World financial and economic crisis could boost Japan chemical industry's structural reform efforts

Transformation accelerated

23 October 2009 10:49  [Source: ICB]

Correction: in the table below entitled "PERFORMANCE OF MAJOR JAPANESE CHEMICAL FIRMS (Y BN)," please read: "2009F" for each entry, instead of "2009", and in the footnote, please read: "F: FORECAST." A corrected story follows.

The global financial and economic tsunami that hit Japan could boost restructuring efforts and strategic tie-ups

Guest columnist
Osamu Kano/The Chemical Daily

THE WORLD economic slowdown triggered by the collapse of Lehman Brothers in the US in September 2008 has hit Japan's chemical industry like a tsunami. The fact that the crash has come on the back of a record-breaking period of profitability for the industry has only served to worsen the impact.

On the back of price increases, driven by higher-priced crude oil and raw materials, and rising demand in the Asian market, the Japanese chemical industry had seen sales increase annually, and dramatically in the period from 2003-2007.

The industry recorded record-high operating profits in fiscal year 2007 (ended March 2008). In fiscal 2008, it suffered a harsh reversal, and slipped in a single year from record profits to losses amid a substantial decrease in sales.

In petrochemicals, for example, Japanese production, measured as ethylene equivalents, fell by 11% year on year in fiscal 2008 (ended March 2009) to just below 6.9m tonnes, representing less than 90% of the 7.7m tonnes/year of production capacity and the first decline in total output in 13 years.

The difficulties spanned the supply chain, from upstream to downstream chemical sectors, including resin processing and fine chemicals. Only the pharmaceutical and agrochemical businesses have avoided the worst of the crash.

THE LIMITS OF COMPETITIVENESS
The competitiveness of the Japanese chemical industry lies in two key factors: its ability to make effective use of all the fractions from its naphtha crackers, and the fact that it has as its end-users the world-leading Japanese automotive and electrical/electronic and other industrial sectors.

It was only after the Lehman shock that business results dropped sharply

But the impact of the economic crisis in the past year has put both these sources of competitive advantage under severe pressure and, in some cases, turned what had been an advantage into a serious disadvantage in the short term, at least.

On the one hand, the fact that Japanese chemical companies make the most of all the cracker fractions from ethylene, propylene to aromatics to petroleum resin, and have achieved this through regular investment and application of advanced and sophisticated technology, means that at this stage of maturity, they do not have that many options to further enhance the competitiveness of the domestic cracking complexes in their current configuration and ownership.

The remaining area that might yield some benefit is improving integration between the petrochemical complexes and the adjacent refineries that feed them. This process has been underway to an extent in recent years but the past few months have seen a surge in activity as companies have placed greater priority on strengthening tie-ups with neighboring petroleum refiners to raise the competitiveness of petroleum complexes as a whole.

On the other hand, the strength of the Japanese industry in the automotive and electrical/electronics sectors has been revealed in the past year as what might be regarded, in the short term at least, as a ­dangerous over-dependence, because both sectors have struggled disproportionately in the recession.

The impact has been very clear in applications such as polypropylene (PP) compounds used for car bumpers, where material is delivered direct to automotive suppliers. But it has also been felt indirectly - and at a level that may have been less well anticipated in many companies - across a wide range of chemical products such as phenol and ­coating materials that find their way less directly in sectors including electronic products and cars.

Furthermore, it is now thought that demand from these key sectors will not return any time soon to the levels seen in the recent peak years. Some estimates suggest that Japan's automotive and electrical/electronics production will only recover to levels at 70-80% of those seen in recent peak years.

At the start of fiscal 2008, Japanese chemical companies anticipated achieving business results similar to those recorded in fiscal 2007, and this was borne out in the first half of the year.

It was only after the Lehman shock that business results dropped sharply, and the hardest hit came in Q4, in the period of January-March 2009. So far in fiscal 2009 (ending March 2010), things seem to have improved, certainly compared with the disastrous Q4 of fiscal 2008.

However, Japan's chemical companies remain cautious in the face of the continuing global economic downturn and are anticipating full-year business performance will be lower in fiscal 2009.

NEED FOR STRUCTURAL REFORM
Japan's chemical industry, in particular the petrochemical industry, had been facing the need for serious structural reform even before the onset of the world economic crisis.

It was clear that highly competitive petrochemical products would flood the Asian market, as large-scale petrochemical projects in the Middle East based on low-cost ethane crackers started up in 2009 and subsequently.

Furthermore, large-scale petrochemical projects are also due on stream over the same period in China, the largest export destination for Japan's chemical products, but which is moving steadily towards self-sufficiency of supply in many petrochemicals.

As a result, it had been anticipated that Japan's general-purpose petrochemical ­products would lose their competitive edge, not only in China, but also in Southeast Asian countries.

Some estimates suggest that Japanese petrochemical production volumes could shrink to around 5m tonnes/year of ethylene equivalent, just enough to satisfy domestic demand. These estimates were prepared before the global economic downturn saw global demand growth abruptly stopped in its tracks, but form the basis for current actions underway or being considered to restructure the industry.

In Japan's petrochemical industry, much merger and acquisition (M&A) activity has been carried out between companies in the field of general-purpose resins in the last decade and a half, but this has not until recently extended to consolidation of ­ethylene centers.

Today, Japanese majors Mitsubishi Chemical and Asahi Kasei are planning such a consolidation. The two companies are discussing production optimization at Mizushima, in Okayama Prefecture, where their ethylene centers are located. A joint company will be set up in April 2010 and a principal goal is to suspend the operation of one of the two ethylene facilities at the site, halving ethylene capacity.

Mitsubishi Chemical has already decided to stop production of several petrochemical products by 2010, including vinyl chloride resin at the Mizushima plant, and styrene monomer (SM) at its Kashima plant, starting the process of curtailing its petrochemical business.

Mitsui Chemicals and Idemitsu Kosan have set out to optimize production at their plants at Chiba, in Chiba Prefecture. Idemitsu operates a petroleum refinery and ethylene facilities there. Mitsui Chemicals operates a cracker and downstream facilities.

Mitsubishi Chemical and Sinopec are discussing environmental technologies

As a first stage, both companies are looking to integrate the management of their ethylene facilities, and then to expand the level of integration at the site to include Idemitsu's oil refinery, to generate cost savings of yen 10bn ($108m).

Mitsui Chemicals is also shutting down and scrapping its uncompetitive plants. It has halted operations at its ethylene oxide/ethylene glycol (EO/EG) facilities in the Ichihara works in Chiba Prefecture and will cease operations during fiscal 2009 at its bisphenol-A (BPA) plant at the Nagoya Works, its No. 2 purified terephthalic acid (PTA) plant at the Iwakuni works, and a polystyrene (PS) plant at the Osaka Works.

In the meantime, it has decided to set up a new hexene-1 line to strengthen metallocene linear low density polyethylene (LLDPE) production, and is also studying further moves to higher added-value products, for example, by replacing scrapped plants with new facilities for ethylene-propylene-terpolymer and PP.

A wild card in planning for looming challenges confronting the domestic petrochemical industry lies in the uncertainty of the outlook for Japan's refineries.

Japanese demand for gasoline is decreasing sharply, and it is thought in some quarters that refining capacity exceeds demand by 20-30%. If refining capacity is slashed in the coming years, the preconditions on which current optimization efforts are being undertaken will change.

GEOGRAPHIC ADVANTAGE
At the same time, Japan's chemical industry has one clear advantage in the global market - its geographic location at the heart of the fast-growing Asian market.

A further strategic imperative for Japan's chemical companies continues to be the goal of winning a share of Asian demand. In the wake of the new economic realities of the last year, this means investment and direct participation in overseas markets, with less reliance on exports from Japan.

Sumitomo Chemical started up in the second quarter of 2009 its joint-venture (JV) Petro Rabigh project with Saudi Arabia's state oil company Saudi Aramco in Saudi Arabia. This is Sumitomo Chemical's third petrochemical base, following its plants in Chiba, Japan, and Singapore. A feasibility study for the Petro Rabigh Phase 2 project, mainly focused on derivatives, is now underway, with start-up planned in 2014.

Mitsubishi Chemical and Mitsui Chemicals have separately agreed with China's largest petrochemical company Sinopec to promote strategic business tie-ups. Mitsubishi Chemical and Sinopec are discussing cooperating in environmental technologies, in addition to tie-ups for investments in PP compounds, BPA/polycarbonate (PC), C4 chemicals and others.

Mitsui Chemicals has identified its aromatics and phenol businesses as core areas for investment in Asia, and has reached a basic agreement with Sinopec for a joint BPA/phenol project in China. It is also studying participating in an aromatics and phenol investment as part of a joint oil refinery project in Vietnam with Idemitsu.

Asahi Kasei is planning to expand its acrylonitrile (ACN) business, currently the world's No. 2. It has a plant under construction in Thailand, and is in talks with SABIC to set up a JV plant in Saudi Arabia.

Mitsubishi Rayon, the world leader in methyl methacrylate (MMA) following its acquisition of the UK's Lucite International earlier this year, has also entered negotiations with SABIC for the construction of a JV plant.

A further priority in the medium and long term for Japan's diversified chemical companies is to further reduce the proportion of their business represented by basic petrochemicals.

In fiscal 2008, in the case of both Mitsui Chemicals and of Mitsubishi Chemical Holdings (the holding company for the group including Mitsubishi Chemical, Mitsubishi Plastics, and Mitsubishi-Tanabe Pharma), deterioration of earnings in the petrochemical business was offset by the results of the pharmaceutical and agrochemical businesses.

Now the new businesses involve keywords such as environment

Mitsui Chemicals' business performance was poor mainly in the petrochemical business because the proportion of products destined for the automotive industry was high. Asahi Kasei's chemical and fiber businesses fell into the red, but the losses were offset by profits in the housing, medical and pharmaceutical businesses.

In the immediate future, the challenge for Japan's chemical companies is to use their advanced technological position and experience to differentiate their products from those coming on stream in the Middle East and China.

Combined with this is the growing impetus to contribute to a sustainable society. Where automotive and electrical/electronics and IT developments were the buzzwords five years ago, now the new businesses being nurtured involve keywords such as environment, new energy, bioplastics, water treatment, and life sciences.

Accelerating development of these new businesses is a central pillar of the research and development and technology strategies for most of Japan's chemical companies.

JAPANESE ETHYLENE PRODUCER RESULTS*, 2003-2008 (Y BN)
	FY03	FY04	FY05	FY06	FY07	FY08
Sales	2,748	3,420	3,963	4,537	5,274	4,470
Change (%)	5.9	24.5	15.9	14.5	16.3	-15.3
Operating profit	71	216	177	246	190	-202
Change (%)	15.7	204.1	-17.9	38.7	-22.6	-206.1
Recurring profit	65	213	175	273	211	-183
Change (%)	51.6	226	-17.8	55.4	-22.6	-186.6
Recurring profit-to-sales ratio (%)	2.4	6.2	4.4	6	4	4.1
*Nonconsolidated, FY = fiscal year; FY2008 ran from April 1, 2008 to March 31, 2009

PERFORMANCE OF MAJOR JAPANESE CHEMICAL FIRMS (Y BN)
	Fiscal year	Sales	Op. profit	Net profit
	2007	2,930	125	164
Mitsubishi Chemical	2008	2,909	8	-67
	2009F	2,500	65	-9
	2007	1,897	102	63
Sumitomo Chemical	2008	1,788	2	-59
	2009F	1,620	35	10
	2007	1,787	77	25
Mitsui Chemical	2008	1,488	-45	-95
	2009F	1,170	-23	-45
	2007	1,697	128	70
Asahi Kasei	2008	1,553	35	5
	2009F	1,355	41	15
	2007	827	59	25
Tosoh	2008	734	-20	-25
	2009F	650	25	9
	2007	704	56	24
Ube Industries	2008	685	31	12
	2009F	552	25	7
SOURCE: COMPANIES, COMPILED BY THE CHEMICAL DAILY
F: FORECAST

Read The Chemical Daily online

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly