Japan's chemical industry shifts to prepare for a new reality

15 October 2010 16:31  [Source: ICB]

The chemical industry continues to make major structural changes to its DNA to boost competitiveness

Osamu Kano The Chemical Daily

Japan's chemical industry staged a comeback in fiscal 2009 (ended March 31, 2010) from the global recession, thanks to the booming economies of China and other parts of Asia.


 Photolibrary/Gareth JJ Burgess

The petrochemical sector has shown particular strength since the recession and is continuing to perform well so far this fiscal year. However, petrochemical profitability is likely to decline in the second half of fiscal 2010 as delayed large-scale petrochemical projects start to come on stream in the Middle East and impact the Asian market.

Japanese chemical firms have been preparing for competition from the Middle East and other parts of the world for some time. They have been focusing on high-performance grades, and streamlining their portfolios through "choice and focus" business strategies.

The most revolutionary change has taken place in recent months with a genuine step forward in the first of the projects to improve the integration of Japan's ethylene cracking centers.

In addition, Japanese chemical companies have been striving to downsize their operations over the past two years, and they are now poised to compete more effectively in the growing Asian market from a position of improved profitability. Their medium-term goal is to further specialize in supplying sectors such as the environment, energy, information technology (IT) and life sciences, in which Japan has a competitive edge.

The performance of Japan's chemical industry, especially the petrochemical sector, nosedived in the fourth quarter (Q4) of 2008 as the global financial crisis started to unfold. The petrochemical market hit bottom in Q1 2009, with domestic naphtha crackers, capable of producing 7.7m tonnes/year of ethylene, operating at around 70% of capacity.

As a result, 11 ethylene centers reported a total loss of Japanese yen (Y) 201.5bn ($2.4bn) in fiscal 2008. Of the six leading chemical companies in Japan, two reported losses at the operating level and four at their bottom line.

Companies that had been shifting their strategic focus to non-basic chemical products such as pharmaceuticals, agrochemicals, or housing, proved to be relatively immune to the downturn, but companies such as Mitsui Chemicals and Tosoh, which are highly dependent on petrochemicals, were badly hit.

In fiscal 2009, the average operating rate of petrochemical plants in Japan rebounded rapidly thanks to growth elsewhere in Asia, though the domestic market remained relatively sluggish.

In particular, exports from Japan of products such as LCD films and engineering plastics increased as the Chinese government's massive stimulus package boosted sales of domestic electrical appliances such as LCD TVs, and car production improved across Asia.

The average operating rate of Japan's ethylene centers increased from around 80% in April 2009 to over 90% in May 2009 and remained above 90% until July 2010.

As a result, the 11 ethylene centers reported an operating profit of Y300m in fiscal 2009. Of the six leading chemical firms, only Mitsui Chemicals reported losses both at the operating level and bottom line. All registered significant improvement over the previous year.

This upswing continued into the first half of fiscal 2010. While domestic demand has yet to pick up, each ethylene center has remained profitable on robust demand in Asia.

Scheduled maintenance turnarounds at several of Japan's ethylene centers and at crackers in South Korea and Taiwan for about two months during Q2 this year further boosted the petrochemical market. All of Japan's ethylene centers performed above expectations in this period (Q1 of fiscal 2010).

However, uncertainties over the outlook for the second half of fiscal 2010 kept many companies cautious, and only Sumitomo Chemical revised its forecast for full-year fiscal 2010 upward when it announced its Q1 results.

Key concerns include the fact that China, which has been driving the world economy, is showing signs of slowing down; employment insecurity is casting a shadow over the US economy; Europe has yet to recover from the global financial crisis; and Japan is still losing competitiveness in export markets due to the stronger yen.

In addition, the Asian market is likely to see an influx of products from the Middle East as the delayed large-scale petrochemical projects of Petro Rabigh and Eastern Petrochemical (Sharq) come on stream in Q4 2010.

"Japanese chemical companies will not just sit back and watch as large-scale petrochemical projects in the Middle East go on stream," says a source at a Japanese petrochemical company. Companies point out that they started work on restructuring well before the collapse of Lehman Brothers in 2008.

For example, they have discontinued or cut back production in Japan of commodity products such as polyethylene (PE), ethylene glycol (EG) and styrene that are not competitive with the ethane-gas fed products coming on stream in the Middle East. They have shifted their focus to propylene-based products, aromatics and functional ethylene-based products.

Of particular note was the decision by Mitsubishi Chemical to discontinue the production of styrene monomer at Kashima and of vinyl chloride monomer (VCM) at Mizushima by March 2011. It had already made its exit from its Singapore operations where it made styrene through its toll arrangement with Anglo-Dutch major Shell at Seraya and Ellba.

The company will also scrap styrene chain (including polymers) and vinyl chloride chain operations. It has withdrawn from its nylon chain operations through its polyamide for polycarbonate (PC) swap with Netherlands-based chemical group DSM, and has relocated its production of purified terephthalic acid (PTA) overseas.

In addition, an olefin conversion unit will be set up in Kashima to ramp up propylene production, and at the same time subsidiary Japan Polypropylene will shut down part of its polypropylene (PP) facilities.

Mitsui Chemicals has reduced capacity and consolidated production of ethylene oxide (EO), EG, bisphenol A, ethylene-propylene terpolymer (EPT) and also plans to reduce its PP capacity. In addition, the production of Evolue metallocene straight-chain low-density polyethylene (LDPE) will be expanded in 2011, and a new plant for hexane-1, a feedstock for Evolue, is scheduled to start up in Q2 2011.

In the core propylene business, olefin conversion units were started up in 2004 in Osaka and in Q2 2010 in Ichihara to ensure the supply of feedstock.

Likewise, Showa Denko is downsizing its acetic acid to ethyl acetate (etac) operations due to the mature domestic market. It halted operations at its etac plant in Tokuyama, Yamaguchi Prefecture in June and now produces etac only in Oita, Japan and in Indonesia. Its current production capacity is 150 000 tonnes/year, half of its former capacity.

Mitsui Chemicals and Sumitomo Chemical withdrew from the polystyrene (PS) business in 2009, closing down production and dissolving their Japan Polystyrene joint venture (JV). No company can afford not to consider restructuring less competitive businesses.

In the wake of the 2008 global financial crisis, however, major petrochemical companies recognized that there was a limit to what they could do on their own.

In 2009, Mitsui Chemicals and Idemitsu Kosan agreed to work on the integration of their ethylene centers in the Chiba area, and Mitsubishi Chemical and Asahi Kasei agreed to the same in the Mizushima area. These agreements received much attention as their outcome will determine the future direction of Japan's petrochemical industry.

Mitsui Chemicals and Idemitsu Kosan announced in April 2010 a limited liability partnership to integrate their ethylene centers. They will take out a total of 1m tonnes/year of ethylene production.

Mitsubishi Chemical and Asahi Kasei established a joint company in June to integrate their ethylene centers. Start-up is scheduled for April 2011 when the capacity of the integrated center will be 1m tonnes/year.

Mitsubishi Chemical and Asahi Kasei will downsize their capacities by 30% in each of 2011 and 2012 and may also shut down one of the two centers altogether.

 The most revolutionary change to date has taken place in recent months with a genuine step forward in the first of the projects to improve the integration of Japan's ethylene cracking centers
Idemitsu Kosan has an oil refinery in the Chiba area and JX Nippon Oil & Energy has two oil refineries in the Mizushima area. The second phase of restructuring involves the integration of petrochemical and refining operations in both the Chiba and Mizushima areas.

Although further integration is unlikely to take place anytime soon, greater integration of refining and petrochemical operations to enhance cost competitiveness appears feasible in the Kashima area (involving Mitsubishi Chemical and JX Nippon Oil & Energy), the Osaka area (Mitsui Chemicals and adjacent oil refineries) and the Kyushu area (Showa Denko and JX Nippon Oil & Energy).

With domestic demand for petroleum products declining, overcapacity is more of an issue in refining than in petrochemicals. The government is thus taking action to reduce refining capacity. Integration is key to surviving in this competitive environment.

In the domestic market, therefore, the emphasis remains firmly on expansion of differentiated products such as functional resins, high-performance films, fine chemicals, pharmaceuticals and agrochemicals, and restructuring and streamlining those commodity and petrochemical businesses that can no longer be operated on a cost-effective basis in Japan.

Such trends are evident in each company's medium-term business plan.

For example, Mitsubishi Chemical Holdings, which includes Mitsubishi Chemical, is focusing on seven business areas including lithium-ion battery materials and white LEDs, targeting sales of hundreds of billions of yen.

Likewise, Sumitomo Chemical is seeking meger and acquisition opportunities in the fields of pharmaceuticals and agrochemicals, while planning to produce OLED panels for large-screen TVs.

Asahi Kasei Group plans to make concerted efforts to develop systematic water treatment and advanced health care businesses.

However, Japan's petrochemical producers have not surrendered their geographical advantage of being located in the rapidly growing Asian market. They are expanding production of those petrochemicals where they remain competitive or have a technological advantage, and are set to extend their reach.

At the same time, the business environment has changed since Japan's petrochemical firms began to make inroads into ASEAN (Association of Southeast Asian Nations) countries in the 1990s; the key now lies in establishing strong partnerships with leading petrochemical companies in these countries, including those owned by governments, to secure access to cost-competitive feedstocks and ensure access into highly regulated markets.

One example is Petro Rabigh, a JV between Sumitomo Chemical and state oil company Saudi Aramco. This world-leading petrochemical complex in Saudi Arabia is a milestone in the history of Japan's chemical industry.

While it took some time before it got on track because of the sheer scale of production capacities involved - 900,000 tonnes/year of PE and 700,000 tonnes/year of PP - the complex is expected to post profits in fiscal 2010. A feasibility study for the second-phase project including derivatives such as phenol, nylon resins and acrylic acid is scheduled for completion in Q4 this year.

Sumitomo Chemical also has petrochemical operations in Singapore and plans to build new plants for solution-styrene butadiene rubber (S-SBR, a raw material for high-performance tires) and ethylene vinyl acetate (EVA) copolymer, used for solar cell encapsulants, through its synthetic resin subsidiary, Polyolefin Company (Singapore). A decision will be made by the end of this year.

Mitsubishi Chemical will produce PC resins and BPA through its JV projects now under construction with Chinese energy and chemical major Sinopec. A feasibility study is under way to produce bio-succinic acid with Thailand's PTT in Thailand.

In Saudi Arabia, the company participates in the Sharq JVs with Saudi chemical giant SABIC and other Mitsubishi group companies, and is now planning a JV for methyl methacrylate (MMA) between Mitsubishi Rayon, now a Mitsubishi Chemical subsidiary, and SABIC.

Mitsui Chemicals is also strengthening its partnership with Sinopec, focusing on phenol and EPT in addition to BPA. In Vietnam, the company is considering taking part in the Nghi Son oil refinery project with Idemitsu Kosan to reinforce its aromatics operations. It also plans to ramp up production of phenol, Evolue and PP in Singapore, where it has a strong operating base.

Asahi Kasei positions acrylonitrile (ACN) and synthetic rubber materials as core products and is also extending its reach worldwide. Its ACN JV with PTT has been delayed along with other projects at Mab Ta Phut in Thailand because of problems in implementing environmental legislation at the site. It is now scheduled to commence production in 2011. In addition, Asahi Kasei is planning to build another ACN plant in the Middle East and a new S-SBR plant in Singapore.

Tosoh has vinyl isocyanate chain operations at Nanyo, Japan, producing primarily VCM and methylene diphenyl di-isocyanate (MDI). The company plans to expand operations but the expansion is thought unlikely to take place in Japan because of government plans to implement an environmental tax based on carbon dioxide emissions. Its polyvinyl chloride (PVC) plant in Guangzhou, China, is also scheduled for expansion, by 390,000 tonne/year, and the company may opt to also build VCM production there.

Further information on the Japanese chemical industry

Author: Osamu Kano

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