29 October 2012 00:00 [Source: ICB]
Faltering demand, rising costs and poor profitability are piling pressure on Japan's chemical sector. Now it faces tough decisions as the realities of cost-cutting, closures and restructuring come into play
Domestic demand for LCD televisions has been flat since an initial surge when Japan switched to digital broadcasting in 2011
With the exception of Shin-Etsu Chemical and a few others, chemical companies reported a significant decrease in profits for the first quarter of fiscal year 2012 (April-June). There has been no sign of improvement in the second quarter (July-September), with the top five chemical companies reporting declines in both revenues and profits. Mitsubishi Chemical Holdings reported second-quarter operating profits at 73.9% of those posted in the same period a year earlier; Sumitomo Chemical's were 62.6%; Mitsui Chemical's were 68.4%; and Asahi Kasei's were 64.1%. Tosoh reported an operating loss resulting from the explosion at the No 2 vinyl chloride monomer (VCM) plant at its Nanyo Complex in Yamaguchi Prefecture.
Domestic ethylene production in the first half of calendar year 2012 fell short of 3m tonne for the first time since 1994. The problem has not been limited to Japan, however. Asian markets have also slowed down significantly in the first half of this year. Although Japanese chemical companies now produce intermediates overseas as well as in Japan, they have been hit this year by sluggish markets across the region in sectors from synthetic fibre raw materials such as purified terephthalic acid (PTA), caprolactam (capro), and acrylonitrile (ACN) to resin feedstocks such as phenol and methyl methacrylate (MMA). Production of most of these intermediates has been running at a loss, and in some cases has fallen below the cash-cost level.
Electronics materials have been a major new source of profits for Japanese chemical companies since 2000, but have had a difficult year because of the sluggish LCD sector. Sales of LCD TVs surged in 2011 when Japan switched to digital broadcasting, but domestic demand has been flat since. At the same time, global markets have been hurt by oversupply as well as weakening demand in recent years and prices of LCD products have come under pressure.
The renewable-energy sector, including solar cells and lithium-ion batteries, was also expected to be a major source of profits, but has not developed as had been hoped. Solar cell panel prices are plunging as Chinese manufacturers ramp up production, while electric and hybrid electric vehicles have been slow to penetrate the market, failing to boost demand for lithium-ion batteries.
If the current situation continues, Japanese chemical companies will be unable to achieve their medium-term profit targets and their share prices will remain depressed. They have little option but to further reduce costs in commodity chemical businesses, pull out of unprofitable operations, review growing business areas and seek partnerships, business swaps and M&A.
Moves to restructure the petrochemical industry are gaining particular momentum, with several polyolefin producers now scheduled to reduce production or close plants. However, reduction of cracking capacity is taking longer.
OVERHAULING THE INDUSTRY
In April 2010, Nishi Nippon Ethylene was established in the Mizushima area by Mitsubishi Chemical and Asahi Kasei Chemicals, and Chiba Chemicals Manufacturing was set up in the Chiba area by Mitsui Chemicals and Idemitsu Kosan, both with the intention of finding ways to reduce cracker operations. Discussions are continuing between Mitsubishi Chemical and Asahi Kasei Chemicals to shut down one or other of their naphtha crackers at Mizushima and to integrate their operations. At Chiba, crackers are operated by Mitsui Chemicals, Idemitsu Kosan, Sumitomo Chemical and Maruzen Petrochemical, and one of these is expected to shut down.
In the meantime, Mitsubishi Chemical has decided to shut down its No 1 cracker - which has a capacity of 343,000 tonne/year - in a year, with a shutdown to come in 2014. It is one of two naphtha crackers at the Kashima Plant and will be the first of the plants that started operations in the 1960s to discontinue operations.
The last straw for Japan's domestic petrochemical operations has been the shale gas revolution in North America. Coming after the surge in new capacity based on competitive Middle East gas feedstock, the surge in shale gas-based ethylene production is expected to put further pressure on ethylene derivatives such as polyethylene (PE) and ethylene glycol (EG). The strong yen led to a 50% year-on-year increase in PE imports to 450,000 tonnes in 2011, resulting in a sharp decline in PE production in Japan even before the impact of the shale gas investments is felt. Japan's ethylene production, which peaked at 7.74m tonnes in 2007, is projected to fall to 6m tonnes this year, and is forecast to fall to 5m tonnes in the future.
MIXED OUTLOOK FOR OLEFINS
Although the outlook for ethylene is pessimistic in Japan, other olefins represent more of an opportunity. Propylene and butadiene (BD) are not made from gas and so do not represent the same issues of competitiveness for Japanese producers. In fact, the overall switch towards gas-based ethylene production will result in relatively short supply of both propylene and BD globally, and Japanese producers are set to benefit from this.
The recent trend in Japan has been to retrofit naphtha crackers to produce propylene and other fractions instead of ethylene and to strengthen partnerships with oil refineries operating in the same complexes to produce BD from butene.
The downsizing of naphtha crackers in Japan can in effect be seen as a shift from ethylene to non-ethylene products.
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