INSIGHT: Japan's economic woes will accelerate chemicals change

27 April 2009 17:00  [Source: ICIS news]

TokyoLONDON (ICIS news)--The latest International Monetary Fund (IMF) global economic outlook forecast makes depressing reading. The IMF thinks global gross domestic product (GDP) will fall 1.3% this year in what will prove to be the first global recession since the Second World War. In January, it projected a 0.5% global economic decline.

The major, export-led economies are expected to sufferer badly with Germany shrinking 5.6% and Japan 6.2%. So two of the world’s leading chemicals producing and consuming nations will slump this year. The impact on some of the largest chemical companies will be severe.

Japan’s position is particularly difficult. Having struggled with low domestic market growth for years its chemical companies face the collapse of export demand. Analysts believe the industry’s fortunes now are highly dependent on what happens globally – in terms of demand growth and the introduction of new low-cost production capacities.

Depressed operating rates reflect the fact that chemicals export demand has collapsed alongside the demand for the goods from Japan’s export-driven industries. Cracker operating rates in February were around 70%, indicating that output was for depressed domestic consumption only.

Chemicals output data show huge swings in production and shipments of basic chemicals and plastics in February compared with January this year, let alone the slump in output compared with February 2008.

As companies in other parts of the world have highlighted, depressed automotive and consumer-serving industries and a depressed construction market have continued to feed back into chemicals demand.

DuPont last said its global economic forecast for 2009 had been revived downward significantly since January.

BASF CEO Jurgen Hambrecht was quoted in the German press as saying that the worst was probably yet to come. He did not see an economic upturn until the middle of next year.

Japan’s chemicals producers have moved to counter slow domestic demand growth through a number of single-product mergers but this slowdown is expected to shake them to their very roots.

Japan’s auto industry is in the pits – output dropped 50% in the first quarter consultants say. A huge yen (Y) 15 trillion ($154bn) stimulus package unveiled by Prime Minister Taro Aso on 10 April is equivalent to about 3% of GDP.

The economic contraction could be painful and deep and is likely to prompt further shutdowns and restructuring across the chemicals sector.

The undercurrent of change has already prompted closures. On 2 April, Mitsui Chemicals and Sumitomo Chemical became the latest to announce the termination of a production joint venture, this time in polystyrene (PS).

Japan’s demand for PS is expected to fall between 6.5% and 7.0% this year; it has been contracting since 2001 as new applications for the plastic have dwindled. Japan’s four PS producers have a combined capacity of 1.1m tonnes, about 70% of which is supplied to the domestic market. Japan Polystyrene, which will shut down in September, has about 16% of the total.

That news comes on the heels of other cutbacks in polyester chain chemicals from Asahi Kasei, Mitsubishi Chemical and Mitsui Chemicals that show how Japan’s shifting economy is putting pressure on its basic chemicals producers.

Mitsui Chemicals last week probably told it like it was for large parts of the sector. It projected a significantly greater full-year 2008/09 net loss of Y95bn ($977m), compared with a January forecast of a Y13bn shortfall. Asahi Kasei had earlier slashed its full-year profits forecast, as had Shin-Etsu Chemical and sector giant Mitsubishi Chemical.

Japan’s chemicals players – of many sorts – will reflect in their financials for the year the extent and depth of the downturn in Japan and in wider Asia. The winds of change have blown through the country’s markets for years but the nation’s chemicals makers usually take their time to act.

The trouble is, this downturn is different. It takes away the export opportunities that have been so important to many businesses for so long and cuts great swathes through the country’s export-led manufacturers, the customers on which Japan’s chemicals players rely.

The current sharp economic contraction is likely to accelerate the inevitable, put further intense strain on petrochemicals and basic chemicals production and highlight the shift to more specialised parts of the business.  

For more on Japan’s chemicals players visit ICIS chemical intelligence
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By: Nigel Davis
+44 20 8652 3214

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