FocusStrong yen aggravates Japan petchems

06 November 2008 05:21  [Source: ICIS news]

By Pearl Bantillo

SINGAPORE (ICIS news)--Japan's strong currency could prolong the agony of its export-oriented petrochemical industry, which is already reeling from weak regional demand and plunging prices, analysts and market sources said on Thursday.

 

The massive $50bn fiscal stimulus package and the country's first rate cut in seven years to inject life into its flagging economy would just temporarily prop up the dollar-yen pair, they said.

 

“All they are likely to be doing is slowing the speed at which the yen continues to appreciate over time,” Ray Attrill, Australian-based economist at consultancy firm Forecast.

 

A significant unwinding of carry trades due to heightened risk aversion while the financial turmoil raged in the US and Europe led to the yen's strengthening against major currencies – rising 19% against the euro and 7.2% against the US dollar in October.

 

As at 12.51 hours Singapore time (0451 GMT), the dollar-yen pair was trading at low Y97.79 levels.

 

Japanese petrochemical giants – Nippon Shokubai, Mitsui Chemicals and Mitsubishi Chemical - have shown significant deterioration in their first half to September earnings as analysts believed the economy has already entered a recession as exports, which accounted for a fifth of the economy’s output, significantly slowed.

 

“Japanese exports are getting crucified by the strength of the yen,” said Forecast’s Attrill.

 

The steep falls in international prices coupled with unfavourable currency movements could leave Japanese polyvinyl chloride (PVC) companies facing huge losses by year-end, said a Japanese PVC producer.

 

“Currencies in all other (PVC-exporting) countries in Asia are depreciating at a time when the yen is rising. This puts us at a disadvantage when we are competing in the same end-markets,” he noted.  

 

“This exchange rate is good for holiday but not PTA (purified terephthalic acid) export business. We have to see what happens before deciding what to do with prices,” said an official from major PTA producer.

 

Inventories were building up at many petrochemical companies due a slump in both domestic and external demand.

 

Japan is a major exporter of ethylene and propylene to China, with Japanese traders dominating the spot olefins trade.

 

Although the strong yen has made imported feedstock naphtha cheaper for domestic consumption, nevertheless Japanese crackers could not escape the plunge in regional demand for downstream chemicals, which has forced them to cut operating rates.

 

“Japan is estimated to have an additional 45,000 tonnes of polypropylene (PP) for export every month starting from October due to weak domestic demand,” an Asian PP producer said, on the assumption that domestic PP demand had shrunk 20%.

 

A dollar-yen exchange at Y100 would be the comfortable level for Japan’s economy, said Naito Toshihiko, senior analyst at ratings agency Japan Credit Ratings (JCR).

 

Based on Bank of Japan’s (BoJ) base case scenario, Japan would gradually return to normal growth path sometime in the middle of its fiscal year 2009, with growth in 2008 expected to be flat before a slight rebound to 0.5% growth in 2009.

 

“It is expected that increased sluggishness in economic activity in Japan will remain over the next several quarters and that it will take some time for the necessary conditions for Japan’s economic recovery to be satisfied,” said Japan central bank governor Masaaki Shirakawa in a recent speech.

 

The weakness in the domestic and world economies, ironically, favours a stronger yen.

 

“The yen has always been driven less by what is happening domestically in Japan. It is more driven by what is happening globally. It is a function of risk-taking for market participants. In the near-term, it is unlikely that risk-taking (appetite) would return,” said Thomas Lam, senior treasury economist at Singapore’s United Overseas Bank.

 

The world's seven richest countries (G7) have raised concerns about the yen's strong ascent, prompting speculation that it granted its blessing for the Bank of Japan to purchase dollars from the market to contain the yen's worrisome appreciation.

 

BoJ’s possible strong intervention could just help stabilize the yen but is not likely to change its course, analysts said.

 

“If that happens, of course the dollar-yen would go higher but for now we are looking for more yen strengthening,” said Thomas Harr, Singapore-based currency strategist at British lender Standard and Chartered Bank.

“There is a risk that it will have a relatively short-term impact because the market is going to focus on the global financial crisis and the global deleveraging and that is yen-positive,” Harr said.

 

“Probably intervention would succeed in making sure it (dollar-yen pair) does not go through yen (Y)90,” said Attrill of Forecast.

 

“It’s not clear whether the dollar-yen will move in one direction. It will probably be going to fluctuate in a wider range,” said UOB’s Lam, projecting a possible range of Y96-102 in the near-term.

 

Ng Hunwei, Hong Chou Hui, Steve Tan and Chow Bee Lin contributed to this story.

 

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By: Pearl Bantillo
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