01 March 2010 17:51 [Source: ICIS news]
By Malini Hariharan
MUMBAI (ICIS news)--Sumitomo Chemical’s latest three-year plan reveals no major strategic shifts but instead sets very ambitious sales and profit targets, which might be difficult to achieve.
There has been a recovery since then, with the company expecting an operating income of yen (Y) 35bn ($394m) and sales of Y1,620bn in the financial year ending 31 March 2010.
Despite an uncertain global economic outlook, the company has set a sales target of Y2,400bn and operating income of Y190bn in the 2012 fiscal year. This would mean a return of equity of 20%, up from the 1.8% projected for 2009-2010.
“The numbers are too aggressive,” says a Tokyo-based analyst. “Sumitomo has large exposure to cyclical businesses such as petrochemicals and information technology (IT).”
“It will be quite difficult to achieve [the targets] if the recent price trend continues. The price assumptions for ethylene and polyethylene are very optimistic. A recovery in domestic petrochemicals is a dream story,” said the trader.
To achieve its overall targets, Sumitomo has said that it will quickly maximise profits and cash flows from major investments, including its PetroRabigh cracker and derivatives joint venture with Saudi Aramco.
In petrochemicals, the company’s policy is to sustain profitability by establishing global operations. To achieve this, Sumitomo plans to establish a worldwide marketing operation built on globally standardised products.
Profitability of operations in
“The issue of [improving] petrochemical competitiveness in
Sumitomo, too, is thinking along the same lines.
“We will increase the proportion of value-added petrochemical products we produce domestically from the current 70-80%,” says a company spokesman. All options are being explored, including new technologies and feedstocks and alliances.
A recent example of activity in this area is the new 150,000 tonne/year propylene demonstration facility, a 50:25:25 joint venture by Idemitsu Kosan, Sumitmo and Mitsui.
Each company will contribute C4 fractions to the new unit and offtake propylene in proportion to their investment.
Sumitomo is unwilling to give details on what it plans to do with the extra propylene, saying only that it would be used for downstream production.
These and other initiatives are expected to help Sumitomo achieve petrochemical sales of Y785bn and operating profit of Y30bn in the 2012 fiscal year, up from forecasted sales of Y500bn and an operating loss of Y9bn in the current financial year.
But the share of sales of petrochemicals and basic chemicals is projected to shrink in the future, from 43% in 2009-2010 to 30% in the 2020 fiscal year, as Sumitomo’s priority is to achieve a balanced business portfolio.
Pharmaceutical and agrochemicals would contribute about 30% of total sales in 2020, almost unchanged from the current level. The share of information and communications technology and the battery and fine chemicals portfolio would expand to 30%, up from 21%.
Sumitomo will make investments to ensure this balance. The petrochemicals and basic chemicals segment would draw only about 20% of the company’s investment dollars through 2020, while the other two segments would each draw 40%.
Future investments in petrochemicals would be mainly outside
A feasibility study is due to be completed in the third quarter of this year and, if viability is confirmed, the second phase will start up in the third quarter of 2014.
The products planned in phase 2 include ethylene propylene rubber, thermoplastic olefin, methyl methacrylate monomer (MMA) and poly methacrylate (PMMA), low-density polyethylene (LDPE), ethylene vinyl acetate (EVA), caprolactam, polyols, cumene, phenol, acetone, acrylic acid (AA), superabsorbent polymer and nylon 6.
The shift away from commodity chemicals and the emphasis on value-added products should help Sumitomo expand earnings and profits. But it faces a tall task in trying to achieve this in just three years.
($1 = Y88.83)
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