INSIGHT: Mitsubishi restructuring: speed is of the essence

05 June 2009 18:37  [Source: ICIS news]

By Malini Hariharan

The writing has been on the wall for some time now for the Japanese petrochemical sector: restructure or perish.

A shrinking home market and escalating Middle East competition in ethylene and its derivatives have pushed companies to not only reorganise existing businesses but also hunt for new avenues for growth.

The sector has seen some action over the last few years in the form of production and marketing alliances, joint ventures, closures of small, uneconomic plants; integration with refineries; and diversification in speciality chemicals, pharmaceuticals and electronic materials.

But petrochemicals still account for a considerable portion of sales for the Japanese majors. And since the economic crisis, they have been under even greater pressure to adjust their portfolios.

A flurry of announcements this year by Mitsubishi Chemical , Japan’s largest chemical company, suggests that the urgency has been recognised.

Earlier this week, Mitsubishi Chemical and Asahi Kasei  announced that they would study unifying their cracker operations at Mizushima. Mitsubishi operates a 450, 000 tonne/year cracker at the site while Asahi has a 440, 000 tonne/year cracker. Derivatives downstream of the cracker and aromatics have not been included in the study.

The two companies have worked together in the past for a government-subsidised project called Research Association of Refinery Integration for Group-Operation (RING). And integration of ethylene operations at Mizushima has been talked about since 2007.

But the two now aim to complete the study in the next two to three months. If results are favourable, a letter of intent will be signed and a joint venture will be formed by April 2010. However, full implementation is likely to take another three years.

Late last week, Mitsubishi said it would exit the styrene monomer (SM) and caprolactam businesses. It would also examine swapping its nylon business with DSM’s polycarbonate (PC) business.

The recent announcements follow a few others made earlier this year. In May, Mitsubishi decided to exit from the polyvinyl chloride (PVC) business by closing a 120,000 tonne/year plant in Kawasaki and a 100,000 tonne/year plant at Yokkaichi by March 2011. A vinyl chloride monomer (VCM) unit and a chlor-alkali plant would also be shut. The plants are operated by V-Tech, a joint venture between Mitsubishi and Toagosei Co.

In April, it agreed on a strategic business partnership with Sinopec to take advantage of respective technologies, markets and materials.

And in February, Mitsubishi revealed plans for restructuring its purified terephthalic acid (PTA) business which involved closing PTA and paraxylene (PX) plants in Japan and moving headquarter operations for this business to Singapore.

Mitsubishi is certainly moving in the right direction but financial analysts complain that the pace has not satisfied investors.

“We value the strategy, but the speed of restructuring is a problem. It is too slow for us,” says one analyst.

Speed is crucial as some of the Middle East plants have already started while others are gearing up for commissioning. Additionally, the company’s chemicals portfolio posted a yen (Y) 55.54bn ($573m) loss in 2008-09. The business, which accounted for 37% of total sales in the last financial year, could very easily post more significant losses this year if petrochemical margins worsen, says the analyst.

He points out that Mitsubishi’s other businesses, such as functional materials, have a future but this business can’t cover losses posted by petrochemicals.

Three years is too long for restructuring cracker operations at only one site, he adds.

A second analyst concurs: “Polyethylene (PE) imports are expected to penetrate the domestic market this year; 2012 is a little too late.”

Details of the joint study are still sketchy and both sides have not yet talked about the impact of the proposed joint venture on their derivative businesses.

Analysts think it is likely that one of the two crackers will have to be shut down. But the two companies have not yet confirmed this.

Mitsubishi has also not clearly spelt out what it plans to do at Kashima where it has two crackers with a total capacity of 851,000 tonnes/year.

“We will first study Mizushima and after that there is a possibility that we will study integration at Kashima,” says a Mitsubishi spokesman.

However, Kashima may turn out to be harder to restructure along the lines of Mizushima as the site only houses only Mitsubishi’s cracker operations which are closely integrated with other chemical companies such as JSR.

The complexity of integrated Japanese chemical sites and cultural differences among companies are major hurdles that cannot be overcome quickly. But companies do not have much time as petrochemical markets are steadily heading towards the bottom of the petrochemical cycle.

Mitsubishi’s vision for the future has seven “next-generation growth businesses” from which it has prioritised white light emitting diode (LED) and lithium-ion battery materials for hybrid electric vehicles (HEVs).

APTSIS 10, the company’s mid-term plan till fiscal 2010, provides a clue of what more can be expected in chemicals. For instance, it says that measures in the PE business will be focused on consolidating production facilities.

Rearranging its feedstock slate to reduce dependence on naphtha is a priority. A number of technologies are being evaluated including using coke oven gas (COG) for production of benzene and propylene and making butadiene through a newly developed process that utilises butene.

COG, generated as a by-product at Mitsubishi’s coke production facilities, is currently used as a fuel. But the company is interested in transforming COG, which is 58% hydrogen and 28% methane, to benzene, methanol and propylene. A pilot plant to convert methane to benzene started operations in August 2008. The next task is to progress to methanol, dimethyl ether (DME) and propylene.

Butadiene-based C4 chemicals such as 1, 4-butandiol and its derivatives are seen as a growth business which Mitsubishi hopes to strengthen with the new butadiene technology that is capable of using butene from naphtha crackers and fluid catalytic cracking (FCC) units at refineries. This has been tested at a pilot plant at Mizushima.

Mitsubishi is also looking at using carbon dioxide as a chemical feedstock. A new research unit, Kaiteki Institute, was set up in April to devise efficient and cost-effective means for synthesizing basic chemicals, chemical intermediates, and materials such as polymers using carbon dioxide and water as basic ingredients.

These new technologies should go a long way in transforming Mitsubishi. Progress so far might appear slow but the company is still moving faster than other Japanese companies in arriving at an optimal business structure. The strategic moves made this year are probably only the beginning of a long drawn out business restructuring.

($1 = Y96.95)

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By: Malini Hariharan
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