Japan's chemical industry fights to recover and improve competitveness

21 October 2011 17:31  [Source: ICB]

The sector will take a long time to regain pre-quake levels of stability Copyright: Rex Features

It's been a rough start to fiscal year 2011. Supply disruptions from the earthquake are easing, but now an economic slowdown in Asia threatens the recovery

Japan's chemical industry has had a turbulent start to fiscal 2011 (April 2011 March 2012), hit first by the Japan earthquake and tsunami of March 11, 2011, and then by the sharp slowdown in China's economy - until earlier this year, the principal driver of the global economy.

Japan staged a V-shaped recovery in fiscal 2009 (ended March 2010) as an upbeat Asian economy helped it shake off the effects of the 2008 global economic and financial crisis, and the trend continued through fiscal 2010.

However, the disaster in March dealt a severe blow to ethylene centers located in the eastern part of Japan. The hardest hit was the Kashima Plant of Mitsubishi Chemical, which was shut down for two months. Supply chains were disrupted and domestic industrial production fell sharply between April and September.

The disaster came against a bleak wider economic backdrop. Growth in China's economy has slowed on the government's policy to manage inflation, while the Western financial crisis has resulted in the appreciation of the yen, putting pressure on exports.

A surge in polyolefins imports, meanwhile, is casting an unwanted spotlight on the ­excess ethylene production capacity which is a structural problem of Japan's petrochemical sector.

Japan's ethylene production was up by 1.5% year on year to 7,018,300 tonnes in calendar 2010, exceeding 7m tonnes for the first time in three years, as domestic demand recovered and the Asian market boomed.

As a result, major chemical companies reported robust sales. Mitsubishi Chemical Holdings Corp., for example, chalked up an operating profit of yen (Y)221bn ($2.88bn), while Mitsui Chemicals returned to the black. Their petrochemical divisions made a particular contribution to the improvement.

Japanese chemical companies lead the markets for methyl methacrylate (MMA), phenol, acrylonitrile (ACN), caprolactam (capro) and purified terephthalic acid (PTA) in Asia.

Supply of these petrochemicals remained tight, resulting in an unprecedented price gap between raw materials and finished products. Demand for LCD TV materials such as acrylic resin (for light guide plates) and optical films also remained strong.

EARTHQUAKE IMPACT
Entering 2011, the petrochemical sector maintained its growth momentum, though the electronic material sector began to slow because of excess LCD TV production. The earthquake upset expectations, however.

Although its impact on petrochemical performance in fiscal 2010 came with only 20 days left before the end of the fiscal year, Mitsui Chemicals booked a significant extraordinary loss, resulting in decreased net profits.

Mitsubishi Chemical's Kashima Plant was shut down until May 20. Also damaged were the Kawasaki Plant of JX Nippon Oil & Energy and the Chiba Plant of Maruzen Petrochemical. In total, four ethylene units in three locations were shut down temporarily.

Other plants for derivatives such as ethylene oxide (EO) and polypropylene (PP) also were shut down. Mitsubishi Chemical scrambled to resume operations without thought of costs in order to maintain supply to customers, according to president and CEO Yoshimitsu Kobayashi.

End-users such as automakers also were affected by the earthquake, which severely disrupted the entire market. The auto industry operated at 50% of capacity in April and 65% in May, and only returned to normal in July.

Applications for food packaging materials increased in April, May and June, as "users rushed to source raw materials for fear of shortages," according to a leading chemical company. But this was followed by an adjustment period in June and beyond,

Despite the turbulence, major chemical companies made a fairly good showing in the first quarter of fiscal 2011 (April-June). Mitsubishi Chemical was severely affected by the earthquake, but saw its sales and operating profits dip only marginally year on year. Asahi Kasei, Mitsui Chemicals, Tosoh and Ube Industries achieved a significant increase in profits, while many other companies revised their estimates upward for the first half of fiscal 2011 (April-September).

The immediate disruption caused by the earthquake is subsiding, but long-standing uncertainties loom. The shutdown of the Fukushima Daiichi Nuclear Power Plant is resulting in a power shortage in east Japan. In addition, it has yet to be seen whether other nuclear power plants will resume operations.

RISING YEN A CONCERN
The rapidly rising yen is another major concern. A strong yen at a current exchange rate of around Y75/$1 dollar is likely to remain for the time being as it is attributable to the ongoing Western financial crisis.

Although the strong yen is not necessarily a disadvantage to Japan's chemical industry, which depends on imported naphtha, it could encourage user industries, including automakers and electronics manufacturers, to relocate production overseas, putting downward pressure on domestic demand.

The imposition by the Chinese government of tighter monetary policy to manage inflation has meant the Chinese market has been relatively sluggish since the end of the Chinese New Year in mid-February. China is also facing power shortages.

ASIA MARKET SLUGGISH
The Asia petrochemical market remains sluggish. Production of polyethylene (PE) from naphtha has been cut back in Asia because of poor profitability. At the same time, the gap between domestic Japanese and overseas prices has been widening, as the latter fluctuate with spot prices.

As a result, high density poluyethylene (HDPE) and linear low density polyethylene (LLDPE) imports into Japan have been rising sharply since April as domestic supply tightened because of the earthquake, to about 10,000 tonnes and 35,000 tonnes, respectively, per month.

Even as the disruption caused by the earthquake subsides and the supply chain is restored, "imports of commodity petrochemicals will most likely continue due to the strong yen," according to the top management of leading polyolefins companies.

PE COMPETITIVENESS IN DOUBT
The competitiveness of HDPE and LLDPE produced in Japan has been in doubt since before the earthquake disaster. The influx of ethane-based products from the Middle East into Asia was expected to divert those produced in Korea, Taiwan and Thailand from China to Japan.

The concern however, proved unfounded, as large-scale plants in the Middle East, including the one operated by Petro Rabigh, failed to operate consistently throughout 2010. But entering 2011, Middle East plants started operating at higher rates while the Chinese market slowed down, resulting in increased supply of petrochemicals and polymers in the Asian market.

Japanese petrochemical manufacturers have been bracing themselves for the anticipated surge in highly cost-competitive commodity petrochemicals from the Middle East, cutting back production and promoting alliances between ethylene centers.

Mitsubishi Chemical has taken the lead in such efforts, implementing a scrap-and-build program for polypropylene (PP) production and taking the decision to pull out of styrene, vinyl chloride and nylon chain operations by the end of 2011.

In the Mizushima area, Mitsubishi Chemical and Asahi Kasei integrated their ethylene units in April and reduced ethylene production capacity by 30% during a recent maintenance shutdown. Japan Polychem, a polyolefins joint venture in which Mitsubishi Chemical has a majority stake, is capable of producing over 1m tonnes/year of both PP and PE, about 10% of which is considered redundant. It plans to accelerate a shift to high-performance grades and gradually reduce the production of commodity grades.

Asahi Kasei cannot easily reduce its ­ethylene capacity in the Mizushima area as it needs to ensure the supply of propylene and butadiene (BD), raw materials for core ­products such as ACN and synthetic rubber. However, the ethylene operation is viable, providing its styrene and HDPE operations remain profitable.

Mitsui Chemicals and Idemitsu Kosan integrated their ethylene businesses in the Chiba area ahead of Mitsubishi Chemical and Asahi Kasei in the Mizushima area. Although the Chiba integration is limited to optimizing the use of raw materials and infrastructure, Shigeru Iwabuchi, senior managing director of Mitsui Chemicals, expects that "the planned cost reduction will be achieved."

Showa Denko has completed restructuring its acetyl chain operations, discontinuing the production of acetic acid by direct oxidation of ethylene and retrofitting an ethylene unit to accommodate more heavy feedstocks. The next challenge is to promote cooperation with JX Nippon Oil & Energy, located nearby.

In addition, Japan's chemical industry has continued to shift its focus from commodity to high-performance grades, a process which should accelerate in fiscal 2011.

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Author: Osamu Kano

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