Showa Denko K.K. (SDK) Reports 20.2% Increase in Operating Income for the Fiscal Year Ended December 31, 2006.

Tokyo, Japan, Feb 8, 2007 - (JCN Newswire) - Showa Denko  K.K. ('SDK'; TSE: 4004; US: SHWDF), a major manufacturer and marketer of chemical products serving a wide range of fields ranging from heavy industry to the electronic and computer industries,has announced results for the full year ended December 31, 2006.

Consolidated net sales in 2006 increased 12.6%, to JPY 914,533 million, and operating income jumped 20.2%, to JPY 68,727 million. Ordinary income rose 22.5%, to JPY 57,514 million, due partly to improvement in the balance between interest expense and interest/dividend income.

Net income was up 84.3%, to JPY 28,836 million, after an extraordinary profit of JPY 11,668 million (due mainly to gain on the sale of investment shares) and an extraordinary loss of JPY 19,602 million (due to loss on sale of fixed assets, resulting from restructuring efforts, and impaired assets accounting).

The Showa Denko Group regards operating income, which shows the results of operations, operating income/net sales ratio, and operating income/total assets ratio (ROA) as important management indexes.

The Company considers the payment of dividends as an important obligation to its shareholders. The Company's basic policy is to decide on dividends after consideration of the profit level for the term and the need for internal reserve for use in future business expansions.

Regarding appropriation of profits for 2006, the Company is planning to pay dividends of 4 yen per share, up 1 yen per share, as announced in August 2006.

The Showa Denko Group launched its new business plan, the Passion Project, at the beginning of 2006, with a view to laying the groundwork for long-term sustainable growth. Thus, the Group took various steps to develop the "strategic growth businesses," while continuing to restructure operations and reduce costs.

I. Financial Goals Under the Passion Project

------------------------------------------------------------------------
                            2005        2006           2007       2008
                         (Results)  Plan Results  Plan Forecast  (Plan)

Net sales (bil yen)        811.9    800.0  914.5   870.0  960.0   940.0
Operating income (bil yen)  57.2     62.0   68.7    73.0   73.0    85.0
Operating income/
    net sales ratio         7.0%     7.8%   7.5%    8.4%   7.6%    9.0%
ROA (operating income/
    total assets)           5.8%      --    6.6%     --     --     8.5%
Interest-bearing debt
    (bil yen)              448.8    461.0  433.2   435.3  430.0   400.0
D/E ratio (times)           2.17      2.1   1.84     1.6    --      1.4

------------------------------------------------------------------------

Despite the soaring crude oil prices and other instability factors, the Japanese economy continued to grow in 2006 owing to the rise in capital spending against the background of strong corporate earnings, increases in exports to Asia and the United States, as well as gradual recovery of personal spending.

In the chemical and nonferrous metals industries, costs of naphtha, aluminum ingot, and other raw materials soared. However, shipments of chemical products to China and other Asian countries were maintained at high levels. The electronic parts/materials industry showed a steady growth despite partial inventory adjustments.

Under the Passion Project, which runs from 2006 through 2008, we will concentrate on measures to accelerate the development of new "growth driver" businesses, continuously expand profit, and improve our financial strength with a view to achieving the "image" of the Group in 2010.

II. Summary of Results by Business Segment

Petrochemicals

Production of ethylene and propylene in 2006 decreased as a result of the maintenance shutdown of the ethylene plant, which is conducted once in every four years. Despite lower shipment volumes resulting from the maintenance shutdown, sales of olefins were up due to higher selling prices, reflecting soaring raw material costs.

In the organic chemicals operations, shipment volumes of vinyl acetate fell as a result of the maintenance shutdown of the ethylene plant. However, overall sales of organic chemicals increased due higher selling prices, reflecting the rise in feedstock costs, and increased shipment volumes of acetic acid. Sales of plastics by Showa Highpolymer Co., Ltd. were up due to an increase in selling prices, reflecting the rise in feedstock costs.

As a result, the Petrochemicals segment's sales rose 11.4%, to JPY 335,383 million, but operating income decreased 25.0 %, to JPY 16,376 million, due mainly to the decline in production resulting from the maintenance shutdown of the ethylene plant.

Chemicals

Production of liquefied ammonia was maintained at the previous year's level, reflecting continued high shipment volumes. Sales of commodity industrial gases, including oxygen and nitrogen, fell slightly. Sales of acryolonitrile, caustic soda and hydrochloric acid were up due to the rise in selling prices.

In the specialty chemicals area, shipment volumes of Shoprene polychloroprene synthetic rubber, amino acids and Shodex chromatography columns increased.

As a result, the Chemicals segment's sales rose 7.0%, to JPY 79,201 million, and operating income increased 7.8%, to JPY 5,108 million.

Electronics

Sales of hard disk (HD) media increased due partly to the start-up of new production capacity and steady demand. Sales of compound semiconductors were also up, reflecting the rise in shipment volumes.

In the electronic materials business, sales of rare earth magnetic alloys increased due to the rise in selling prices. Sales of semiconductor-processing specialty gases, electronic ceramics and fine carbons increased due to the rise in shipment volumes.

As a result, the Electronics segment's sales increased 23.6%, to JPY 165,541 million, and operating income jumped 45.2%, to JPY 28,634 million.

Inorganics

Production of graphite electrodes increased slightly. Sales of ceramics were up due mainly to the rise in selling prices of alumina, reflecting higher raw material cost. Sales of graphite electrodes increased due to continued steady shipments, reflecting a growing demand for steel worldwide.

As a result, the Inorganics segment's sales increased 20.1%, to JPY 74,301 million, and operating income jumped 93.4%, to JPY 16,069 million. Showa Denko Carbon, Inc., of the United States, was the main contributor to the substantial increase in the segment's operating income.

Aluminum

Production of automotive heat exchangers in Japan, the United States and Europe increased. Production of extrusions was maintained at the previous year's level, but production of rolled products and Shotic forged products increased.

Sales from ingot marketing rose, reflecting higher prices on the international market. Sales of rolled products were up due to the rise in selling prices, reflecting higher raw material cost. Sales of extrusions/specialty products increased due to increases in shipment volumes and selling prices.

In the heat exchanger business, sales rose slightly in each of the markets in Japan, the United States and Europe. Sales of Shotic forged products increased due to a growing demand for automotive parts applications. However, sales of aluminum cans fell due to a decrease in shipment volumes.

As a result, the Aluminum segment's sales increased 8.0%, to JPY 260,107 million. However, operating income decreased 22.1%, to JPY 6,472 million, due mainly to the impact of higher aluminum ingot price on the aluminum cans business.

III. Major steps taken in 2006

Petrochemicals

- Further diversification of ethylene feedstock and capacity expansion -

The Company modified its ethylene plant at the Oita Petrochemical Complex during the maintenance shutdown in the first half of the year to increase the use of non-naphtha feedstock. At the same time, the Company modified certain production lines of the plant, thereby increasing the production capacity by 24,000 tons per year, to 672,000 tons per year. The total cost amounted to approximately JPY 2 billion.

- Expansion of acetic acid/vinyl acetate production capacities -

In the first half of the year, the Company expanded its annual production capacity of acetic acid from 100,000 tons to 130,000 tons, and that of vinyl acetate from 120,000 tons to 175,000 tons, respectively.

- Turning Showa Highpolymer into a fully owned subsidiary -

In September, the Company made Showa Highpolymer Co., Ltd. (SHP) a fully owned subsidiary through a share exchange arrangement. SHP is a key player in the Company's specialty polymers operations and a leader in the domestic market for vinyl ester, biodegradable plastics and emulsion.

- Structural reform of plastic processing businesses -

In December, the Company transferred its medical packaging business of Showa Denko Plastic Products Co., Ltd. (SPP) to Hosokawa Yoko Co., Ltd. Meanwhile, the Company signed an agreement with Okamoto Industries, Inc. to transfer SPP's business in moisture removal sheet for perishable foods to Okamoto by April 2007. In January 2007, the Company transferred all the shares in its fully owned subsidiary Heisei Polymer Co., Ltd., to Toyo Denka Kogyo Co., Ltd.

- Transfer of shares in Showa Aluminum Powder -

In May, the Company transferred the majority of shares in its fully owned subsidiary Showa Aluminum Powder K.K. to ITOCHU Corporation and ITOCHU Chemical Frontier Corporation. The Company now owns 14.9% of Showa Aluminum Powder.

Chemicals

- Launch of "gentle-to-hair" new curling agent -

In January, the Company started selling a "gentle-to-hair" new curling agent (trade name: Spiera) that efficiently gives natural curling.

- Launch of new additive in photo-curing resins -

In April, the Company started selling a new compound for addition to photo-curing resins. The compound, sold under the trade name of Karenz MT, represents the first commercialization of multifunctional-thiol-based compounds for this application.

- Launch of insulating ink for LCD panels -

In December, the Company's consolidated subsidiary, Nippon Polytech Corporation, started selling a new high-performance electrical insulating ink for manufacturing electronic parts based on the chip-on-film technology for use in TV/PC LCD panels. The ink is made using the Company's newly developed urethane-based thermoset resin. Demand for the ink is expected to increase substantially, reflecting the growth of the LCD panel TV market.

Electronics

- Expansion of HD media production capacity to 15.75 million disks per month -

In April, the Showa Denko Group increased its HD media production capacity to 13.75 million disks a month to meet a growing demand for small diameter media for use in mobile music players. At the end of December, the capacity was further increased to 15.75 million disks a month through construction of new lines at Showa Denko HD Trace Corporation in Taiwan and debottlenecking at other production sites.

- Completion of a new HD media plant in Singapore -

In December, the Showa Denko Group's fourth HD media plant was completed in Singapore. The new plant is the second HD media plant in Singapore, and in addition to the existing plants in Chiba (Japan), and Taiwan. We will install additional production lines at the new plant in Singapore to meet growing demand, increasing our total capacity to 24 million disks a month by the end of 2008. Our investment in the building, clean room and production lines (present and future) at the new plant in Singapore is expected to total JPY 60 billion.

- Commercial production of 2.5-inch PMR HD media -

To meet brisk demand for high-capacity HD media for notebook PCs, the Group is stepping up commercial production of media using the innovative perpendicular magnetic recording (PMR) technology. In the third quarter, the Group started commercial shipments of 2.5-inch HD media with data-storage capacity of 100 gigabytes per disk.

- Completion of a new HD media R&D facility -

In August, the Company completed a new R&D facility in Ichihara City, Chiba Prefecture, Japan, to improve the PMR technology and to promote the development of the next-generation HD media. In view of the strong demand, part of the facility is to be used for commercial production.

- Merger of Showa Denko HD K.K. -

In November, the Company merged its fully owned subsidiary Showa Denko HD K.K. The step was taken to enhance the efficiency of the HD media business through integration of the development, marketing and production functions.

- Expansion of high-purity chlorine production capacity -

The Company started expanding its production capacity of high-purity chlorine at its Kawasaki Plant to meet growing demand for use in the manufacture of semiconductors and LCD panels. By the end of the first half of 2007, the purification capacity will be increased from 300 tons a year to 1,000 tons a year, and the filling capacity from 300 tons a year to 600 tons a year, respectively.

- Establishment of specialty-gas marketing subsidiary in South Korea -

In November, the Company began full-scale marketing of its specialty gases for the South Korean market through its newly established subsidiary Korea Showa Chemicals Co. The marketing activities focus on the growing semiconductor and LCD markets in that country. The Showa Denko Group now provides its specialty gases through five marketing units located in Japan, Taiwan, China, Singapore and South Korea.

- Construction of second rare earth magnetic alloy plant in China -

In August, the Company began construction of a second rare earth magnetic alloy plant in China at Ganzhou, Jiangxi Province. The plant will be operated by Ganzhou Zhaori Rare Earth New Materials Co., Ltd., a newly established joint venture with Tokai Trade Co., Ltd. of Japan and two Chinese rare earth mineral producers. This will ensure our stable procurement of rare earth minerals to meet rapidly growing demand for high-performance magnets in cars. Upon completion of the new plant, the Company will begin producing 3,000 tons a year of rare earth magnetic alloys in China, together with its existing plant in Baotou, Inner Mongolia.

- Expansion of VGCF carbon nanofiber production capacity -

In the second half of the year, the Company started expanding its production capacity of VGCF vapor-grown carbon nanofiber, which is used as additives in lithium-ion batteries. The capacity will be increased from 40 tons a year at present to 100 tons a year in the early part of 2007.

- Expansion of ultra bright red/yellow LED production capacity -

The Company decided to increase its capacity for producing aluminum-gallium-indium-phosphide (AlGaInP) ultra bright LED chips to meet growing demand for use in LCD backlighting and automotive parts. The production capacity will be increased from 30 million units a month at present to 100 million units a month. Our AlGaInP ultra bright LED chips produce diverse colors, such as red, yellow, and orange, based on our proprietary technologies. We can also provide these LED chips in a large size or special sizes as required by respective customers. We aim to expand this business as a new "growth driver" business.

Inorganics

- Development of world's largest sintered compacts of CBN -

In April, the Company started commercial shipments of large sintered compacts of cubic boron nitride (CBN) to be used mainly for cutting automotive parts. Based on its newly developed technology, the Company can produce the world's largest CBN compacts.

- Increased production of large-diameter graphite electrodes -

The Company decided to increase its production of 30-inch- and 32-inch-diameter graphite electrodes to meet growing demand from electric arc furnace steelmakers. The 32-inch-type is the largest size on the world market. The Company started construction of a new graphitizing furnace in the first half of the year for start-up in the second half of 2007.

- Joint F/S for alumina project in Indonesia -

In April, the Company reached agreement with PT. ANTAM Tbk of Indonesia, Straits Trading Amalgamated Resources Private Limited of Singapore, and Marubeni Corporation of Japan on implementation of a joint feasibility study for a chemical-grade alumina plant in Indonesia.

- Opening of a ceramic abrasives plant in China -

In June, the Company held an opening ceremony for a new ceramic abrasives plant of Lianyungang Zhaoling Abrasives Co., Ltd., a joint venture with Mitsubishi Corporation , located in Lianyungang, Jiangsu Province, China. The Company has the largest share in the abrasives market in Asia, and ranks as one of the leading abrasive manufacturers in the world. With the start-up of the joint venture, we have established an efficient production system together with our existing facility in Shiojiri, Nagano Prefecture, Japan.

Aluminum, etc.

- Expansion of production capacity for aluminum cylinders for laser printers -In September, the Group started up its state-of-the-art aluminum cylinders production facility at the Oita Complex to meet growing demand for use in office color laser printers. The Company also upgraded existing plants, increasing the total production capacity from nine million units a month to 15 million units a month. Total investment amounted to around JPY 2.5 billion.

- Expansion of high-purity aluminum foils production capacity -

The Group decided to increase its production capacity of high-purity aluminum foils for electrolytic capacitors used in cars and digital equipment, from 1,500 tons a month to 1,800 tons a month. The Group will invest around JPY 1.2 billion, starting up the new facility in 2008.

- Consolidation of aluminum alloys business -

In July, the Company transferred the aluminum alloys business of its fully owned subsidiary Showa Aluminum Alloy K.K. to Summit Showa Aluminum Ltd. (former name: Summit Aluminum Ltd.), a consolidated subsidiary of Sumitomo Corporation. At the same time, the Company subscribed for new shares in Summit Showa Aluminum issued "for allotment to third party."

- Withdrawal from commodity aluminum foils business -

The Company decided to withdraw from the production and sale of commodity aluminum foils used mainly for food packaging. The Company stopped receiving new orders in December 2006 and will terminate sales at the end of April 2007.

- Launch of Showa Ecopipe based on used PET bottles -

In July, the Company's consolidated subsidiary Showa Denko Kenzai K.K. started commercial shipments of new drainage/ventilation pipes for homes. The product, sold under the trade name of Showa Ecopipe, is produced using recycled PET bottles.

IV. Projections for 2007

Overall projections

As to the Japanese economy in 2007, capital investments are expected to increase amid favorable corporate earnings and personal consumption is expected to recover slightly, leading to continued economic growth at a moderate rate. However, due to currency fluctuations, expected continuation of high prices of oil, aluminum, and other raw materials, and possible impact of the slowdown of the U.S. economy, the business environment is forecast to remain severe.

Under the circumstances, the Showa Denko Group will promote its growth strategy as defined in the Passion Project, developing individualized and competitive products through interconnections of inorganic, aluminum and organic chemical technologies. At the same time, the Group will increase the competitiveness of its base businesses and lay the groundwork for long-term sustainable growth, thereby striving to fulfill its social responsibility. The Showa Denko Group's performance forecast for 2007 is as follows:

------------------------------------------------------------------------
                                                      (millions of yen)
              Forecast for    Results for
                       term ending     term ended              Rate of
                      Dec. 31, '07   Dec. 31, '06      Dif.     change
------------------------------------------------------------------------

Net sales                  960,000        914,533    45,467       5.0%
Operating income            73,000         68,727     4,273       6.2%
Ordinary income             60,500         57,514     2,986       5.2%
Net income                  31,500         28,836     2,664       9.2%

------------------------------------------------------------------------

Net sales, operating income, ordinary income and net income will increase from the 2006 results to JPY 960 billion, JPY 73 billion, JPY 60.5 billion, and JPY 31.5 billion, respectively. The above forecast is based on the assumption that the exchange rate will be JPY 115 to the U.S. dollar and the naphtha price will be JPY 46,000/KL.

Net sales by business segment

------------------------------------------------------------------------
                                                      (millions of yen)
              Forecast for    Results for
                       term ending     term ended              Rate of
                      Dec. 31, '07   Dec. 31, '06      Dif.     change
------------------------------------------------------------------------

Petrochemicals             340,000        335,383     4,617       1.4%
Chemicals                   80,000         79,201       799       1.0%
Electronics                210,000        165,541    44,459      26.9%
Inorganics                  80,000         74,301     5,699       7.7%
Aluminum, etc.             250,000        260,107   -10,107      -3.9%
Total                      960,000        914,533    45,467       5.0%

------------------------------------------------------------------------

V. Financial Conditions

Assets, Liabilities and Total Equity at December 31, 2006

We continued our efforts to reduce total assets. However, due mainly to increases in fixed assets, total assets increased JPY 51,591 million, to JPY 1,037,823 million. Interest-bearing debt further decreased JPY 15,659 million, to JPY 433,172 million, as a result of continued reduction efforts. Meanwhile, total liabilities increased JPY 41,887 million, to JPY 772,331 million, due mainly to increases in notes and accounts payable.

Total equity increased JPY 58,754 million, to JPY 265,492 in million. Notwithstanding the payment of dividends for the previous year and the fall in the land revaluation reserve as a result of revised tax allocation, total equity increased, due to the rise in net income for 2006 and the fact that we started including minority interests and deferred hedge gains (losses) in the category of total equity as from the settlement of accounts for 2006.

Cash Flows in 2006

Net cash provided by operating activities increased JPY 13,432 million from the previous year, to JPY 91,398 million, due mainly to the rise in operating income. Net cash used in investing activities increased JPY 37,961 million, to \55,948 million, due to a substantial increase in capital expenditures.

Thus, free cash flow decreased JPY 24,529 million, to JPY 35,450 million. Net cash used in financing activities decreased \35,399 million, to JPY 18,047 million, due to reductions in interest-bearing debt and a fall in the amount of redemption of bonds. As a result, cash and cash equivalents at December 31, 2006 increased JPY 17,867 million, to JPY 55,100 million, after changes in the list of the consolidated subsidiaries.

Projections for 2007

While cash flows from operating activities will increase, net cash used in investing activities will also increase due to the rise in acquisition of tangible fixed assets. Thus, free cash flow for 2007 is expected to decrease around JPY 29,000 million, to plus JPY 6,400 million. Interest-bearing debt at the end of the year will be JPY 430,000 million, down JPY 3,200 million from the end of 2006.

Trends in Cash Flow Indexes

------------------------------------------------------------------------
                                 2003        2004       2005       2006
------------------------------------------------------------------------

Equity ratio                    17.7%       18.8%      21.0%      22.7%
Equity ratio on a
  market value basis            29.2%       32.0%      53.3%      51.6%
Debt maturity (years)            8.3         8.4        5.8        4.7
Interest coverage ratio          6.0         5.9        8.9       12.5

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For more information, please visit the Showa Denko IR website at

http://www.sdk.co.jp/aa/english/ir/index.html .

About Showa Denko K.K.

Showa Denko K.K. ('SDK'; TSE: 4004, US: SHWDF) is a major manufacturer and marketer of chemical products serving a wide range of fields ranging from heavy industry to the electronic and computer industries. SDK makes petrochemicals (ethylene, propylene), aluminum products (ingots, rods), electronic equipment (hard disks for computers) and inorganic materials (ceramics, carbons). The company has overseas operations and a joint venture with Netherlands-based Montell and Nippon Petrochemicals to make and market polypropylenes. In March 2001, SDK merged with Showa Denko Aluminum Corporation to strengthen the high-value-added fabricated aluminum products operations, and is today developing next-generation optical communications-use wafers. For more information, please visit www.sdk.co.jp.

Source: Showa Denko K.K.

Contact:

Showa Denko K.K.
Nobuhiro Kato
[e-mail]
[phone]

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