The Japan earthquake has put the chemical supply chain into focus

24 October 2011 00:00  [Source: ICB]

The Great East Japan Earthquake on March 11, 2011, dealt a severe blow to Japan's chemical industry. At the same time, the disaster put the spotlight on the role played by chemical materials in a wide range of industries, and also revealed the vulnerabilities of Japan's highly sophisticated supply chain.

The Japan disaster shattered the country's infrastructure

Six months on, the industry is returning to normal, but the issues that emerged in the wake of the disaster are likely to shape strategic thinking for a long time. Even now, some plants have yet to resume operations and power shortages continue to pose problems. Forced to source alternative fuels and transport products over long distances, chemical companies are finding themselves under increasing cost pressure as they strive to meet customer requirements.

Four ethylene centers representing about 40% of domestic ethylene production were shut down in the wake of the earthquake: Mitsubishi Chemical's No. 1 and No. 2 crackers at Kashima, with 375,000 tonnes/year and 453,000 tonnes/year of capacity (including maintenance shutdown); Maruzen Petrochemical's Chiba Plant with 453,000 tonnes/year capacity (excluding maintenance shutdown) and JX Nippon Oil & Energy's Kawasaki Plant with 443,000 tonnes/year capacity (excluding maintenance shutdown).

The Kashima complex was one of the hardest hit. In addition to the crackers, plants producing propylene, polyethylene (PE), polypropylene (PP), caustic soda and chlorine were also damaged, hitting production of many downstream intermediates and finished products.

The severity of the situation at Kashima was reflected by the K Project, launched by Japan's Ministry of Economy, Trade and Industry (METI) to speed up the recovery process at the site. As the No. 1 cracker at Kashima was scheduled for regular maintenance in mid-May, the company focused its efforts on restarting the No. 2 cracker, carrying out repairs to a seawater intake pump and cleaning the inside of pipes and reaction tubes. The No. 2 cracker was restarted on May 20 ahead of expectations, and the No. 1 cracker was restarted in June following maintenance.

EMERGENCY IN PRINTING INKS

Some facilities, however, are unlikely to restart anytime soon. Production facilities for methyl ethyl ketone (MEK) and di-isobutylene at Maruzen Petrochemical's Chiba Plant, for example, are only scheduled to restart in June 2012.

With 170,000 tonnes/year of capacity, Maruzen is the largest MEK producer in Japan and one of the largest in Asia. It is Japan's only merchant supplier of di-isobutylene. Both chemicals are used as raw materials for printing inks. The loss of its production could open the door for competitors.

"We are not sure if we will be able to retain customers," says Shun Fujii, president and CEO of Maruzen Petrochemical, "but we are going to take advantage of this opportunity to renew and upgrade our operations." This will include retrofitting existing aging facilities.

In the meantime, the Japan Printing Ink Makers Association has declared an emergency in the printing and newspaper industries and requested both sectors to reduce their use of printing inks because of the tight supply of MEK and di-isobutylene.

Idemitsu Kosan's Tokuyama Refinery in Yamaguchi Prefecture will start commercial production of di-isobutylene at a 9,000 tonne/year plant. Originally planned to target the Asian market, the priority for the new plant for the time being will instead be the domestic market. In addition, JX Nippon Oil & Energy produces di-isobutylene for captive use as a gasoline octane enhancer at its Kawasaki Plant in Kanagawa Prefecture, but plans to divert production to meet market requirements while the Maruzen capacity remains out of action.

DIC and other ink manufacturers have sought to secure raw materials from abroad or from other ink manufacturers, and have also made every effort to use alternative raw materials and increase production of inks that do not contain MEK. However, this has often meant cost increases. In addition, higher naphtha prices have pushed up solvent prices, and ink prices have risen.

The paints and coatings industry has also faced difficulties in sourcing raw materials, in some cases exacerbated by the shift to flexible manufacturing that has occurred in recent years with the aim of helping suppliers differentiate products and serve a wide range of industries from automotive to construction.

Yuzo Kawamori, chairman of the Japan Paint Manufacturers Association and president of Kansai Paint, says that the disaster has made him recognize the industry's limitations in attempting to serve the market on its own.

Since March, paints and coatings manufacturers have had no choice but to seek suppliers at home and abroad, in some cases paying for raw materials at two-to-three times the usual price to meet obligations to customers.

The industrial gas industry is also facing increased costs because of the need to transport product long distances to ensure supply.

Dealing with issues after the catastrophe will determine the way ahead

An air separation unit was damaged at the Sendai Sanso Center of Taiyo Nippon Sanso, the largest industrial gas manufacturer in Japan. The Sendai Sanso Center is an on site plant supplying oxygen and other gases by pipeline to steel bar manufacturer JFE Bars & Shapes and liquid gases to other nearby users.

Since the disaster, the company has transported liquid gases by truck from the Kanto region to the Tohoku region, incurring additional costs in May, June and July estimated at several hundred million yen. Scheduled power outages were another serious blow to the industrial gas industry. Air separation units consume large amounts of electricity and are not compatible with intermittent operation because of the need to maintain rectifying columns at very low temperatures.

The disaster also had a significant impact on the chlor-alkali industry. Seven caustic soda plants run by six companies in the Tohoku and Kanto regions were shut down which, together with plants already shut down for regular maintenance, represented the loss of about 30% or 150,000 tonnes/month of domestic production capacity.

Four plants resumed operations within a week of the earthquake, but the supply remained tight in Fukushima Prefecture and the northern part of the Kanto region. Although product was available, there was no place to store it, as tanks had been damaged by the earthquake and tsunami, according to a leading chlor-alkali manufacturer.

The Kashima plant of Asahi Glass, Japan's largest manufacturer of sodium hypochlorite, was also damaged, putting pressure on supply. Sodium hypochlorite is difficult to move over long distances because it deteriorates in a week or so, making storage a problem.

DISRUPTIONS

Tight epichlorohydrin (ECH) supply has presented a problem for epoxy resin producers after the Kashima Chemical plant was damaged, while other plants in West Japan were shut down for regular maintenance. Leading ECH manufacturer Daiso therefore will complete maintenance at its Mizushima plant in Okayama prefecture ahead of schedule, and will produce an additional 8,000 tonnes/year at the Mizushima plant and the Matsuyama plant in Ehime prefecture.

The supply of polypropylene (PP) used for automotive parts such as bumpers tightened in the wake of the disaster. PP grades are custom made for each car maker and model, which means there is a large variety of grades supplied by a limited number of sources.

Among bulk chemicals, supply of sulfuric acid tightened as several smelters were shut down in the wake of the earthquake, resulting in dramatically decreased production. Sulfuric acid inventories stood at some 200,000 tonnes as of the end of April, compared with the usual level of about 250,000 tonnes.

Despite the high season, therefore, each producer cut exports to serve the domestic market. With some of the damaged smelters back to normal, inventory exceeded 250,000 tonnes at the end of May. The outlook, however, remains uncertain, as smelters are scheduled for maintenance in the fourth quarter.

It also became more difficult to buy microprocessors. Ultra-pure hydrogen peroxide, which is used for semiconductor production, also has been in short supply, with seven plants damaged, together accounting for 75% of domestic production capacity.

In particular, the shutdown of Mitsubishi Gas Chemical's Kashima Plant was potentially a severe blow to the semiconductor industry, which strongly requested that supply not be disrupted. Mitsubishi Gas Chemical, therefore, shipped from inventory and imported hydrogen peroxide from Korea and Taiwan to produce ultra-pure grades. The company later announced that it would build stocks for a few months to about twice the usual level.

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Author: Shotaro Kazama

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