A tough ride ahead

01 June 2000 00:00  [Source: APC]

Despite years of mergers and acquisitions Japan still has some way to go to solve the problems besetting its petrochemical industry reports Hiroshi Seta of The Chemical Daily

The Japanese petrochemical industry has been experiencing major merger and acquisition activity with companies changing their business portfolios, carrying out restructuring and reorganising/integrating their businesses.

Major mergers include the deals that gave birth to Mitsubishi Chemical and Mitsui Chemicals and were driven with the aim of survival in the market. At a different level, reforms in business structure have been driven by such problems as high costs, excess capacity and low competitive advantage.

Despite the actions taken, however, these problems still remain unresolved in Japan. Europe and the US have seen much more extensive merger and acquisition activity. In addition, major complexes have begun operations in Asia and the Middle East.

It is now seen as essential that the Japanese petrochemical industry deal with this serious situation. It is necessary to make daring decisions in order to survive in the market.

In the business structure of the Japanese petrochemical industry, many derivatives makers are clustered around the 11 major ethylene producers. Although each facility is very small in scale, the total production capacity is in surplus over demand. As a result, the Japanese petrochemical industry tends to slide into excessive competition and operate at low profit levels.

In the past, despite this structural weakness, the Japanese petrochemical industry has been able to maintain its operations and generate a certain profit on the back of domestic consumption and exports to high growth regions such as the Association of Southeast Asian Nations (Asean) and China.

However, following the example of Taiwan and South Korea, Asean nations have started to operate their own large-scale petrochemical complexes. In addition, European and US companies have increased their production and sales levels in order to expand their businesses in the growing Asian region. These changes in the international market have had a significant impact on Japanese producers.

The competitiveness of the Japanese petrochemical industry is low because of high plant costs, which reflect small production scale and high production costs, including labour costs. The changes in the international market have forced the Japanese petrochemical industry to realise the extent of its disadvantage due to its higher cost structure.

General-purpose synthetic resins account for a significant portion of the petrochemical industry. Producers of general-purpose synthetic resins have significantly reorganised their businesses since the early 1990s.

In polyolefins, the number of PE producers has fallen from 14 to 10, and the number of PP players dropped from 14 to seven. The number of PVC producers has reduced from 15 to 10, while the number of PS players has dropped from nine to five (in four groups).

The restructuring has brought the most positive effects in the PS sector. When Sumitomo Chemical and Mitsui Chemicals established Japan Polystyrene, they axed some production capacity and integrated their businesses. The formation of the A&M Styrene partnership, between Asahi Chemical Industry and Mitsubishi Chemical, and the Toyo Styrene partnership involving Denki Kagaku Kogyo, Daicel Chemical Industries and Nippon Steel Chemical, saw a lot of capacity shut when their respective production facilities were integrated.

Idemitsu Petrochemical and Dainippon Ink and Chemicals have also carried out scrap and build programmes.

Domestic production capacity for PS was some 1.56m tonne/year in 1997 before this restructuring, well above domestic consumption of about 1m tonne/year. Following these restructuring moves, the domestic production capacity was reduced to 1.171m tonne/year in 1999, much closer to domestic demand, and the result was an improved supply-demand balance.

Other benefits have also accrued from the restructuring. Denki Kagaku Kogyo is now able to export product to overseas customers from its Singapore production base, enabling it more easily to adjust prices when raw material prices change.

Structural reforms have also been implemented in the field of PVC. Tosoh is playing a leading role in driving restructuring in the Taiyo Vinyl partnership involving Tosoh, Mitsui Chemicals and Denki Kagaku Kogyo. Tokuyama Corp has assumed management responsibilities to restructure the organisation at the Shin Dai-ichi Vinyl partnership with Nippon Zeon and Sumitomo Chemical.

In addition, Mitsubishi Chemical and Toa Gosei established V-Tech. And Chisso sold its commercial rights to Kanegafuchi Chemical when it exited the vinyl chloride business.

These actions have already contributed to improved integration of facilities in the PVC market.

Restructuring has also been extended to involve the upstream vinyl chloride monomer (VCM) market, accelerating structural reforms. During 1999, the production capacity of PVC decreased by 257 000 tonne/year, or 8.9%, to 2.608m tonne/year. The capacity of VCM also decreased by 300 000 tonne/year, or 8.8%, to 3.102m tonne/year. The top five companies - Taiyo Vinyl, Shin-Etsu Chemical, Kanegafuchi Chemical, V-Tech and Shin Dai-ichi Vinyl - account for 88% of total production capacity.

The reduction in production capacity has not gone far enough in terms of the supply-demand structure. The closure of facilities and the reduction in production capacity has already shown positive effects, resulting in higher profits. In the future, more facilities will be integrated and smaller producers will retreat from the market. These phenomena will facilitate the structural reforms in the vinyl chloride market.

Further structural reforms have been delayed in the polyolefin sector, despite the progress made to date. The number of PP makers has been significantly reduced, for example, and PE companies have integrated their businesses by establishing a succession of new joint-venture companies. These actions have brought headcount reductions and significant decreases in the number of grades. They have also contributed to a reduction in distribution costs.

Furthermore, since these efficiency improvements and rationalisations would have been very difficult for just one company, a certain amount has been achieved in terms of better integrating the business.

However, the most important objectives remain unresolved - that is to shut down old facilities, to concentrate production activities on state-of-the-art facilities and to build large-scale facilities through scrap and build programmes in order to gain global competitiveness.

The delay has occurred as Asian markets have recovered following the Asian crisis. Exports from Japan increased due to the economic recovery in Asia, enabling Japanese facilities to operate at maximum capacity. As a result, they have had no time to deal with issues such as reorganisation of facilities. The only scrap and build activities have been associated with new PE businesses using metallocene catalysts, and the actions taken by Sumitomo Chemical in the field of PP.

However, the issue is becoming pressing. Large-scale polyolefin production facilities able to produce 300 - 450 000 tonne/year are being built in Asean and Middle Eastern countries, leaving Japan with an obvious comparative disadvantage.

Moreover, the Japanese import tariff rate on polyolefins has been lowered every year. The present per-unit tax system will be replaced in 2004 by an ad valorem tariff system - with an applicable rate of 6.5%. This new rate is calculated to correspond to just 50% of the present tariff on PE and PP.

The result will be an increase in imports into Japan from Asean countries, China, and South Korea.

Polyolefin producers are endeavouring to strengthen their international competitiveness by a comprehensive lowering of their costs. However, the worry is that this will not contribute sufficiently to significant increases in their competitiveness.

Inevitably, the Japanese petrochemical industry will be forced to set up business alliances and business integrations around core companies such as the Japan Polychem partnership between Mitsubishi Chemical and Tonen Chemical, Mitsui Chemicals and Sumitomo Chemical.

Already, the reorganisation in derivatives markets has been extending to a reorganisation among major ethylene producers. The Keiyo Ethylene joint venture between Mitsui Chemicals, Sumitomo Chemical and Maruzen Petrochemical has increased its production capacity to 700 000 tonne/year. Ethylene production capacity has been increased at Osaka Petrochemical, which is now a wholly owned company of Mitsui Chemical. Showa Denko will shut its No1 ethylene facility with production capacity of 231 000 tonne/year in June 2000 and increase the production capacity of its No2 ethylene facility from 524 000 tonne/year to 600 000 tonne/year.

Mitsubishi Chemical will stop operating its 270 000 tonne/year ethylene facility at Yokkaichi City at the end of 2000 and concentrate its olefin production in its Kashima and Mizushima facilities.

These actions include both closure and build-up of facilities, which seem to be in opposite directions.

However, they share the same objectives - to optimise the balance between olefins and derivatives in order to increase global competitiveness.

It is obvious that further alliances and partnerships between complexes will be promoted in the future.

In terms of alliances based on geographic locations, the Japanese Ministry of International Trade and Industry (Miti) is planning a 'Complex Renaissance' initiative, aimed at encouraging alliances between oil refineries and petrochemical makers.

Based on this government initiative, study groups have been established in Mizushima, Kashima, Chiba and Tokuyama to investigate its feasibility.

The Mizushima plants of Asahi Chemical and Mitsubishi Chemical are production bases for propylene derivatives. This interesting alliance was actually formed to establish submarine pipelines.

Other than integration with refineries, local alliances are also likely to be promoted. Currently, the most competitive companies, such as Mitsui Chemicals, Sumitomo Chemical and Maruzen Petrochemical, are trying to strengthen their 'Chiba alliance'. According to this plan, they will make Keiyo Ethylene into the core ethylene production centre.

Tonen Chemical and Nisseki Chemical are also strengthening their alliance. If they extend their plan to include a Chiba-Kawasaki alliance, their 'Tokyo Bay Rim Complexes' plan might be achieved. Similar initiatives are also planned in the Setonaikai area.

Nonetheless, it is clear that 11 ethylene centres with 15 facilities is still too many given ethylene domestic production of 6m tonne/year and the demands of global competitiveness. It will be necessary to implement daring new ways of thinking to concentrate these facilities in four or five locations.

In the meantime, the Japanese government has finally begun to correct the high cost structure in Japan. It established the Industry Competitiveness Conference in order to enable a full reform of Japanese industry. It has also recognised the realities of the present situation: 'Having the production bases within Japan itself is becoming a barrier to gaining global competitiveness,' according to Katsunosuke Maeda, vice chairman of the Japan Federation of Economic Organisations and chairman of Toray Industries.

In October 1999, the Industrial Vitality Recovery Special Measure Law came into effect. This law supports mergers and acquisitions and closures of facilities through the tax system, financial system and Commercial Code.

The government has also begun to investigate the feasibility of introducing a consolidated tax payment system and amending the Commercial Code.

In the near future, these measures will eliminate longstanding constraints on the decision-making of corporations.

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