INSIGHT: Japan petchem majors struggle with overcapacity, weak demand

15 May 2013 17:08  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)-- Japan’s petrochemical and polymer producers have had a torrid time of it for the past 18 months. Ethylene production has slowed markedly with output at levels last seen in the early 1990s. Producer margins have been squeezed with the major players reporting much lower profits for the latest financial year.

The publication that ICIS and its partner, Japan’s The Chemical Daily, prepared for the Asian Petrochemical Industry Conference (APIC) conference held in Taiwan last week, has some of the detail. The full-year financial results from the chemical majors released this month open a window on the impact.

Fibre intermediates, such as purified terephthalic acid (PTA), acrylonitrile (ACN) and caprolactam have been hard hit as have products further downstream such as methyl methacrylate (MMA). The slowing of growth in China and Japan’s persistent economic stagnation are to blame.

Take industry giant Mitsubishi Chemical.

“The Mitsubishi Chemical Holdings Group faced a difficult business environment in fiscal 2012,” it said when it reported full-year financial results on 9 May. “Demand in PRC [the People’s Republic of China] and other overseas markets was sluggish due to the global economic slowdown and the appreciation of the yen, which continued nearly to the end of the third quarter of fiscal 2012.

"These factors created especially difficult conditions for the Performance Products and Industrial Materials domains.”

The company’s chemicals and industrial materials sales fell by 10.3% to yen (Y) 903.6bn ($8.83bn) while the activities were loss-making to the tune of Y200m, Y15.0bn down on the profits of the prior year. The loss was attributable largely to the dire situation and shrinking margins in PTA where overcapacity pushed prices lower.

Ethylene production was up year on year even though production rates had to be cut back because of the demand decline for ethylene-based products. The impact on ethylene output of the Japan earthquake and tsunami in 2011 had worked through the system.

Mitsubishi Chemical said has said that it will shut down a 410,000 tonne/year ethylene plant and a benzene production unit in Kashima but expand a second ethylene unit at the site to provide a structure better-able to respond to the trend towards higher performance and value-added petrochemical products.

The company is not alone in cutting back in ethylene. Japan’s ethylene producers appear at long last to be getting to grips with ethylene overcapacity.

Sumitomo Chemical is due to decommission a 430,000 tonne/year cracker at its Chiba Works in 2015, for instance. Asahi Kasei and Mitsubishi Chemical are talking about consolidating their combined naphtha cracking capacity at the Mizushima Complex in Japan’s Okayama Prefecture.

Ethylene output in Japan in calendar 2012 was down 8% to 6.146m tonnes.

Polyethylene (PE) and polypropylene (PP) plant closures are also designed to address the weakened demand picture and the supply/demand imbalance in the major polymers.

Mitsubishi Chemical’s polymers and industrial materials sales in fiscal 2102 were up 2.6% at Y676bn but operating income dropped 99.6% to Y100m “due to a shrinking price variance between raw materials and products as a whole, despite generally strong performance in sales of performance polymers, mainly for automotive use,” the company said.

This reporting segment also includes polycarbonate and other synthetic resins which showed a recovery from the 2011 earthquake. Weak demand, however, hit markets for MMA, acrylic resin and some other products.

The slump in petrochemicals and polymers hit other producers in the latest financial year including Sumitomo Chemical, Asahi Kasei and Ube Industries.

The country’s fifth largest chemicals producer by sales, Mitsui Chemicals, was hard hit by the slump in PTA and in phenol.

Speaking of fiscal 2012 it said: “In the chemicals industry, conditions became difficult due to sluggish demand, primarily in China, and increases in raw material and fuel prices."

Mitsui Chemicals ethylene and propylene production volumes were down year on year because of the drop in demand while PE sales remained weak. PP sales volumes were lower in Japan the company said, but higher overseas.

For its petrochemicals segment overall, which includes the two polymers, sales were up 9.6% at Y469bn but operating profits were down Y1.2bn at Y7.7bn.

An accident at the Iwakuni-Ohtake works in April 2012 curtailed basic chemicals production for part of the year and had a significant negative impact on the segment. Phenol sales were weak, mainly because of slower economic growth in China, Mitsui Chemicals said.

Bisphenol A sales were weak because of poor demand for polycarbonate. PTA and PET production was suspended because of the accident at the Iwakuni-Ohtake Works as well as the market downturn.

The polyurethane business performed better after normal operations were resumed at the Kashima Works following the 2011 earthquake and tsunami with demand mixed but generally poor in Japan but better overseas. Both the basic chemicals and polyurethane operations were loss-making for the year.

The on-going recovery from the devastating 2011 earthquake and tsunami will help lift some businesses for the major chemical players in Japan but the firms need stronger domestic economic growth to help bolster businesses in which there is still overcapacity.

Three naphtha crackers are set to close in Japan but more capacity may yet have to be shuttered to better-balance downstream demand.

The major players are downsizing their petrochemical businesses and continuing the shift that has been on-going for years, towards higher added value products and materials, but they remain on a rocky road.

($1 = Y102.24)

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By: Nigel Davis
+44 20 8652 3214

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