The big push for competitiveness

08 January 2001 00:00  [Source: ACN]

The Japanese petrochemical industry is seeking to improve its global competitiveness through mergers and consolidations. More old facilities are expected to be replaced through scrap-and-build projects in the next few years, reports Clara Tan

Nationalisation of production is the golden rule for survival in Japan's petrochemical industry.

Japan is already producing more than enough olefins and polymers to satisfy local demand and a substantial amount needs to be exported.

The industry is expecting more replacement of existing old facilities through scrap-and-build projects rather than the building of new plants in the next few years. New grassroots projects are expected to be few and far between in Japan in the short term.

The Japanese petrochemical industry is expected to focus on improving its competitiveness through consolidations and alliances to achieve better profitability.

The recently announced merger between Mitsui Chemicals and Sumitomo Chemical demonstrates an understanding among local players of the urgency to be competitive in a global marketplace. The consolidation will help both companies save costs and keep up with global competition.

A local producer rationalises that there are too many chemical players in Japan with low competitiveness. Corporate mergers, he adds, will reduce the number of players in Japan and make them bigger and stronger. Mergers will also mean improved efficiency for companies through consolidation of similar business operations.

In Japan, there are currently 11 major ethylene producers and more than 20 PP and PE producers, including the smaller players.

Sumitomo and Mitsui will combine their polyolefins businesses in October this year (ACN 11 Dec, p8). It remains to be seen how the merger will affect Mitsui affiliate Grand Polymer's earlier plans for a scrap-and-build PP project.

Grand Polymer says it has factored the impact of the Mitsui-Sumitomo merger in to a final proposal for the PP scrap-and-build plan. The proposal is expected to be submitted early this year to Grand Polymer shareholders for approval.

Grand Polymer plans to build a 200 000 tonne/year PP plant in Japan as a replacement for one or two existing plants. The company has yet to decide which plants it will scrap and when.

Similar to Mitsui and Sumitomo's efforts to streamline their business operations, other producers are also seeking ways of enhancing their competitiveness and plant efficiency. Increasing capacities is, however, not an option.

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One reason is that Japan is already producing enough for the local market. In 1999, Japan exported 15-30% of its polyolefins production, depending on which polymer. This is similar to the range for 1998.

'Japan's demand for polyolefins is almost stable. Another challenge is to compete in the international markets with players from Singapore, Taiwan and Saudi Arabia,' a Japan Polychem source says.

ExxonMobil, Formosa Petrochemical Corp and Sabic are expected to bring their new worldscale crackers to full operations this year.

Foreign competition prompted Showa Denko to scrap one of its two less-efficient crackers. The company permanently shut its 231 000 tonne/year cracker last August and expanded its other cracker in Oita from 524 000 tonne/year to 600 000 tonne/year in September last year.

'The cracker we closed was not as competititve as the newer crackers in Taiwan and Singapore,' a Showa Denko source says. Showa Denko expects the scrap-and-build plan will save it Yen3bn (US$26.7m)/ year.

Trimming ethylene capacity also gives Showa Denko the flexibility of not having to export when market prices are not favourable.

'Before the old cracker was scrapped, we had to export even when prices were no good,' the Showa Denko source says.

Showa Denko is not alone in taking such measures. Several producers have also followed the scrap-and-build route to improve their overall plant efficiency and enjoy cost savings. The plants which have been shut down were usually more than 20 years old.

Producers say that to avoid further oversupply, plants in Japan will only be constructed to replace old and inefficient facilities. Last year, Japan Polychem closed down two PP plants, one in Mizushima and the other in Yokkaichi. The PE/PP producer is now considering building one or two polyolefins plants to replace the scrapped capacity. A decision on the new plants is expected in Q1 this year.

The closure of the old plants has not only helped Japan Polychem save on labour and operating costs, but has also reduced the producer's reliance on exports.

'We are now exporting in the mid-range of 10-20%, compared with 15-20% before the plants were shut,' the Japan Polychem source says.

In 1999, Sumitomo scrapped two PP facilities with a total capacity of 110 000 tonne/year, and replaced them with a new plant of the same capacity in Chiba.

The company is likely to next scrap its 10 000 tonne/year No1 PP plant in 1-2 years and replace the capacity by debottlenecking its No7 plant by 10 000 tonne/year, a company source says. No1 was built in the 1960s.

Sumitomo has also recently upgraded the process used in its 70 000 tonne/year No2 PP plant and has reduced the number of grades produced at the facility.

For future cracker projects, Japan is expected to witness only two cracker expansions in the next few years among the 11 Japanese major ethylene players (ACN 16 Oct, p28). They are a debottlecking project and a scrap-and-build project. Japan is not expected to build grassroots ethylene plants in the near future.

Idemitsu Petrochemical will raise its ethylene capacity at its Tokuyama cracker by 100-200 000 tonne/year. The new capacity will come onstream in October 2002. Idemitsu's new ethylene output will help supplement Tosoh's feedstock requirements for its ethylene dichloride and vinyl chloride monomer plants at the same site. Tosoh currently has to purchase 50% of its ethylene with the balance supplied from its own cracker in Yokkaichi.

Mitsubishi Chemical is considering expanding its 830 000 tonne/year cracker in Kashima by 200 000 tonne/year as part of a scrap-and-build plan. The expanded facility would replace Mitsubishi's oldest cracker in Yokkaichi, which is scheduled to be closed on 12 January this year. The 85 000 tonne/ year monoethylene glycol (MEG) and 111 000 tonne/year ethylene oxide (EO) plants operating downstream of the Yok-kaichi cracker will be shut on 15 January.

Mitsubishi says production of MEG and EO will instead be focused at its Kashima cracker, where the Japanese major will transport EO to Yokkaichi to ensure uninterrupted sales to its customers in central and western Japan. EO supply from Kashima will also ensure continued production of EO derivatives at Yokkaichi.

The Yokkaichi site will instead focus on producing more speciality products. Mitsu-bishi is building a pilot POGE (polyglycerine fatty acid ester) plant in Yokkaichi, which is due to be completed in early 2001.

The company will also expand its 20 000 tonne/year PBT (polybutylene terephthalate) production in Yokkaichi to 80 000 tonne/year. The new 60 000 tonne/year plant is due to be completed at end-2002. Mitsubishi is already producing 37 000 tonne/year of PTMG (polyteramethylene-etherglycol) at the site.

Mitsubishi's decision to change its product slate at Yokkaichi reflects an ongoing shift in product focus from petrochemicals to speciality chemicals and engineering plastics by many Japanese companies.

High production costs in Japan are another factor eroding the competitiveness of Japanese producers. Japan relies heavily on naphtha imports, which makes it difficult for the producers to reduce feedstock costs. Japan's expensive distribution and power are other factors contributing to the high production costs.

Except for Showa Denko's cracker facility, the remaining crackers in Japan are based entirely on naphtha. Showa Denko's cracker can use up to 40% of natural gas liquids as feedstock.

Cheap overseas gas feedstock has attracted many Japanese companies. Mitsui & Co and Mitsubishi Gas Chemical have ventured overseas to make gas-based chemical investments, where gas feedstock is abundant and competitively priced.

Mitsui & Co invested in a joint-venture 660 000 tonne/year ammonia plant in Bontang, east Kalimantan, Indonesia. The Japanese trading house is currently considering a second gas-based chemical project in Indonesia. It was previously keen to buy gas from Pertamina for a methanol project in Natuna Island, but is now considering co-operating with Pupuk Kaltim to develop gas-based projects in Central Sulawesi (ACN 20 Nov, p39).

Mitsubishi Gas Chemical (MGC) has set up large methanol production bases in Venezuela and Saudi Arabia, where gas is also very competitively-priced.

The option to venture overseas is likely to stay entrenched in the mindsets of many Japanese companies. Already, studies are ongoing for more gas-based chemical projects in Asia.

MGC is studying a methanol-dimethyl ether project in Western Australia because of gas feedstock availability and Western Australia's proximity to Asia (ACN 11 Dec, p32).

Mitsui Chemicals is studying building a gas-based cracker in Asia in order to compete with Middle Eastern players. The merged Mitsui-Sumitomo entity is likely to invest in the project (ACN 27 Nov, p30).

To attain a competitive edge over other players in terms of technology, Japanese companies have increased investment in R&D in order to develop proprietary technologies.

Sumitomo, for example, last year announced its new caprolactam and propylene oxide (PO) technologies, which the company claims, will not produce any co-products or by-products.

A proprietary catalyst enables the production of PO without styrene and MTBE as co-products. Sumitomo plans to employ the technology in a 200 000 tonne/year plant in Chiba (ACN 9 Oct, p32).

The caprolactam technology, which uses an EniChem catalyst, will be first applied in a 90 000 tonne/year plant in Ehime, Japan (ACN 16 Oct, p33). The process will not produce ammonium sulphate as a by-product, unlike other conventional processes.

Producers employing this technology in their plants would not need to build an ammonium sulphate recovery and sulphuric acid plants, thereby saving substantial costs. Sumitomo estimates it will cost US$1100- 1200/tonne to produce caprolactam from a plant using its new technology. This is more cost-effective than using DSM's new HPO plus technology, which will produce caprolactam at about US$1400-1500/tonne (ACN 29 Nov 1999, p16).

Asahi Kasei Corp recently developed a direct propane-to-acrylonitrile process to produce acrylonitrile. The technology does not require propylene feedstock.

Asahi is studying building an acrylonitrile plant in Thailand using this process, which it believes will greatly enhance the project's competitiveness.

The Japanese petrochemical sector seems to have taken the right steps towards recovery, thanks to ongoing restructuring initiatives undertaken by many companies.

The onus on these companies is to continue focusing on strengthening their competitiveness and improving their efficiency through scrap-and-build measures, upgrading of plants and consolidation. These options are expected to take precedence over grassroots projects in the next few years.

About this guide

This is the tenth in a 12-part series on Investing in Asia.

2000	Issue date
Thailand	3 Apr
Philippines	1 May
Singapore	5 June
Malaysia	3 July
Indonesia	7 Aug
China	4 Sept
India	2 Oct
Vietnam	6 Nov
& Indochina
Taiwan	4 Dec
2001
Japan	Jan
South Korea	Feb
Australasia	Mar

For more details, contact Andy MacGregor
Tel: +44 208 652 8035
Fax: +44 208 652 8918

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