking opportunities for the development of facilities, brokerage in properties and tenants.

Americas Segment

The Americas Segment trades in various commodities and conducts related business led by overseas trading subsidiaries in North, Central and South America. Mitsui & Co. (U.S.A.), Inc., or Mitsui U.S.A., manages the business of the segment as the center of the regional strategy. Effective April 2006, following the introduction of our regional business unit system, the Americas Business Unit was formed which consists of those trading subsidiaries operating in this region. The Chief Operating Officer of this business unit has been delegated an authority of operations within the region.

Gross profit and net income for this segment for the year ended March 31, 2006 were ¥61.6 billion or 7.5% and ¥12.6 billion or 6.2% of our consolidated totals, respectively.

This segment consists of 9 trading subsidiaries including Mitsui U.S.A., Mitsui & Co. (Canada) Ltd., Mitsui Brasileira Importacao e Exportacao S.A., Mitsui Chile Ltda., and 30 other subsidiaries owned mainly by Mitsui U.S.A., including Mitsui Steel Holdings, Inc., Portac Inc., Channel Terminal Corp., Westport Petroleum Inc., Mitsui Tubular Products, LLC. and Mitsui Comtek Corp. and 2 associated companies.

Mitsui U.S.A. is our largest overseas subsidiary, and carries out many diversified business activities together with our subsidiaries and associated companies, in collaboration with the operating segments of the Head Office in Japan. Mitsui U.S.A. has been leading our entry in the U.S. market, and we believe that Mitsui U.S.A. is one of the major exporters of American products.

Mitsui U.S.A. has its corporate head office in New York City. Other offices are located in Cleveland, Detroit, Houston, Los Angeles, Nashville, Portland, San Francisco, Seattle and Washington, D.C. Business activities of Mitsui U.S.A.’s major operating divisions are as follows:

 

  Ÿ  

The Iron & Steel Products Division maintains alliances with steel mills, steel processors, and customers in the U.S. and other countries. Working closely with solution providers, it specializes in SCM of steel products,

 

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manages inventory and process arrangements. This division has been focusing on business activities through subsidiaries such as Mitsui Steel, Inc. for steel product sales and demand chain management (“DCM”) services, Mitsui Steel Holdings, Inc which holds Mi-Tech Steel Inc., a steel service center, PK U.S.A., Inc., an automotive steel stamping, Hannibal Industries, Inc., a steel tube and pallet rack manufacturing operator, Champions Pipe & Supply, a pipe distributor, and MTP LLC, a pipe sales entity.

 

  Ÿ   The Iron & Raw Materials and Non-Ferrous Metals Division specializes in iron and steel raw materials, coal, primary aluminum, aluminum alloy, copper cathode, and non-ferrous metals. The division is supported by relationships with subsidiaries jointly held with the Head Office, for example, Raw Materials Development Co., Ltd., in which the division has an equity share of 20%.

 

  Ÿ   The Power, Transportation & Plant Projects Division deals in power, energy, transportation, and industrial and infrastructure projects in the Americas through close coordination with the Head Office. In addition, subsidiaries such as Hydro Capital Corp. for waste water treatment projects in Mexico and MIT Wind Power, Inc. for wind power generation in Texas are engaged in this business field.

 

  Ÿ   The Machinery Division deals in motor vehicles, ship and marine projects, aircraft and construction and industrial machinery. The Division works closely with United Auto Group, Hino Motors, Chevron, Modec International, Embraer, JetBlue and Komatsu. Particularly, its activities are focused on investment in distribution & retails of automobile and construction machinery, outdoor power equipment, newbuilding ship tonnage provider to oil major and shipping companies, and aircraft leasing for growing regional airlines.

 

  Ÿ   The Organic Chemicals Division and the Plastics & Inorganic Chemicals Division are engaged in the domestic and international trade of various organic and inorganic chemicals and chemical intermediates, plastic resins, compounds and final products, pharmaceutical intermediates, food additives, fertilizer and crop protection chemicals, and petrochemicals. For example, this division has a subsidiary, Channel Terminal Corp., which is engaged in the chemical tank leasing business. Recent development of this division toward a new business is an acquisition of CornerStone Research & Development Inc., which focuses on processing and packaging of healthcare foods and suppliments.

 

  Ÿ   The Energy Division specializes in the global trading of petroleum products, including crude oil, heavy oil and petroleum coke, as well as the importation of LNG. This division has a subsidiary, Westport Petroleum, Inc., in which Mitsui U.S.A. has 65.0% equity share. The remaining share is owned by the Head office. Westport Petroleum, Inc. is engaged in sales, trading and commercial and operational services to the energy industry with respect to pipeline and cargo trading of petroleum products throughout the United States and major international energy markets. These transactions by Westport Petroleum, Inc. account for a significant portion of our revenues from sales of products groupwide.

 

  Ÿ   The Foods and Retail division deals in grain, coffee, foods materials and other foods products. This division has a subsidiary, United Grain Corp, which forms United Harvest, LLC, a joint venture with CHS Inc. for export facility operations for wheat and barley, and also has 20% minority interest in WILSEY FOODS INC. See also “Foods &Retail Business Unit” for business collaboration with CHS Inc. Additionally, Mitsui Foods Inc. is specialized in the import food distribution business.

 

  Ÿ   The Life commerce division focuses on consumer-oriented business development. This division has a subsidiary, Portac, Inc., a lumber mill, which produces dimension lumber and specialty items for U.S consumption and export. In other areas, the division has an equity share in MBK Real Estate Ltd., a real estate subsidiary jointly held with the Head Office and engaged in development and homebuilding services.

Europe Segment

The Europe Segment trades in various commodities and conducts related businesses led by overseas trading subsidiaries in Europe and Africa. Mitsui & Co. Europe PLC (“Mitsui Europe”) is authorized to manage the business of this segment as the center of its regional strategy. In addition, this segment carries out diversified business activities in collaboration with the operating segments of the Head Office. Effective April 2006, following the introduction of our regional business unit system, the Europe Business Unit was formed which

 

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consists of those trading subsidiaries in this region. The Chief Operating Officer of this business unit has been delegated an authority for operations within the region.

Gross profit and net income for this segment for the year ended March 31, 2006 were ¥22.4 billion or 2.7% and ¥4.9 billion or 2.4% of our consolidated totals, respectively.

As of March 31, 2006, this segment consisted of 10 trading subsidiaries, including Mitsui Europe, Mitsui & Co. UK PLC, Mitsui & Co. Deutschland GmbH, 6 subsidiaries and 6 associated companies.

Mitsui Europe, our wholly-owned subsidiary with its head office in London, manages the overall business activities in Western Europe, Africa, Central, Eastern Europe and Turkey through its 9 operating subsidiaries, 10 branch offices and liaison offices. Mitsui Europe collaborates with our subsidiaries and associated companies of other operating segments.

In April 2005, this segment reorganized its internal structure. Before the change, each of those operating subsidiaries independently reported to the Managing Director of Mitsui Europe, with the result that their business plans and operations tended to be limited to specific countries. In order to accelerate business development based on a product strategy that encompasses the whole of Europe, this segment introduced a Business Division System within Europe, in which Divisional Operating Officers oversee operations by products and services in the region and directly report to Managing Director of Mitsui Europe.

Recently, the major parts of business in this segment have been sales and trading in steel products, chemicals and machinery. For example, this segment provided assistance services for SCM of steel products procured by Norsk Hydro ASA. In the chemical business, this segment has been engaged in sales and trade in various chemical products and materials supported by our global network and relationship with large scale manufactures including Bayer Aktiengesellschaft. In machinery business, for Mitsui’s worldwide power plant and industrial plant and transportation projects, this segment has provided assistance service in collaboration with European manufacturers such as Siemens Aktiengesellschaft.

Over the years, in Central and Eastern Europe, we have established trading subsidiaries and representative offices to expand business opportunities in the region, and have continuously participated in joint ventures, mainly with Japanese manufactures. In connection with the enlargement of European Union, Japanese automobile, electric and chemical manufactures are rushing to set up operations in the region. We are collaborating with them by taking advantage of our existing business bases.

During the year ended March 31, 2006, we entered a joint operation with Arcelor S.A., a European steel maker, which was merged to Arcelor and Mittal Steel Company N.V, to supply steel sheet to Japanese automobile and automobile parts manufacturers.

Asia Segment

In order to develop new business opportunities emerging with the development of network economies based around China, the ASEAN countries and India, we introduced an Asian Regional Managing Directorship system. Broad authority and responsibility to manage our businesses throughout non-Japan Asia is delegated to the Regional Managing Director, Asia starting in the year ended March 31, 2006. Effective April 2006, following the introduction of our regional business unit system, the Asia Business Unit was formed and consists of the trading subsidiaries, branches and liaison offices in this region. The Chief Operating Officer of this business unit has been delegated an authority for operation within this region.

Gross profit and net income for this segment for the year ended March 31, 2006 were ¥27.4 billion or 3.4% and ¥9.3 billion or 4.6% of our consolidated totals, respectively.

China

China has been a focus of recent global attention, with 9.9% and 10.1% growth in gross domestic product in 2005 and 2004, respectively, as a result of its accession to the WTO and a growing reputation as an efficient and

 

47


cost effective manufacturer of goods. We have been increasing our operations in, and shifting management resources to, Greater China, which includes mainland China, Hong Kong and Taiwan, in order to expand and strengthen our business operations involving products such as automobiles, consumer products, IT, electronics, energy and metals, while reinforcing our transportation and logistics services.

Our presence in China is comprised of ten local subsidiaries, including Mitsui & Co., (China) Ltd., an investing company in Beijing and six subsidiaries in China’s bonded areas including Mitsui & Co. (Shanghai) Ltd. as well as Mitsui & Co. (Hong Kong) Ltd. In addition, we have established representative offices in 13 cities in China as of March 2006.

In September 2005, Mitsui received approval from the Chinese Ministry of Commerce to establish three wholly owned trading companies, permitting us to conduct import and export and wholesale trade domestically within China, which would enable us to trade in a broader range of products, including valueadded services in finance and logistics. Thus, Mitsui & Co. (China) Trading Ltd. and Mitsui & Co. (Guangdong) Ltd. were established in 2005 and started operations.

Mitsui & Co., (China) Ltd. has made investments jointly with the business units of the Head Office in critical joint ventures in China. Among others, we place a high priority on establishment of logistic network within China. For example:

 

  Ÿ   In March 2003, we entered into a comprehensive strategic alliance with China Postal Logistics Co., Ltd. Through this alliance, we are in a position to utilize the facilities and distribution networks of China’s postal service, the China State Post Bureau.

 

  Ÿ   Mitsui International Logistics and Trade (Suzhou) Co., Ltd., in which Mitsui & Co., (China) Ltd. has minority share, has the right to conduct import and export under our own name outside a bonded area.

ASEAN Region

In the ASEAN region, overseas offices including the Singapore, Kuala Lumpur and Manila branches, trading subsidiaries including Mitsui & Co., (Thailand) Ltd., Mitsiam International Ltd. (Thailand), PT Mitsui Indonesia (Indonesia) and associated companies jointly collaborate with the Head Office and engage in various business activities involving, among other things, chemical and metal products and industrial type projects. Such industrial projects are referred to in the discussion of business activities of the Infrastructure Projects Business Unit above. With the Head Office, these branches and trading subsidiaries jointly establish various subsidiaries and participate in joint ventures formed with the third parties.

Southwest Asia

Our operations in India were traditionally handled by branch offices in New Delhi, Calcutta, Madras and Bombay and were concentrated primarily in exporting commodities, such as iron ore, finished iron and steel products, textiles, and marine products, to Japan and other areas of the world. However, with the increasing deregulation of the Indian economy, in March 2003 we established Mitsui & Co., India Pvt. Ltd. Through Mitsui & Co., India Pvt. Ltd, we expect not only to engage in import and export-related transactions but also to pursue investment opportunities in domestic distribution channels.

Other Overseas Areas Segment

This segment includes all of our region-based subsidiaries, liaison offices and affiliated companies excluding those in our Americas, Europe and Asia Segments. The subsidiaries, liaison offices and associated companies in this segment are located primarily in Oceania, the Middle East, and CIS. The Overseas Areas Segment is engaged in business activities that are essentially similar to that of Mitsui. We conduct business activities in all industry sectors based on our specialized knowledge particular to that region.

Gross profit and net income for this segment for the year ended March 31, 2006 were ¥4.9 billion or 0.6% and ¥14.3 billion or 7.1% of consolidated totals, respectively.

 

48


Oceania

In Australia, Mitsui & Co. (Australia) Ltd. is active in the development of minerals such as iron ore and coal, energy and agricultural exports in collaboration with corresponding operating segments, mainly in the Head Office. As described in the Iron & Steel Raw Materials and Non-Ferrous Metals Segment and the Energy Segment above, Australia is a critical geographic area in our corporate strategy. Mitsui & Co. (Australia) Ltd. participates in Mitsui Iron Ore Development Pty. Ltd. (Australia) and Mitsui Coal Holdings Pty. Ltd. (Australia) with equity shares of 20% and 30%, respectively.

The Middle East

In the Middle East we have established trading subsidiaries Mitsui & Co., Middle East Ltd. (United Arab Emirates), Mitsui and Co.(Middle East) B.S.C.(c) (Bahrain), Mitsui and Co., Iran Ltd. (Iran) and Mitsui and Co. Kuwait W.L.L.(Kuwait). Mitsui & Co., Middle East Ltd. owns offices in United Arab Emirates, Qatar and Oman. Mitsui has 10 representative offices in the Middle East countries including Saudi Arabia. These trading subsidiaries and offices in the Middle East collalorate with the Head Office primarily in the field energy development and production and projects of petrochemical plants and power plants.

All Other Segment

The operations of the All Other Segment include financing services, office services and other services to external customers, and/or to us, and associated companies.

Gross profit and net income for this segment for the year ended March 31, 2006 were ¥7.1 billion or 0.9% and ¥11.2 billion or 5.5% of our consolidated totals, respectively.

The All Other Segment has 11 subsidiaries and 1 associated company. The activities of major subsidiaries in this segment are as follows:

 

  Ÿ   Mitsui & Co. Financial Services Ltd. is engaged in financial services such as commercial loan and cash management services, mainly provided to domestic subsidiaries and associated companies.

 

  Ÿ   Mitsui & Co., Asia Investment Ltd. (Singapore) is engaged in-house financial services in the South East Asian region.

Principal Markets

We are involved in the worldwide trading of various commodities. The following table provides a breakdown of our revenues by commodity type for the years ended March 31, 2006, 2005 and 2004.

 

     In Billions of Yen
     Years Ended March 31,
     2006    2005    2004

Revenues(1),

        

Distribution by Commodity:

        

Iron and Steel

   ¥ 523.7    ¥ 407.1    ¥ 312.9

Non-Ferrous Metals

     102.1      161.4      157.2

Machinery

     368.0      264.9      301.3

Electronics & Information

     164.9      144.7      119.8

Chemicals

     886.7      729.1      520.1

Energy

     1,360.5      1,035.1      954.7

Foods

     424.6      473.6      389.5

Textiles

     42.4      43.0      32.8

General Merchandise

     78.8      96.1      84.8

Property and Service Business

     163.8      139.6      97.4
                    

Consolidated Total

   ¥ 4,115.5    ¥ 3,494.6    ¥ 2,970.5
                    

 

49



Notes:

(1) In accordance with SFAS No. 144, revenues from discontinued operations are eliminated from each product amount and “Consolidated Total.” The figures for the years ended March 31, 2005 and 2004 have been reclassified to conform to the current year presentation.

The following table shows our total trading transactions in each of our major markets for the years ended March 31, 2006, 2005 and 2004.(1)(2)(3)

 

     In Billions of Yen
     Years Ended March 31,
     2006    2005    2004

Japan

   ¥ 8,554.6    ¥ 7,719.4    ¥ 7,177.1

United States

     1,265.0      1,090.9      831.3

United Kingdom

     174.6      200.4      159.7

China

     709.3      607.9      421.1

All Other

     4,182.2      3,965.3      3,681.9
                    

Consolidated Total

   ¥ 14,885.7    ¥ 13,583.9    ¥ 12,271.1
                    

Notes:

(1) Total trading transactions is a voluntary disclosure and represents the gross transaction volume or the nominal aggregate value of the sales contracts in which we act as principal and transactions in which we serve as agent. Total trading transactions is not meant to represent sales or revenues in accordance with U.S. GAAP. Total trading transactions should not be construed as equivalent to, or a substitute or proxy for, revenues, or as an indicator of our operating performance, liquidity or cash flows generated by operating, investing or financing activities. A substantial part of total trading transactions represents transactions in which title to and payment for the goods pass through us without physical acquisition and delivery through our inventories. We have included the information concerning total trading transactions because it is used by similar Japanese trading companies as an industry benchmark, and we believe it is a useful supplement to results of operations data as a measure of our performance compared to other similar Japanese trading companies. Total trading transactions is included in the measure of segment profit and loss reviewed by the chief operating decision maker. See Notes 2, “BASIS OF FINANCIAL STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” and 17, “SEGMENT INFORMATION” accompanying the consolidated financial statements for further discussion.
(2) Total trading transactions are attributed to countries based on the location of customers.
(3) In accordance with SFAS No. 144, total trading transactions to external customers from discontinued operations are eliminated from each geographic area amount and “Consolidated Total.” The figures for the years ended March 31, 2005 and 2004 have been reclassified to conform to the current year presentation.

 

C. Organizational Structure.

We are a global general trading company and we conduct our business with our subisidiaries and associated companies. As of March 31, 2006, we had 376 subsidiaries and 206 associated companies that are accounted for by the equity method.

 

50


The table below provides information on our significant subsidiaries as of March 31, 2006. We have supplementarily provided voting power where it differs from ownership interest.

 

Operating Segment

 

Company

  Country of
Incorporation
 

Principal Business

 

Ownership
Interest

(%)

 

Voting
Power

(%)

Iron & Steel Products   Mitsui Bussan Construction Materials Co., Ltd.   Japan   Sales of construction materials and semi-assembled steel products   100.0  
  SINTSUDA CORPORATION(1)   Japan   Wholesale of steel products   100.0  
  Regency Steel Asia Pte Ltd.   Singapore   Wholesale and retail of steel products   85.0  
  Seikei Steel Tube Corp.   Japan   Manufacture and sales of steel tube   70.0  
                     
Iron & Steel Raw Materials and Non-Ferrous Metals   Mitsui Iron Ore Development Pty. Ltd.   Australia   Mining and sales of Australian iron ore   100.0  
  Sesa Goa Limited   India   Mining and sales of Indian iron ore and processing and sales of coke   51.0  
  Mitsui Itochu Iron Pty. Ltd.   Australia   Mining and sales of Australian iron ore   70.0  
  Mitsui Coal Holdings Pty. Ltd.   Australia   Investments in Australian coal business   100.0  
  Japan Collahuasi Resources B.V.   Netherlands   Investments in a copper mine in Chile   61.9  
  Raw Materials Development Co., Ltd.   United States   Investments in ferrous raw materials business   100.0  
  Mitsui Bussan Raw Materials Development Corp.   Japan   Wholesale of ferrous and non-ferrous scrap and ferroalloys   100.0  
  Mitalco Inc.   United States   Aluminum smelting   100.0  
  Mitsui & Co. Metals Ltd.   Japan   Marketing of copper and aluminum metals   100.0  
                     

Machinery &

Infrastructure Projects

  MBK Project Holdings Ltd.   Japan   Investments in manufacturers of plant-related materials and equipment   100.0  
  Mitsui Rail Capital Holdings, Inc.   United States   Freightcar leasing and management in North America   100.0  
  Mitsui Bussan Plant & Project Corp.   Japan   Sales of chemical plants and heavy machinery equipment   100.0  
  Mitsui Power Ventures Limited   United Kingdom   Investments in power generation business   100.0  
  Mitsui Rail Capital Europe B.V.   Netherlands   Freightcar leasing and management in Europe   100.0  
  Clio Marine Inc.   Liberia   Shipping business   100.0  
  Toyota Chile S.A.   Chile   Import and sales of automobiles and auto parts in Chile   100.0  
  P.T. Bussan Auto Finance   Indonesia   Motorcycle retail finance   90.0  
  Mitsui Automotive Europe B.V.   Netherlands   Investments in automotive-related companies and trading of automobiles   100.0  
  Lepta Shipping Co., Ltd.   Liberia   Shipping business   100.0  
  Mitsui Bussan Aerospace Co., Ltd.   Japan   Sales of helicopters and defence related systems   100.0  
  Tombo Aviation Inc.   United States   Purchase, sales and leasing of aircraft   100.0  
  CM Pacific Maritime Corporation   Liberia   Shipping business   100.0  
  MMK CO., LTD.   Japan   Sales of machine tools and injection molding machine   100.0  

 

51


Operating Segment

 

Company

  Country of
Incorporation
 

Principal Business

 

Ownership
Interest

(%)

 

Voting
Power

(%)

  Tombo Capital Corporation   Japan   Purchase, sales and leasing of aircraft   100.0  
                     
Chemical   P.T. Kaltim Pasifik Amoniak   Indonesia   Production and sales of anhydrous ammonia   55.0  
  Novus International, Inc.   United States   Manufacturing and sales of feed additives   65.0  
  Fertilizantes Mitsui S.A. Industria e Comercio   Brazil   Production and sales of fertilizers   100.0  
  Nikken Fine Chemicals Co., Ltd.   Japan   Production and sales of sorbitol and related organic chemical products   100.0  
  MITSUI BUSSAN SOLVENT & COATING CO., LTD.   Japan   Sales and trading of solvents and coating materials   100.0  
  Japan-Arabia Methanol Company Ltd.   Japan   Investments in methanol producing business in Saudi Arabia and sales of products   55.0  
  Mitsui Bussan Agro Business Co., Ltd.   Japan   Development and sales of fertilizers and agricultural products   100.0  
  Daito Chemical Co., Ltd.   Japan   Production and sales of industrial chemicals   70.0  
  Mitsui Bussan Plastics Co., Ltd.   Japan   Wholesale of plastic raw materials and products   100.0  
  Nippon Trading Co., Ltd.   Japan   Sales of plastics and chemicals   53.9   54.4
  Mitsui Electronics Asia Pte. Ltd.   Singapore   Service in the process of grinding of liquid crystal display parts   100.0  
  Bussan Nanotech Research Institute Inc.   Japan   Research and development of nano-products   100.0  
                     
Energy   Mitsui E&P Australia Pty Limited   Australia   Exploration, development and production of oil and natural gas   100.0  
  Mittwell Energy Resources Pty., Ltd.   Australia   Sales of crude oil and condensate, development of Casino gas field in Australia   100.0  
  Mitsui E&P Middle East B.V.   Netherlands   Exploration, development and production of oil and natural gas in Oman   79.1   60.0
  Wandoo Petroleum Pty Ltd   Australia   Exploration, development and production of oil and natural gas   70.9   100.0
  Mitsui Gas Development Qatar B.V.   Netherlands   Development and production of natural gas and condensate   100.0  
  Mitsui LNG Nederland B.V.   Netherlands   Investments in Qatar LNG project   100.0  
  Mitsui & Co. (E&P) B.V.   Netherlands   Exploration, production and investments in oil and natural gas   100.0  
  Endeavour Resources Limited   United Kingdom   Investments in Japan Australia LNG (MIMI) Pty. Ltd.   100.0  
  Mitsui Sakhalin Holdings B.V.   Netherlands   Investments in Sakhalin Energy Investment Company Ltd.   100.0  
  Mitsui E&P New Zealand Limited   New Zealand   Exploration, production and investments in oil and natural gas   100.0  

 

52


Operating Segment

 

Company

  Country of
Incorporation
 

Principal Business

 

Ownership
Interest

(%)

 

Voting
Power

(%)

  Mitsui Oil (Asia) Pte. Ltd.   Singapore   Physical and future trading of crude oil and petroleum products   100.0  
  Mitsui Oil Co., Ltd.   Japan   Sales of petroleum products in Japan   89.9  
  Mitsui Liquefied Gas Co., Ltd.   Japan   Sales of liquefied petroleum gas in Japan   89.9  
  Kokusai Oil & Chemical Co., Ltd.   Japan   Sales of petroleum products in Japan   100.0  
                     
Foods & Retail   Mitsui Norin Co., Ltd.   Japan   Manufacture and sales of food products   51.9   87.6
  MITSUI FOODS CO., LTD.   Japan   Wholesale of foods and beverages   99.9  
  WILSEY FOODS, INC.   United States   Investments in processed oil food company   90.0  
  DAI-ICHI BROILER CO., LTD.   Japan   Production, processing and sales of broilers   72.3  
  VENDOR SERVICE CO., LTD.   Japan   Procurement and demand chain planning and management of food materials   100.0  
  Hokushuren Company Limited   Japan   Wholesale of liquor and foods   70.5   72.9
  Retail System Service Co., Ltd.   Japan   Sales of sundries and foodstuff to retailers   100.0  
                     
Lifestyle, Consumer Service and Information, Electronics & Telecommunication   Mitsui Bussan Inter-Fashion Ltd.   Japan   Planning and management of production and distribution of apparel   100.0  
  Bussan Real Estate Development Co., Ltd.   Japan   Real estate sales, leasing and management   100.0  
  MBK Real Estate Ltd.   United States   Real estate-related business   100.0  
  Mitsui Bussan House-Techno, Inc.   Japan   Housing business   100.0  
  CABLENET SAITAMA CO., LTD.   Japan   Cable TV business in urban area   50.8  
  Kids Station Inc.   Japan   Broadcasting of TV programs for children   67.0  
  Telepark Corp.   Japan   Sales of mobile phones and related telecommunication services   61.9  
  Nextcom K.K.   Japan   Network integration focused on multi-vendor and in-house developed solutions   49.0  
  Mitsui Knowledge Industry Co., Ltd.   Japan   Planning, development, maintenance and operation of computer systems   67.4  
  TOYO Officemation, Inc.   Japan   Design, operation and maintenance of information systems   100.0  
  Mitsui Electronics Inc.(2)   Japan   Investments in semiconductor device sales companies   100.0  
                     
Logistics & Financial Markets   Mitsui & Co. Energy Risk Management Ltd.   United Kingdom   Trading of energy derivatives   100.0  
  Mitsui & Co. Precious Metals, Inc.   United States   Trading of precious metals   100.0  
  Mitsui Bussan Futures Ltd.   Japan   Future commission merchant   100.0  
  Mitsui Bussan Precious Metals (Hong Kong) Limited   Hong Kong,
China
  Trading of precious metals   100.0  

 

53


Operating Segment

 

Company

  Country of
Incorporation
 

Principal Business

 

Ownership
Interest

(%)

 

Voting
Power

(%)

  Bussan Capital Corp.   Japan   Securities investment, commercial finance and related activities   100.0  
  Nitto Logistics Co., Ltd.   Japan   Warehousing, customs broking and real estate leasing   100.0  
  Mitsuibussan Insurance and Consulting Co., Ltd.   Japan   Property and casualty insurance consignment and agency services   100.0  
  Tri-Net (Japan) Inc.   Japan   International integrated transportation services   100.0  
  Tri-Net Logistics (Asia) Pte. Ltd.   Singapore   International integrated transportation services   100.0  
  TOSHIN SOKO KAISHA, LTD.   Japan   Warehousing and customs broking   100.0  
  KYOGI WAREHOUSE CO., LTD.   Japan   Warehousing, transportation and real estate   99.0  
                     
Americas   Mitsui & Co. (U.S.A.), Inc.   United States   Trading   100.0  
  Mitsui & Co. (Canada) Ltd.   Canada   Trading   100.0  
  Mitsui Brasileira Importacao e Exportacao S.A.   Brazil   Trading   100.0  
  Mitsui Steel Holdings, Inc.(3)   United States   Investments in steel-related businesses   100.0  
  Westport Petroleum, Inc.   United States   International trading of petroleum products and crude oil   100.0  
  Champions Pipe & Supply, Inc.   United States   Sales of steel pipes   94.0  
  Portac, Inc.   United States   Manufacture of lumber and lumber products   100.0  
  Mitsui Steel, Inc.   United States   Wholesale and SCM services for steel products   100.0  
  CornerStone Research & Development, Inc.   United States   Processing and packaging of healthcare foods and supplements   100.0  
  Channel Terminal Corp.   United States   Investments in tank leasing business   100.0  
                     
Europe   Mitsui & Co. Europe PLC   United Kingdom   Management of business in Europe and Africa   100.0  
  Mitsui & Co. UK PLC   United Kingdom   Trading   100.0  
 

Mitsui & Co. Financial Services (Europe) B.V.(4)

  Netherlands   Financial services   100.0  
  Mitsui & Co. Deutschland GmbH   Germany   Trading   100.0  
  Mitsui & Co. Benelux S.A./N.V.   Belgium   Trading   100.0  
  Mitsui & Co. France S.A.S.   France   Trading   100.0  
  Mitsui & Co. Italia S.p.A.   Italy   Trading   100.0  
                     
Asia   Mitsui & Co. (Hong Kong) Ltd.   Hong Kong,
China
  Trading   100.0  
  Mitsui & Co. (China) Ltd.   China   Management of business in China   100.0  
  Mitsui & Co. (China) Trading Ltd.   China   Trading   100.0  
  Mitsui & Co. (Shanghai) Ltd.   China   Trading   100.0  
  Mitsui & Co. (Taiwan) Ltd.   Taiwan   Trading   100.0  
  Mitsui & Co. (Thailand) Ltd.   Thailand   Trading   100.0  
  Mitsiam International Ltd.   Thailand   Trading   51.2   55.0

 

54


Operating Segment

 

Company

  Country of
Incorporation
 

Principal Business

 

Ownership
Interest

(%)

 

Voting
Power

(%)

Other Overseas Areas   Mitsui & Co. (Australia) Ltd.   Australia   Trading   100.0  
  Mitsui & Co., Middle East Ltd.   United Arab
Emirates
  Trading   100.0  
                     
All Other   Mitsui & Co. Financial Services Ltd.(5)   Japan   Financial services   100.0  
  Mitsui & Co. Financial Services (Asia) Ltd.(6)   Singapore   Financial services   100.0  

(1) Changed its corporate name from Tsuda Corporation in April 2005
(2) Changed its corporate name from Xion Electronics Inc. in October 2005
(3) Changed its corporate name from Mitsui Steel Development Co., Inc. in December 2005
(4) Changed its corporate name from Mitsui & Co. International (Europe) B.V. in August 2006
(5) Changed its corporate name from Bussan Credit Co., Ltd. in April 2005
(6) Changed its corporate name from Mitsui & Co., Asia Investment Ltd. in July 2006

 

D. Property, Plant and Equipment.

The following table provides a list of our principal property, plant and equipment as of March 31, 2006.

(Sft: Square feet, MT: Metric Ton)

 

Property, Plant and Equipment Description (Holder
or Lessee Other than Mitsui)

  

Location

   Size or Annual
Production
Capacity
  

Use of property

In Japan:

           

Mitsuibussan Building

   Tokyo    1,321,572    Sft    Office use (Corporate Headquarters)

Osaka Mitsuibussan Building

   Osaka    450,306    Sft    Office use

Nagoya Mitsuibussan Building

   Nagoya    152,067    Sft    Office use

Hibiya Central Building

   Tokyo    509,841    Sft    Office building for lease

Bussan Building Annex

   Tokyo    210,705    Sft    Office building for lease

Company Housing & Dormitory

   Chiba    130,010    Sft    Employees’ residential facility

Human Resource Development Center

   Shizuoka    83,863    Sft    Training facility

Land and equipment (Sintsuda Corporation)

   Yokohama    197,324    Sft    Coil center

Land and equipment (Mitsui Liquefied Gas Co., Ltd.)

   Ishikawa    852,072    Sft    Liquefied petroleum gas terminal

Land (MITSUI FOODS CO., LTD.)

   Saitama    71,171    Sft    Distribution center

Land and equipment (DAI-ICHI BROILER CO., LTD.)

   Aomori    46,102    Sft    Broiler processing factory

Land and equipment (Mitsui Norin Co., Ltd.)

   Yamanashi    339,871    Sft    Tea leaf processing factory

Land (Hokushuren Company Limited)

   Sapporo    286,751    Sft    Distribution center

Wakamatsu Building & Shinsuna Bayside Building (Bussan Real Estate Development Co., Ltd.)

   Tokyo    172,406    Sft    Office building for lease

Land (KYOGI WAREHOUSE CO., LTD.)

   Tokyo    649,753    Sft    Logistics center

Sun East Shinonome Building & Sun East Tatsumi Building (Nitto Logistics Co., Ltd.)

   Tokyo    129,221    Sft    Office use and office building for lease

Tojin Building (TOSHIN SOKO KAISHA, LTD.)

   Tokyo    26,759    Sft    Office use and office building for lease

 

55


(Sft: Square feet, MT: Metric Ton)

 

Property, Plant and Equipment Description (Holder
or Lessee Other than Mitsui)

  

Location

   Size or Annual
Production
Capacity
  

Use of property

Overseas:

           

Office space (Mitsui & Co. (U.S.A.), Inc.)

   United States    180,507    Sft    Office space leased from others

Office building (Mitsui & Co. UK PLC)

   United Kingdom    64,369    Sft    Office use

Equipment (Mitsui Coal Holdings Pty. Ltd.)

   Australia(1)    5,904,000    Mt    Mining equipment for coal

Equipment (Mitsui Iron Ore Development Pty. Ltd.)

   Australia(1)    21,674,000    Mt    Mining equipment for iron ore

Equipment (Mitsui-Itochu Iron Pty. Ltd.)

   Australia(1)    2,521,000    Mt    Mining equipment for iron ore

Equipment (Sesa Goa Limited)

   India    2,844,000    Mt    Mining equipment for iron ore

Land and plants (P.T. Kaltim Pasifik Amoniak)

   Indonesia    579,397    Sft    Ammonia manufacturing plant

Land and plants (Novus International, Inc.)

   United States    658,187    Sft    Methionine production facility

Office building (MBK Real Estate Europe Limited)

   United Kingdom    188,254    Sft    Office building for lease

Senior service apartment (MBK Real Estate, Ltd.)

   United States    146,628    Sft    Leasing asset

Chemical tank yard (Mitsui & Co. (U.S.A.), Inc.)

   United States    11,495,355    Sft    Chemical tank

(1) Information on our mining activities related to Mitsui Coal Holdings Pty. Ltd., Mitsui Iron Ore Development Pty. Ltd., and Mitsui-Itochu Iron Pty. Ltd. that are located in Australia and Sesa God Limited that is located in India is shown in “Iron & Steel Raw Materials and Non-Ferrous Metals Business Unit” of “B. Business Overview” in this Item and “Mining Activities” below.

In addition to the above, our major assets leased to others as of March 31, 2006 were as below:

 

  Ÿ   Clio Marine Inc. (Liberia), Lepta Shipping Co., Ltd. (Liberia) and LPG Transport Service Ltd. (Bermuda) own ocean vessels leased to foreign and domestic shipping companies whose combined book value amounting to ¥33 billion;

 

  Ÿ   Mitsui Rail Capital Holdings Inc. (United States) and Mitsui Rail Capital Europe B.V. (Netherlands) own rolling stock mainly leased to railway companies in the United States and European countries amounting to ¥36 billion as book value; and

 

  Ÿ   Tombo Aviation Inc. (United States) owns aircraft leased to foreign and domestic airline companies amounting to ¥4 billion as book value.

For information on oil and gas producing activities, see “Supplementary Information on Oil and Gas Producing Activities (Unaudited)” to the consolidated financial statements included elsewhere in this annual report.

A portion of the land, buildings and equipment owned by us is subject to mortgages or other liens. As of March 31, 2006, the aggregate amount of such mortgages or other liens was ¥67 billion. We know of no material defect in our title to neither of any of the properties nor of any material adverse claim with respect to them, either pending or contemplated.

We consider our offices and other facilities to be well maintained and believe that our plant capacity is adequate for our current requirements. For the information on plans to construct, expand or improve facilities, in particular those related to mineral resource projects and oil and gas projects, see relevant descriptions in “Item 4.A. History and Development of the Company—Capital Expenditures,” “Iron & Steel Raw Materials and Non-Ferrous Metals Segment” and “Energy Segment” of “Item 4.B. Business Overview” and “Mining Activities” below in this section.

We do not believe there are any material environmental issues that would affect the utilization of our assets.

 

56


Mining Activities

Information regarding our mining activities is provided below.

IRON ORE

Name of Joint Venture or Investee(1)

Entity by which Mitsui Participates in the Mining Activity and its Ownership Interest

Area of Mining Operation (Region, State, Country)

 

Name of Mines(2)

 

Location

 

Type of
Mineral
Resources(3)

  Fe Basis
(%)
 

Means of Access
to the Property

 

Title/Lease

 

Type of
Mine

 

Power Source

Robe River Iron Associates

         

Mitsui Iron Ore Development Pty. Ltd. (33%)

       

Pilbara Region, Western Australia, Australia

         

Mesa J(4)

  Robe Valley, north of the town of Pannawonica   Pisolite   57.2   Railway and port in Cape Lambert (owned by Robe River Iron Associates and operated by Pilbara Iron Pty Ltd.)   Agreements for life of mine with Government of Western Australia   Open pit   Supplied through the integrated Hamersley and Robe power network operated by Pilbara Iron

West Angelas(4)

  Approximately 100km west of the town of Newman   Marra Mamba   62.2   Same as above   Same as above   Open pit   Same as above

Mount Newman Joint Venture

         

Mitsui Itochu Iron Pty. Ltd. (10%) (Mitsui share of Mitsui Itochu Iron Pty. Ltd. is 70%)

 

Pilbara Region, Western Australia, Australia

       

Mt. Whaleback

  Near the town of Newman, 426 km south of Port Headland  

Brockman

Marra Mamba

  63.2
62.3
  Railway (owned and operated by Mount Newman Joint Venture) and port in Port Headland (owned and operated by Mount Newman Joint Venture)   Mineral lease granted in 1967 under the Iron Ore (Mount Newman) Agreement Act 1964 scheduled to expire in 2009 with rights for successive renewals for 21 years   Open pit   Sourced from Alinta Dewap

Yandi Joint Venture

         

Mitsui Iron Ore Development Pty. Ltd. (7%)

       

Pilbara Region, Western Australia, Australia

       

Marillana Creek

  92 km north of Newman, 310 km south of Port Headland   Channel Iron Deposit   57.9   Rail spur (owned by Yandi Joint Venture) connected to the main Newman/ Hedland line (owned and operated by Mount Newmani Joint Venture) and port inn Port Hedland (owned and operated by Mount Newman Joint Venture)   Mining lease granted in 1991 under the Iron Ore (Marillana Creek) Agreement Act 1991 scheduled to expire in 2012 with the right to extend for additional 42 years   Open pit  

Sourced from Alinta Dewap

 

57


Name of Mines(2)

 

Location

 

Type of

Mineral

Resources(3)

 

Fe Basis

(%)

 

Means of Access

to the Property

 

Title/Lease

 

Type of

Mine

 

Power Source

Mount Goldsworthy Joint Venture          
Mitsui Iron Ore Development Pty. Ltd. (7%)      
Pilbara Region, Western Australia, Australia      

North Area

(Yarrie)

(Nimingarra)

  210 km east of Port Headland   Nimingarra   60.3   Railway (owned and operated by Mount Goldsworthy Joint Venture) and port in Port Headland (owned and operated by Mount Goldsworthy Joint Venture)   Multiple mineral leases under the Iron Ore (Mount Goldsworthy) Agreement Act 1964 and the Iron Ore (Goldsworthy— Nimingarra) Agreement Act 1972. The last one expires in 2014, with rights of renewal over these leases for successive 21-year periods.   Open pit  

Sourced from Alinta Dewap

Area C

  120 km northwest of Newman, 37 km southwest of Yandi   Marra
Mamba
  62.0   Rail spur (owned by Goldsworthy Joint Venture) connecting to the Yandi spur line (owned by Yandi Joint Venture) and then onto the main Newman/ Hedland line (owned and operated by Mount Newman Joint Venture) and port in Port Hedland (owned and operated by Goldsworthy Joint Venture)  

Same as above

(The mining lease expires in 2007 and has a right of renewal for further period of 21 years.)

  Open pit  

Sourced from Alinta Dewap

Sesa Goa Limited          
Sesa Goa Limited (51%)          
Goa and Karnataka, India          

Codli

  Goa, India   Fines/Lumps   58.0
to
62.0
  Barge and port in Mormugao   Combination of own lease and sub lease   Open pit   Supplied by state

Sonshi

  Goa, India   Fines/Lumps   58.0
to
62.0
  Barge and port in Mormugao   Combination of own lease and sub lease   Open pit   Supplied by state

Chitradurga

  Karnataka, India   Fines/Lumps   63.5
to
64.0
  Railway, truck and shipping facility at Mormugao and Chennai   Combination of own lease and sub lease   Open pit   Supplied by state

Hospet

  Karnataka, India   Fines/Lumps   63.5
to
64.0
  Railway, truck and shipping facility at Mormugao and Chennai   Combination of own lease and sub lease   Open pit   Supplied by state

(1) The term “Investee” refers only to Sesa Goa Limited.
(2) “Name of Mines” indicates the names of principal producing mines.
(3) “Pisolite”, “Marra Mamba”, “Brockman”, “Channel Iron Deposit” and “Nimingarra” refer to the types of iron ore that are found in the Pilbara region of Western Australia.
(4) The percentage figures of “Fe Basis” of Mesa J and West Angelas represent the figures corresponding to mines, excluding the figures corresponding to stockpile components.

 

58


COAL

Name of Joint Venture or Investee

Entity by which Mitsui Participates in the Mining Activity and its Ownership Interest(2)

Area of Mining Operation (Region, State, Country)

 

Name of Mines(3)

 

Location

  Type of
Resources
 

Means of Access

to the Property

 

Title/Lease

 

Type of

Mine

  Power Source

BHP Mitsui Coal Pty. Ltd.

         

BHP Mitsui Coal Pty. Ltd.(1) (20%)

       

Queensland, Australia

       

Riverside

  In the Bowen Basin, 150 km south-west of Mackay   Metallurgical
coal
  Railway (Queensland Rail) and port in Mackay   Leases granted by State and renewable subject to State’s discretion   Open pit   State owned
grid

South Walker Creek

  In the Bowen Basin, 100 km south-west of Mackay   Metallurgical
coal and
thermal coal
  Same as above   Same as above   Open pit   State owned
grid

Bengalla Joint Venture

         

Mitsui Coal Holdings Pty. Ltd. (10%)

       

New South Wales, Australia

       

Bengalla

  4km west of Muswellbrook in the Upper Hunter Valley   Thermal coal   Railway and port at Newcastle   Leases granted by State   Open pit   State owned
grid

Kestrel Joint Venture

         

Mitsui Coal Holdings Pty. Ltd. (20%)

         

Queensland, Australia

         

Kestrel

  In the Bowen Basin, 200 km west of Rockhampton   Metallurgical
coal and
thermal coal
  Railway and port at Gladstone   Leases granted by State   Underground   State owned
grid

Dawson Joint Venture

         

Mitsui Coal Holdings Pty. Ltd. (49%)

         

Queensland, Australia

         
Dawson (formerly “Moura”)   In the Bowen Basin 184 km south-west of Gladstone   Metallurgical
coal and
thermal coal
  Railway and port at Gladstone   Leases granted by State   Open pit   State owned
grid

German Creek Joint Venture

         

Mitsui Coal Holdings Pty. Ltd. (30%)

         

Queensland, Australia

         

German Creek

  In the Bowen Basin, 200 km south-west of Mackay   Metallurgical
coal
  Railway and port at Gladstone   Leases granted by State   Underground   State owned
grid

(1) “BHP Mitsui Coal Pty. Ltd.” indicates the name of the company established by BHP Billiton plc and Mitsui.
(2) BHP Mitsui Coal Pty. Ltd. is our associated company in which Mitsui has 20% interest. Mitsui Coal Holdings Pty. Ltd. is our subsidiary which owns interests in Bengalla Joint Venture, Kestrel Joint Venture, Dawson Joint Venture and German Creek Joint Venture.
(3) “Name of mines” indicates the names of principal producing mines.

 

59


A brief history and the present condition of each of the above-mentioned mines, including the current state of development, if applicable, are provided below.

IRON ORE

Name of Joint Venture or Investee

Entity by which Mitsui Participates in the Mining Activity and its Ownership Interest

Area of Mining Operation (Region, State, Country)

 


Robe River Iron Associates

Mitsui Iron Ore Development Pty. Ltd. (33%)

Pilbara Region, Western Australia, Australia

 

Mesa J    The development of the Robe River project began in 1962(*) near Pannawonica. The Robe River project was commissioned and the first shipment was made in 1972. Iron ore reserves at the Mesa J production Base provide the cornerstone of Pannawonica’s sinter fines and lump output. Development of Mesa J began in 1992, and all mine administration, workshops, warehousing and other support facilities were integrated there in 1994. The mine produces Rove River fines and lump, which are pisolitic iron ore products. Process Plant 1 was commissioned in 1999 and Process Plant 2 in 2001. The plant processes clay-contaminated pisolite, sub-grade material which was once discarded, to reduce contaminants and retain on-specification ore. Total material hauled at Mesa J is between 65 and 75 million tonnes per year. From this production base, the joint venture produces approximately 32 million tonnes of iron ore each year.
West Angelas    The development of West Angelas began in 1998. Mining of ore commenced in March 2002. The West Angelas deposits contain Marra Mamba type iron ore with higher iron content than Robe River’s Mesa J mine. The West Angelas operation is comprised of an open pit mine, a crushing and screening ore processing plant producing lump and sinter fines iron ore, as well as stockpiling, reclaiming and train-loading facilities. Further expansion of the West Angelas mine was completed ahead of schedule in October 2005. This $105 million project took the mine’s production capacity to 25 million tonnes per year. Robe River Iron Associates uses a dedicated rail system, operated by Pilbara Iron, to transport ore from its mines to the company’s deepwater port facilities at Cape Lambert. The US$200 million rail expansion project to duplicate almost 100 kilometers of track and associated interconnection and infrastructure to increase the capacity of the Pilbara Iron main line is progressing well, with the southern section completed in 2005 and the northern section on schedule completed in mid-2006.

(*) The Robe River project was originally started by Cleveland Cliffs Iron Company, an iron and steel producer in the United States. Since then, there were major changes in ownership before Rio Tinto took a 53% stake in Robe River Iron Associates in 2000.

 


Mount Newman Joint Venture

Mitsui Itochu Iron Pty. Ltd. (10%) (Mitsui share of Mitsui Itochu Iron Pty. Ltd. is 70%)

Pilbara Region, Western Australia, Australia

 

Mount Whaleback   

The joint venture began production in 1969 at the Mount Whaleback ore body. Today, production continues to be sourced from the major Mount Whaleback ore body and is complemented by production from other ore bodies, namely Orebody 25, 29 and 30 and Jimblebar, which we are involved in through the Wheelarra arrangement with BHP Iron Ore (Jimblebar) Pty Ltd, Itochu Minerals & Energy Australia Pty Ltd, and 4 Chinese steel companies. At current price assumptions and production rates, reserves from Mt Whaleback are expected to contribute to the Mount Newman Joint Venture for at least 20 years.

 

The facilities at Mount Whaleback include primary and secondary crushing plants with a nominal capacity of 35 million tonnes of product per year, a heavy media beneficiation plant with an annual capacity of 8 million tonnes and a train-loading facility. An additional primary and secondary crushing plant is present at Orebody 25 with a nominal capacity of eight million tonnes of product per year. The three joint ventures, namely, Mt. Newman joint venture, Yandi joint venture and Goldsworthy joint venture have been planning for staged expansions of supply capacity. As a step, in October 2005 they approved an expansion plan to add 20 million tonnes per annum to their capacity, upgrading combined capacity to 129 million tonnes per annum by 2008. The capital expenditure for the expansion work will total A$2.2 billion. Mitsui will bear approximately A$150 million. The expansion will focus mainly on Mining Area C mine and encompass expansions of rail systems and the loading port, which is meant to bring improved efficiency in operations and reduce overall operating costs.

 

60



Yandi Joint Venture

Mitsui Iron Ore Development Pty. Ltd. (7%)

Pilbara Region, Western Australia, Australia

 

Marillana Creek   

Development of the ore body began in 1991 with a capacity of 10 million tonnes per annum and the project’s first shipment of iron ore was in March 1992. Capacity was progressively expanded between 1994 and 2003 and the current capacity is 42 million tonnes per annum. Two processing plants (OHP1 and OHP2) and a primary crusher and overland conveyor (Iowa) are used to crush and screen the Yandi ore and deliver it to one of two train loading facilities. At the current production rate, it is expected that the reserves will be sufficient for at least 20 years.

Mount Goldsworthy Joint Venture

Mitsui Iron Ore Development Pty. Ltd. (7%)

Pilbara Region, Western Australia, Australia

 

North Area

(Yarrie)

(Nimingarra)

   Mount Goldsworthy was commissioned in 1966 in the North Area. The original Goldsworthy mine was closed in 1982 and mining operations ceased at Shay Bay in 1993. Since then, mining has continued from the adjacent Nimingarra mine and Yarrie mine, 30 kilometers to the south-east. Two primary crushers exist, one at Yarrie and the other at Nimingarra. The ore is crushed and then railed to Finucane Island.
Area C   

In October 2003, the joint venture opened the new Area C mine located 120 kilometers north-west of Newman, which produces a Marra Mamba ore deposit, which is sold under the trademark MAC.

 

Initial mining has commenced at the C Deposit under the POSMAC arrangement, to which BHP Billiton Minerals Pty Ltd, POS-Ore Pty Ltd, Itochu Minerals & Energy Australia Pty Ltd and we are parties. Under this arrangement, POSCO has committed to purchase 3 million tonnes per annum.

 

All production from the Mount Goldsworthy North (Yarrie and Nimingarra deposits) is transported on a separate railway to Port Hedland. Ore from Area C is transported via a 39 kilometer new section of railway to the Yandi mine which then connects to the main Newman to Port Hedland railway. From there, the venture ships the ore through the Nelson Point and Finucane Island facilities. Ore is produced from Goldsworthy North area at a nominal capacity of 8 million tonnes of product per year as of the end of March 2006.

 

The ore currently being produced at Area C is from C Deposit, which is an open-pit mine. The ore processing plant at Area C has a nominal capacity of 23 million tonnes of product per year. E Deposit will also contribute to Area C products commencing in 2005-2006 and other Area C deposits (F, A and D Deposits) commencing in 2008-2009. At current price assumptions and production rates, reserves from Area C will continue to support Area C products for at least 20 years.

Sesa Goa Limited

Sesa Goa Limited (51%)

Goa and Karnataka, India

 

Codli Sonshi    Sesa Goa Limited commenced operations in 1954 in North Goa, India. Sesa Goa’s main mining operations are at the Codli and Sonshi mines. Goan ore tends to be relatively high in alumina content, and most Goan ore is beneficiated to raise the iron content. We acquired a 51% interest in Sesa Goa in 1996.
Chitradurga Hospet    The main operation in Karnataka is at Chitradurga mine. A second mine is located at Hospet. These mines are equidistant from the part of Mormugao and Chennai and ore can be shipped from either port.

COAL

Name of Joint Venture or Investee

Entity by which Mitsui Participates in the Mining Activity and its Ownership Interest

Area of Mining Operation (Region, State, Country)

 


BHP Mitsui Coal Pty. Ltd.

BHP Mitsui Coal Pty. Ltd. (20%)

Queensland, Australia

 

Riverside   Reserves from Riverside were depleted in March 2005.
South Walker Creek   South Walker Creek became operational in 1998. It produces pulverized coal injection fuel and minor quantities of by- product energy coal. South Walker Creek has a production capacity of four million tonnes per year. Exploration has increased the reserve base in the past year. BHP Mitsui Coal holds undeveloped leases in the Bowen Basin (specifically, the areas of Wards Well, Lancewood, Kemmis-Walker, Bee Creek and Nebo West) and is developing Poitrel.

 

61


 

 

Bengalla Joint Venture

Mitsui Coal Holdings Pty. Ltd. (10%)

New South Wales, Australia

Bengalla   Development consent was granted in 1996 and production commenced in 1999. Coal & Allied, Rio Tinto’s subsidiary in Australia, acquired its interest in Bengalla in 2001. Its coal preparation plant has been designed to allow the mine to produce low ash thermal coal for export. Production in 2005 was 6.0 million tonnes of thermal coal.

Kestrel Joint Venture

Mitsui Coal Holdings Pty. Ltd. (20%)

Queensland, Australia

Kestrel   The Kestrel Coal mine, previously known as Gordonstone Mine commenced operation in 1992. Coal is extracted by underground mining. The mine has two longwall units that are operated alternately to minimize downtime and ensure seamless production and reliability. The Kestrel Preparation Plant has been designed to allow the mine to produce low ash coking coal and high energy thermal coal. Production in 2005 was 3.7 million tonnes saleable high quality coking coal and export thermal coal.

Dawson Joint Venture

Mitsui Coal Holdings Pty. Ltd. (49%)

Queensland, Australia

Dawson

(formerly “Moura”)

  The Moura Mine commenced operation in 1961. Since 1994, all production at Moura has been from its surface operation. Production tonnage has been increasing steadily throughout the years. After a few changes of ownership, Anglo Coal acquired a 51% share in 2002. In September 2003, the adjacent Theodore deposit was developed which further expanded its capacity. Anglo Coal Australia and Mitsui Coal Holdings intend to recapitalize their existing operations at the Moura mine and to establish two additional operations on adjacent tenures. The new and expanded operations will be known as the Dawson Complex. Moura Joint Venture has already changed its name to Dawson Joint Venture. The joint venture’s capital expenditure is estimated in excess of Australian dollar 1 billion and will include a new coal preparation plant, additional mining equipment, a coal conveying system for transporting coal, rail load out facilities and administration buildings. The additional coal will be made available for the market in 2007, and consequently, annual production capacity will increase from an existing 7 million tonnes to 12.7 million tonnes of metallurgical and thermal coals.

German Creek Joint Venture

Mitsui Coal Holdings Pty. Ltd. (30%)

Queensland, Australia

German Creek   Open pit mining commenced in 1981. Underground mining in the Central Colliery area started in 1984, while underground mining in the Southern Colliery area began in 1988. Grasstree is a new underground mine being developed within our existing German Creek operations lease area. This mine will produce hard coking coal for our export markets. The mine construction commenced in 2001, underground development work is now underway and it will commence production from the latter half of 2006. In addition, the joint venture has started the development of Lake Lindsay mine, a new open cut mine adjacent to German Creek mine, to increase the aggregate annual production from 6 to 10 million tonnes per annum and to extend the total joint venture’s mine life by about 11 years.

 

62


Production Tonnage

IRON ORE

Production tonnage figures in the table below represent those of marketable products as tonnage after accounting for extraction and beneficiation losses.

 

            In Thousands of Tonnes
            Year Ended March 31,
            2006   2005   2004

Joint Venture or Investee and
Name of Mines

 

Mitsui’s Subsidiary
or
Associated Company

 

Location

  Total
Production
  Mitsui’s
Share
  Total
Production
  Mitsui’s
Share
  Total
Production
  Mitsui’s
Share
Robe River Iron Associates   Mitsui Iron Ore Development Pty. Ltd.   Pilbara Region, Western Australia            

Pannawonica

      30,129   9,943   31,023   10,238   30,260   9,986

West Angelas

      21,149   6,979   19,561   6,455   14,181   4,680
Mount Newman Joint Venture   Mitsui Itochu Iron Pty. Ltd.   Pilbara Region, Western Australia            

Mt. Whaleback

      36,021   2,521   34,992   2,449   36,332   2,543
Yandi Joint Venture   Mitsui Iron Ore Development Pty. Ltd.   Pilbara Region, Western Australia            

Marillana Creek

      40,335   2,823   40,899   2,863   40,548   2,838
Mount Goldsworthy Joint Venture   Mitsui Iron Ore Development Pty. Ltd.   Pilbara Region, Western Australia            

North Area

(Yarrie)

(Nimingarra)

      7,089   496   5,268   369   7,006   490

Area C

      20,471   1,433   16,845   1,179   3,736   262
Sesa Goa Limited   Sesa Goa Limited   India            

Codli, Sonshi

    Goa   3,998   2,039   2,983   1,521   2,941   1,500

Chitradurga, Hospet

    Karnataka   1,578   805   2,063   1,052   1,556   794
                           
   

TOTAL

  160,770   27,039   153,634   26,126   136,560   23,093
                           

 

63


COAL

Production tonnage figures in the table below represent those of marketable products as tonnage after accounting for extraction and beneficiation losses.

 

            In Thousands of Tonnes
            Year Ended March 31,
            2006   2005   2004

Joint Venture or Investee and

Name of Mines

 

Mitsui’s Subsidiary

or

Associated Company

 

Location

  Total
Production
  Mitsui’s
Share
  Total
Production
  Mitsui’s
Share
  Total
Production
  Mitsui’s
Share
BHP Mitsui Coal Pty. Ltd.   BHP Mitsui Coal Pty. Ltd.   Queensland, Australia            

Riverside

      2,384   477   3,323   665   2,641   528

South Walker Creek

      3,273   655   3,658   732   3,927   785
Bengalla Joint Venture   Mitsui Coal Holdings Pty. Ltd.   New South Wales, Australia   5965   596   5,312   531   6,203   620
Kestrel Joint Venture   Mitsui Coal Holdings Pty. Ltd.   Queensland, Australia   3,720   744   3,282   656   3,322   664

Dawson Joint Venture

(formerly “Moura Joint Venture”)

  Mitsui Coal Holdings Pty. Ltd.   Queensland, Australia   6,200   3,038   7,023   3,441   5,964   2,922
German Creek Joint Venture   Mitsui Coal Holdings Pty. Ltd.   Queensland, Australia   5,086   1,526   5,782   1,735   5,422   1,627
                           
    TOTAL   26,628   7,036   28,380   7,760   27,479   7,146
                           

Reserve Tonnage

IRON ORE

Reserves of iron ore classified according to operator are presented in the tables below. As used below, “marketable reserve” refers to tonnage after accounting for extraction and beneficiation losses, and “recoverable reserve” refers to tonnage after accounting for extraction losses.

Operator: Rio Tinto Ltd.(1)(2)

Reserves as disclosed by Rio Tinto Ltd. consist of proved and probable marketable reserves.

 

            In Millions of Tonnes
            Year Ended December 31,
            2005   2004   2003

Joint Venture or Investee and
Name of Mines

 

Mitsui’s Subsidiary

or
Associated Company

 

Location

  Total
Marketable
Reserve
  Mitsui’s
Share
  Total
Marketable
Reserve
  Mitsui’s
Share
  Total
Marketable
Reserve
  Mitsui’s
Share
Robe River Iron Associates   Mitsui Iron Ore Development Pty. Ltd.   Pilbara Region, Western Australia            

Pannawonica(3)(4)

      303   100   172   57   200   66

West Angelas(3)

      394   130   418   138   440   145

(1) Iron ore reserves are shown as recoverable reserves of marketable product after accounting for all mining and processing losses. Mill recoveries are not available.
(2) Reserves of Robe River Iron Associates indicate reserves as of the end of December 2005, 2004 and 2003.
(3) Stockpile components of reserves are included.
(4) Pannawonica reserves have increased following revision and updating of geological models and mine designs, leading to the inclusion of reserves for the Mesa A deposit.

 

64


Operator: BHP Billiton Ltd.(1)(2)(3)(4)

Reserve amounts of Mt. Newman, Yandi and Mt. Goldsworthy consist of proved and probable recoverable reserves.

 

            In Millions of Tonnes
            Year Ended June 30,
            2005   2004   2003

Joint Venture or Investee and
Name of Mines

 

Mitsui’s Subsidiary

or

Associated Company

  Location   Total
recoverable
Reserve
  Mitsui’s
Share
  Total
recoverable
Reserve
  Mitsui’s
Share
  Total
recoverable
Reserve
  Mitsui’s
Share
Mount Newman Joint Venture   Mitsui Itochu Iron
Pty. Ltd.
  Pilbara
Region,
Western
Australia
           

Mt. Whaleback

      836   59   955   67   1,026   72
Yandi Joint Venture   Mitsui Iron Ore
Development
Pty. Ltd.
  Pilbara
Region,
Western
Australia
           

Marillana Creek

      860   60   901   63   641   45

Mount Goldsworthy

Joint Venture

  Mitsui Iron Ore
Development
Pty. Ltd.
  Pilbara
Region,
Western
Australia
           

North Area

(Yarrie)

(Nimingarra)

      14   1   13   1   21   2

Area C

      474   33   499   35   204   14

(1) Mining dilution and mining recovery (in general around 95%) has been taken into account in the estimation of reserves.
(2) No third party audits have been conducted specifically for the purposes of this disclosure.
(3) Metallurgical recoveries for the operations are 100% except for Mt Newman Joint Venture of which metallurgical recovery is 92 to 100%.
(4) Reserves provided in the table above indicate reserves as of the end of June 2005, 2004 and 2003.

Operator: Sesa Goa Ltd.(1)(2)

Reserve amounts of Sesa Goa consist of proved and probable recoverable reserves.

 

            In Millions of Tonnes
            Year Ended March 31,
            2006   2005   2004

Joint Venture or Investee and
Name of Mines

 

Mitsui’s Subsidiary

or

Associated Company

  Location   Total
recoverable
Reserve
 

Mitsui’s

Share

  Total
recoverable
Reserve
 

Mitsui’s

Share

  Total
recoverable
Reserve
 

Mitsui’s

Share

Sesa Goa Limited   Sesa Goa Limited   India            

Codli, Sonshi

    Goa   57   29   55   28   53   27

Chitradurga, Hospet

    Karnataka   28   14   30   15   20   10

(1) Iron ore reserves are shown as recoverable reserves before accounting for all mining and processing losses. For the year ended March 31, 2006, average rates of mill recovery for marketable products for Codli and Sonshi, and for Chitradurga and Hospet were both 70%.
(2) Reserves of Sesa Goa Ltd. indicate reserves as of the end of March 2006, 2005 and 2004.

 

65


COAL

In the table below, coal reserves are shown as marketable reserves, which are tonnage after accounting for extraction and processing and preparation losses.

 

                In Millions of Tonnes
       

Mitsui’s 

Subsidiary

or

Associated
Company

      Year Ended March 31,
              2006   2005   2004

Joint Venture or Investee and
Name of Mines

 

Operator

   

Location

 

 

Total
Reserve

 

Mitsui’s

Share

  Total
Reserve
 

Mitsui’s

Share

  Total
Reserve
 

Mitsui’s

Share

BHP Mitsui Coal Pty. Ltd.(1)  

BHP Billiton Ltd.

  BHP Mitsui Coal Pty. Ltd.   Queensland, Australia            

Riverside(2)

        —     —     3   1   5   1

South Walker Creek

        45   9   92   18   96   19
Bengalla Joint Venture(3)  

Rio Tinto Ltd.

  Mitsui Coal Holdings Pty. Ltd.  

New South Wales,

Australia

  155   16   161   16   166   17
Kestrel Joint Venture(3)  

Rio Tinto Ltd.

  Mitsui Coal Holdings Pty. Ltd.   Queensland, Australia   116   23   120   24   123   25

Dawson Joint Venture(3)

(formerly Moura Joint Venture)

 

Anglo American

  Mitsui Coal Holdings Pty. Ltd.   Queensland, Australia   298   146   208   102   132   65

German Creek Joint Venture(3)

(including Lake

Lindsay Mine)

 

Anglo American

 

Mitsui Coal Holdings Pty. Ltd.

 

Queensland, Australia

  177   53   78   23   90   27
                             
      TOTAL   791   247   662   184   612   154
                             

(1) Reserves of BHP Mitsui Coal Pty. Ltd. indicates reserves as of the end of June 2005, 2004 and 2003, respectively. 2006 reserves means reserves as of the end of June 2005.
(2) Reserves from Riverside were depleted in March 2005.
(3) Reserves of Bengalla Joint Venture, Kestrel Joint Venture, Dawson Joint Venture and German Creek Joint Venture indicate reserves as of the end of December 2005, 2004 and 2003, respectively. 2006 reserves mean reserves as of the end of December 2005.

We hold a 15% profit share in Valepar S.A., which held a 34% profit share of the common stock and preferred stock of Companhia Vale do Rio Doce (“CVRD”) as of December 31, 2005. Accordingly, 5.1% (34% x 15%) of CVRD’s production and reserve amounts are indirectly attributable to us. The following table provides iron ore production and reserve amounts for CVRD, and Mitsui’s share of the production and reserve amounts of CVRD.

Production Tonnage (for the year ended December 31)

 

Millions of Tonnes

2005

 

2004

 

2003

Total Production

 

Mitsui’s Share

 

Total Production

 

Mitsui’s Share

 

Total Production

 

Mitsui’s Share

233.9

  11.9   211.3   10.8   188.3   9.6

Proven and Probable Reserves (as of December 31)

 

Millions of Tonnes

2005

 

2004

 

2003

Total Reserve

 

Mitsui’s Share

 

Total Reserve

 

Mitsui’s Share

 

Total Reserve

 

Mitsui’s Share

7,981.8

  407.7   6,869.1   350.3   4,926.20   251.6

 

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Oil and Gas Producing Activities

The following table shows crude oil, condensate, natural gas liquids and natural gas production from our reserves for the three fiscal years indicated:

Production Information

 

     Millions of Barrels    Billions of Cubic Feet
    

Crude Oil, Condensate and

Natural Gas Liquids(1)

   Natural Gas(1)

Year Ended March 31,

   Middle East    Oceania    Others    Worldwide    Middle East    Oceania    Others    Worldwide

2006

   3    6    5    14    6    59    39    104

2005

   3    6    5    14    9    49    34    92

2004

   2    8    5    15    —      45    29    74

The following tables show proved reserves and proved developed reserves of crude oil, condensate, natural gas liquids and natural gas as of the ending date of three fiscal years indicated:

Proved Reserve Information:

Proved Reserves

 

     Millions of Barrels    Billions of Cubic Feet
    

Crude Oil, Condensate and

Natural Gas Liquids(1)

   Natural Gas(1)

Year Ended March 31,

   Middle East    Oceania    Others    Worldwide    Middle East    Oceania    Others    Worldwide

At March 31, 2006

   23    94    104    221    40    881    1,789    2,710

At March 31, 2005

   24    78    92    194    75    840    1,393    2,308

At March 31, 2004

   23    49    127    199    84    873    965    1,922

Proved Developed Reserves(2)

 

     Millions of Barrels    Billions of Cubic Feet
    

Crude Oil, Condensate and

Natural Gas Liquids(1)

   Natural Gas(1)

Year Ended March 31,

   Middle East    Oceania    Others    Worldwide    Middle East    Oceania    Others    Worldwide

At March 31, 2006

   18    20    25    63    39    319    67    425

At March 31, 2005

   24    20    18    62    75    356    82    513

At March 31, 2004

   23    21    19    63    84    330    69    483

(1) 1 barrel of crude oil = 5,800 cubic feet of natural gas
(2) The proportion of Proved Developed Reserves to Proved Developed and Undeveloped Reserves is approximately 28% as of March 31, 2006 and relatively low. The expected costs to develop these undeveloped reserves are estimated to be ¥515 billion in total as of March 31, 2006. Undeveloped reserves are largely attributable to an associated company in Russia and an associated company in Australia. Production of crude oil in 2007 and LNG in 2008 are expected, for the associated company in Russia. Production of crude oil and LNG has already commenced at the existing facilities at the Australian company. The drilling of additional development wells will be performed over the project life according to the project drilling program.

Information on our oil and gas producing activities is shown in the “Supplemental Information on Oil and Gas Producing Activities (Unaudited)” to the consolidated financial statements included elsewhere in this annual report. And also see “Operating and Financial Review and Prospects—Operating Results by Operating Segment—Energy Segment.”

Item 4A.    Unresolved Staff Comments

We are a large accelerated filer as defined in Rule 12b-2 under the Securities Exchange Act of 1934. There are no written comments which have been provided by the staff of the Securities and Exchange Commission

 

67


regarding our periodic reports under that Act not less than 180 days before the end of the fiscal year ended March 31, 2006 and which remain unresolved as of the date of the filing of this Form 20-F with the Commission and which we believe are material.

Item 5.    Operating and Financial Review and Prospects

 

A. Operating Results

You should read the following discussion and analysis of our financial condition and results of operations together with “Selected Financial Data” and our consolidated financial statements, that appear elsewhere in this annual report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements.

As used in this Operating and Financial Review and Prospects, “Mitsui” is used to refer to Mitsui & Co., Ltd. (Mitsui Bussan Kabushiki Kaisha), and “we,” “us,” and “our” are used to indicate Mitsui & Co., Ltd. and subsidiaries, unless otherwise indicated.

In the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements, the “Company” is used to refer to Mitsui & Co., Ltd., and the “companies” is used to refer to Mitsui & Co., Ltd. and subsidiaries, unless otherwise indicated.

All references to “Note” throughout the Operating and Financial Review and Prospects relate to the Notes to Consolidated Financial Statements contained elsewhere in this Annual Report.

Throughout the Operating and Financial Review and Prospects, we describe the domicile of our subsidiaries and associated companies in parentheses following names of those companies. For example, Mitsui Iron Ore Development, Pty. Ltd. (Australia) means that the company’s name is Mitsui Iron Ore Development, Pty. Ltd. and that it is domiciled in Australia.

Operations of a subsidiary that either have been disposed of or are classified as held for sale have been accounted for as discontinued operations under accounting principles generally accepted in the United States of America (“U.S. GAAP”). This means that income statement and cash flow information are reclassified for all years to separate the discontinued operations from our continuing operations. This presentation is required by U.S. GAAP and facilitates historical and future trend analysis of our continuing operations.

Key Performance Measures under Management’s Discussion

Although our operating results and financial condition are influenced by various factors, management believes that as of the end of the fiscal year under review the following indicators can be usefully employed to discuss trends in our performance and financial condition.

Gross profit, operating income* and equity in earnings of associated companies

We undertake worldwide business activities, involving diversified risk-return profiles, ranging from intermediary services as agent to development and production of mineral resources and energy. In this context, changes in the amounts of gross profit, operating income and equity in earnings of associated companies by operating segment reflect the overall progress of our business, and greatly affect the amount of net income in the Statements of Consolidated Income. For further information, refer to the table of “Operating Segment Information” and subsequent discussions in “Operating Results by Operating Segment” in this Operating and Financial Review and Prospects.

 


* Operating Income

Operating income is included in the measure of segment performance reviewed by the chief operating decision maker. Operating income is comprised of our (a) gross profit, (b) selling, general and administrative expenses, (c) provision for doubtful receivables and (d) government grant for transfer of substitutional portion of the Employee Pension Fund (“EPF”), as presented in the Statements of Consolidated Income.

 

68


Trends in the price of and supply-demand for mineral resources and energy

Our operating results are influenced by conditions of various commodity markets. In recent years, our operating results have been influenced by supply-demand balance and price fluctuations for mineral resources and energy that have been driven by expanding demand from emerging countries, particularly China, and the importance of our mineral resources and energy operations in our overall operating results has increased. For further information regarding trends and prospects in this field, refer to the sections relating to the Iron & Steel Raw Materials and Non-Ferrous Metals Segment and the Energy Segment in “Operating Results by Operating Segment.”

Investment plans and financial leverage

According to our Medium-term Management Outlook announced in May 2006, we intend to invest a total of ¥800 billion during the two fiscal years ending March 2007 and 2008, in order to build strategic business portfolios in the four business areas of Mineral Resources and Energy Area; Global Marketing Networks Area, including steel products and chemicals; Infrastructure Area, including power generation; and Consumer Services Area, including outsourcing services and content businesses. Mitsui is monitoring and managing our financial leverage with a view of securing an efficient return on equity as well as maintaining and improving credit ratings and financial soundness in order to secure the capital resources required for these investments and to refinance our interest bearing debt. For further discussion on these investments and related financial policies, refer to “B. Liquidity and Capital Resources” in this Operating and Financial Review and Prospects.

Results of Operations

Summary of Operations for the Year Ended March 31, 2006

Operating Environment

Principal developments in the economic environment that influenced our results of operations during the year ended March 31, 2006 included the following:

 

  Ÿ   The global economy continued its steady expansion driven by the growth in the United States, as well as emerging countries, particularly China. The expansion again brought higher consumption, housing investment and capital investment. Emerging countries especially continued strong economic growth led by increasing personal consumption from a growing middle-income class and by robust infrastructure demand.

 

  Ÿ   These factors contributed to a substantial increase in global trade and spurred the rising trend in commodity prices such as crude oil, iron ore, coal and non-ferrous metals.

 

  Ÿ   The Japanese economy entered a period of self-sustaining growth. Capital investment increased reflecting expansion of corporate earnings while improved employment and wages supported a favorable trend in personal consumption. In addition, export volume increased supported by an expansion of the global economy and the weak yen.

 

  Ÿ   In the United States, the Federal Reserve Board (“FRB”) continued its policy of raising interest rates, which resulted in a gradual rise in interest rates worldwide. In March 2006, the Bank of Japan terminated its quantitative easing policy, which it had followed for the prior five years.

Summary of Operating Results, Financial Condition and Cash Flows

 

  Ÿ   Operating results

 

  For the year ended March 31, 2006, we recorded net income of ¥202.4 billion, an increase of ¥81.3 billion, or 67.1%, from ¥121.1 billion for the year ended March 31, 2005.

 

  Most operating segments except for the Foods & Retail Segment recorded improved operating results, which benefited from a favorable economic environment.

 

69


  Gross profit and equity in earnings of associated companies increased by ¥107.7 billion, or 15.2%; and ¥29.9 billion, or 46.5%, respectively, reflecting favorable commodity prices including mineral resources and energy. On the other hand, Mitalco Inc. (United States) and MITSUI FOODS CO., LTD. (Japan) recorded significant one-time impairment losses on long-lived assets. In addition, interest expenses increased principally from the investment in the Sakhalin II project.

 

  Ÿ   Financial condition

Total assets as of March 31, 2006 reached ¥8.6 trillion mainly due to investments in the energy and mineral resources businesses, the infrastructure businesses and the foods and retail businesses; increases in trade receivables and inventories; and the increases in unrealized holding gains on available-for-sale securities. As a result of a public offering and increased retained earnings, our shareholders’ equity as of March 31, 2006 reached ¥1.7 trillion.

 

  Ÿ   Cash flows

Net cash provided by operating activities for the year ended March 31, 2006 was ¥146.4 billion. Net cash used in investing activities was ¥347.3 billion, resulting primarily from investments in energy and mineral resources businesses as well as infrastructure businesses.

Impact of Foreign Currency Exchange Fluctuation on Operating Results

Due to the increase in gross profit and equity in earnings of associated companies discussed above, net income for the year ended March 31, 2006 from overseas subsidiaries and associated companies reached ¥174.8 billion, significantly higher than ¥117.9 billion recorded for the year ended March 31, 2005. The impact of any appreciation of the yen against the currencies used by these companies as functional currency in their reporting—principally U.S. dollars, Australian dollars and Euros—is becoming even more significant.

During the year ended March 31, 2006, the U.S. dollar continued to appreciate against the yen and the Euro, reflecting the increasing disparity in interest rates over Japan and Europe. The average U.S. dollar—yen exchange rate during the year ended March 31, 2006 was ¥113.93 = U.S.$1, representing yen depreciation of ¥6.33, or 5.9%, compared to the average rate during the year ended March 31, 2005 of ¥107.60 = U.S.$1.

The impact of foreign currency exchange fluctuations on net income for the year ending March 2007 will largely depend on the net income denominated in local currencies of overseas subsidiaries and associated companies. Based on net income in the business plans of these companies covering the year ending March 2007, yen appreciation by ¥1 against 1 U.S. dollar would have the net effect of reducing net income by approximately ¥1.6 billion.

Discussion and Analysis of Operating Results for the Year Ended March 31, 2006 as Compared to the Year Ended March 31, 2005

Revenues

In accordance with U.S. GAAP, revenues are reported based on the gross amount billed to a customer or on the net amount retained (that is, the amount billed to a customer less the amount paid to a supplier). Revenues are reported based on gross amounts for transactions where we have the related risks and rewards of ownership such as transactions where we are a primary obligor in the arrangement and/or assume general inventory risk without any significant mitigation of our risk level. Revenues are reported based on net amounts where we assume a low degree of related risks and rewards, effectively acting as an agent for the applicable products or services. A typical example of reporting revenues based on net amounts is a transaction where we receive a commission or fee at a fixed rate based on transaction volume or amount.

We classified our revenues into sales of products, sales of services and other sales with the corresponding costs of revenues.

 

70


The table below provides these three categories of revenues by products in “PRODUCT INFORMATION”* in Note 17, “SEGMENT INFORMATION.”

 

    Billions of Yen  
    Years Ended March 31,                        
    2006   2005   Change  
   

Sales of

Products

 

Sales of

Services

 

Other

Sales

    Total  

Sales of

Products

 

Sales of

Services

 

Other

Sales

    Total  

Sales of

Products

   

Sales of

Services

   

Other

Sales

    Total  

Iron and Steel

  ¥ 454.7   ¥ 68.8   ¥ 0.2     ¥ 523.7   ¥ 351.2   ¥ 55.7   ¥ 0.2     ¥ 407.1   ¥ 103.5     ¥ 13.1     ¥ 0.0     ¥ 116.6  

Non-Ferrous Metals

    77.7     9.2     15.2       102.1     137.0     8.4     16.0       161.4     (59.3 )     0.8       (0.8 )     (59.3 )

Machinery

    219.1     97.6     51.3       368.0     163.4     63.3     38.2       264.9     55.7       34.3       13.1       103.1  

Electronics & Information

    77.5     87.4     0.0       164.9     74.9     69.8     0.0       144.7     2.6       17.6       0.0       20.2  

Chemicals

    785.9     93.3     7.5       886.7     642.7     79.8     6.6       729.1     143.2       13.5       0.9       157.6  

Energy

    1,331.8     7.7     21.0       1,360.5     1,009.3     14.0     11.8       1,035.1     322.5       (6.3 )     9.2       325.4  

Foods

    377.8     47.2     (0.4 )     424.6     423.7     50.1     (0.2 )     473.6     (45.9 )     (2.9 )     (0.2 )     (49.0 )

Textiles

    24.5     16.8     1.1       42.4     22.1     19.8     1.1       43.0     2.4       (3.0 )     0.0       (0.6 )

General Merchandise

    69.8     9.0     0.0       78.8     86.0     10.2     (0.1 )     96.1     (16.2 )     (1.2 )     0.1       (17.3 )

Property and Service Business

    60.8     75.3     27.7       163.8     53.8     63.0     22.8       139.6     7.0       12.3       4.9       24.2  
                                                                                   

Consolidated Total

  ¥ 3,479.6   ¥ 512.3   ¥ 123.6     ¥ 4,115.5   ¥ 2,964.1   ¥ 434.1   ¥ 96.4     ¥ 3,494.6   ¥ 515.5     ¥ 78.2     ¥ 27.2     ¥ 620.9