Market outlook: Japan domestic petrochemical cuts to come

31 May 2013 09:42  [Source: ICB]

Japan's petrochemical and polymer producers have had a torrid time of it for the past 18 months. The country's economic outlook is indeed brighter because of the government's aggressive pro-growth moves, and the industry will accelerate its restructuring efforts to become more cost-competitive.

Ethylene production has slowed markedly - 8% year on year in calendar 2012 to 6.146m tonnes - to levels last seen in the early 1990s.This is set to decline further with the closure of high-cost naphtha crackers. At the same time, Japan's petrochemical companies are partnering with their counterparts in the US to take advantage of cheap shale gas-based feedstocks.

Japan plant Getty images

Getty Images

Japan's petrochemical sector continues to shift towards higher added-value products and materials

Japanese petrochemical firms must optimise and restructure their production capabilities and integrate their operations with domestic refiners in order to remain competitive, the Japan Chemical Industry Association (JPCA) said in a report published for the Asia Petrochemical Industry Conference (APIC) which took place from 9-10 May in Taipei, Taiwan.

"Construction of new large-scale petrochemical facilities in the Middle East and China and increased reliance on shale gas in North America have forced Japanese petrochemical industry to undertake sweeping fundamental reforms to strengthen its competitiveness in the global market," it said in the report.

"One of the important imminent tasks is optimisation of its domestic crackers," it noted.

Steam cracker operators Mitsui Chemicals and Idemitsu are studying the possibility of integrating their operations in Chiba, while Mitsubishi and Asahi Kasei are doing the same for their facilities in Mizushima, according to the JPCA.

Mitsubishi plans to permanently shut down its 392,000 tonne/year Kashima No 1 cracker by May 2014, while Sumitomo Chemical will shut its 430,000 tonne/year naphtha cracker in Chiba in the autumn of 2015. Mitsui Chemicals, meanwhile, has announced that it will withdraw from the Keiyo Ethylene joint venture in Chiba by the end of fiscal 2014 (ending March 2015). Keiyo is a joint venture between Maruzen Petrochemical, Sumitomo and Mitsui.

The JPCA said the domestic petrochemical industry lacks cost competitiveness because each complex in Japan is relatively small in scale and dependent on feedstock imports.

The domestic petrochemical industry should continue to produce high performance products in partnership with downstream industries such as the automotive, electronics, eco-products and healthcare sectors, it said.

"Chemical companies and downstream industries need to integrate more the technologies, markets and products in order to generate new markets," said the JPCA.

SHIFT TO THE US

Players are making moves to reposition in the Japan market, but they are also establishing more partnerships in the US to take advantage of shale gas.

In mid-May, Mitsui & Co and US-based Celanese announced a joint venture to set up a 1.3m tonne/year methanol plant at Celanese's integrated chemical plant in Clear Lake, Texas.

The unit will utilise "abundant, low-cost natural gas" in the US Gulf Coast region as a feedstock and will benefit from the existing infrastructure at Celanese's Clear Lake facility, the companies said.

Total shared capital and expense investment in the facility is estimated to be approximately $800m (€616m) and operations are expected to begin in mid-2015. In March, Mitsui & Co and Idemitsu announced an ethylene offtake agreement with US-based Dow Chemical as Dow builds its 1.5m tonne/year cracker in Freeport, Texas by 2017.

Idemitsu and Mitsui & Co will build a 330,000 tonne/year linear alpha olefins (LAO) plant and take ethylene from Dow's new cracker. In turn, Dow will buy some of the LAO for use in its performance plastics business.

FIBRE CHAIN HARD HIT

Japan petrochemical producer margins have been squeezed with the major players reporting much lower profits for the latest financial year, as detailed in the APIC Supplement prepared by ICIS and its partner, Japan's The Chemical Daily. The full-year financial results from the chemical majors released in May 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.

MITSUBISHI POSTS LOSS

"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 [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."

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Mitsubishi Chemical'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.

Mitsubishi Chemical's polymers and industrial materials sales in fiscal 2012 (ended March 2013) were up 2.6% at Y676bn but operating income dropped by 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 (PC) 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.

MITSUI HIT BY PTA, PHENOL

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

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

Mitsui Chemicals' ethylene and propylene production volumes were down year on year because of the drop in demand while polyethylene (PE) sales remained weak. Polypropylene (PP) sales volumes were lower in Japan, but higher overseas, the company said. For its petrochemicals segment overall, which includes the two polymers, sales were up by 9.6% at Y469bn, but operating profits were down byY1.2bn 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.

Bisphenol A (BPA) sales were weak because of poor demand for PC. PTA and polyethylene terephtalate (PET) production was suspended because of the accident at the Iwakuni-Ohtake Works as well as the market downturn. The polyurethanes (PU) business performed better after normal operations were resumed at the Kashima Works following the 2011 earthquake and tsunami, with demand mixed - although generally poor - in Japan but better overseas. Both the basic chemicals and PU operations were loss-making for the year.

MACRO FACTORS

Japan key factsThe ongoing 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.

The Japanese government is pulling out all the stops to revive decades of stagnant economic growth. Prime Minister Shinzo Abe has taken a massive pro-growth stance since his appointment in December 2012.

Japan's central bank is undertaking an ­unprecedented quantitative easing (QE) ­program involving the purchase of $1.4 trillion in government debt securities, to the tune of $70bn/month. That money-printing operation is aimed at boosting liquidity and driving inflation to 2%/year in a country that has suffered from multiple years of deflation.

The yen has plunged against the US dollar in response to levels last seen in late 2008, boosting Japan's export competitiveness. And Japan's stock market has soared over 50% from December 2012 through mid-May on optimism that the government's efforts will spur economic growth.

While renewed growth could give Japan's petrochemical sector some relief, the long-term fundamentals in the industry have not changed. 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.


By: Nigel Davis
+44 20 8652 3214



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