Japan: Robust actions put recovery in sight

25 October 2013 10:01  [Source: ICB]

The revitalised economy and a chemical sector focused on enhancing its technologies provide room for optimism

Japanese chemical companies have long been criticised for their follow-the-leader mentality. Lithium ion batteries are one such example, where they all invested in what was initially a profitable business, resulting in cut-throat competition.


Japan celebrates its successful bid to host the 2020 Olympic Games - another sign of growing optimism in the country and economy

Copyright: Rex Features

“Such an approach is no longer an effective strategy for survival,” says Yoshimitsu Kobayashi, chairman of the Japan Petrochemical Industry Association (JPCA) and president and CEO of Mitsubishi Chemical Holdings. “We should instead leverage and improve our proprietary technologies such as those for catalysts and process development in an effort to differentiate ourselves in the areas of environmental conservation, aging society, new energy and healthcare.”

The key to survival for Japan’s chemical industry lies in improving its catalytic and process technologies, as noted by JPCA’s Kobayashi, and in exploring business opportunities in new areas such as energy saving, renewable energy sources, healthcare and green innovation.

The development of alliances between petrochemical complexes is also important, so they are able to compete against low-cost natural gas-based petrochemicals, and to develop new production technologies to expand the production of propylene, butadiene and aromatics.

The Japanese economy is showing signs of picking up, thanks to prime minister Shinzo Abe’s administration’s economic policy (Abenomics). Problems such as the strong yen, high corporate tax rates, a slow response to free-trade agreements (FTAs), restrictive labour regulations on the manufacturing industry such as the ban on temporary services, a tightening of environmental regulations and a power shortage seem to be easing.

Before the re-election of Abe last year, these had come to be referred to as the “six difficulties putting significant pressure on the Japanese economy”. Now the excessively strong yen is being corrected by an aggressive quantitative easing policy. Cuts in the rate of investment and corporate taxes are scheduled for discussion this quarter. Negotiations on an Economic Partnership Agreement with the EU started in April, and were followed by talks for the Trans-Pacific Partnership in July.

However, scarce energy and natural resources remain a significant handicap to Japan’s manufacturing industry, in particular to the chemical industry, undermining its international competitiveness.

Fuel procurement costs for power companies have increased by yen (Y) 3.8 trillion/year ($38bn/year, €29bn/year) since the Great East Japan Earthquake in March 2011, putting significant pressure on their business.

As natural gas in the Middle East, shale gas and oil in North America and coal-based chemicals in China emerge as major feedstocks, Japan’s chemical industry is expected lose international competitiveness because of these higher feedstock costs. Imports of low-cost polyethylene (PE) and other basic petrochemical feedstocks are building a presence in the domestic market. Commodity petrochemicals are no longer a source of profits for Japanese chemical companies.

As expected, petrochemicals put downward pressure on the performance of five major Japanese chemical companies in fiscal year (FY) 2012. Asahi Kasei Chemicals, for example, reported a significant drop in profits due to a slump in the monomer market and a rise in the costs of PE and other feedstocks. Mitsubishi Chemical Holdings Corp, the largest chemical company in Japan, also reported a decreased operating profit of Y40.4bn, Y35.8bn of which was attributable to chemicals and polymers.

Sumitomo Chemical’s operating profits also declined; basic petrochemical feedstocks saw a decrease of Y15.7bn resulting in a loss of Y6.4bn while petrochemicals fell Y9.4bn resulting in a loss of Y3.2bn.

Mitsui Chemicals’ petrochemical business remained sluggish due to the accident at the Iwakuni-Ohtake Works and a slump in the market for basic petrochemical feedstocks, as did Tosoh Corp’s, mainly because of the explosion of Nanyo No 2 vinyl chloride monomer (VCM) line.

In the first quarter of FY2013 (from April to June), many Japanese chemical companies reported a recovery thanks to the depreciation of the yen, which boosted the profitability of exports. Specifically, the profitability of electronic materials and agrochemicals, which are highly dependent on exports, improved dramatically, while domestic market–oriented products such as those for housing and pharmaceuticals remained strong.

Although the petrochemical market began to pick up after hitting the bottom in the first quarter of 2012, synthetic fibre intermediates sectors such as acrylonitrile (AN), caprolactam (capro) and purified terephthalic acid (PTA), and resin intermediates including phenol and methylmethacrylate (MMA), have yet to recover due to a slump in the Chinese market.

While each chemical company is expected to see growth this fiscal year thanks in part to foreign exchange gains, there remains the need to strengthen their domestic business and focus on high-performance materials.

Japan’s petrochemical industry is faced with the growing need to reduce the production capacity of ethylene crackers because of a slowdown in the world economy in the wake of the European debt crisis, the appreciation of the yen, an influx of commodity resin imports and global ethylene production expansion following the US shale gas revolution.

Japan’s ethylene production is projected to decrease to 5m tonnes/year to match domestic demand, which translates into the closure of five out of 15 ethylene plants currently in operation, or a reduction of 2.5m tonnes/year from a total of 7.5m tonnes/year.

Mitsubishi Chemical has taken the lead in cutting down production, announcing it will shut down its Kashima No. 1 naphtha cracker in May 2014. Sumitomo Chemical also decided this February to shut down its ethylene plant at the Chiba Works in 2015 and would source basic petrochemical feedstocks exclusively from Keiyo Ethylene.

Asahi Kasei Chemicals and Mitsubishi Chemical announced this August that they will consolidate naphtha operations in the Mizushima industrial zone in Okayama Prefecture, with Asahi Kasei Chemicals’ ethylene plant scheduled for shutdown in the second quarter of 2016.

The two companies, which formed an LLP (Limited Liability Partnership) in the second quarter of 2011 to maximise integration synergies, plan to optimise their production facilities and narrow down derivative operations in preparation for a 5m tonne/year market.

As a result, Japan’s ethylene production capacity is expected to decrease to 6.3m tonnes/year by mid-2015. Domestic ethylene production, meanwhile, recovered to 3.28m tonnes in the first half of 2013, which translates into an annual production of 6.5m tonnes. Downsizing of ethylene facilities, therefore, appears to be reaching a plateau.

The petrochemical industry splits into two camps: optimists who think that the current production level can be kept stable and pessimists who argue that further decline is inevitable because of the projected expansion in US ethylene production associated with shale gas development and the emergence of China’s coal chemical industry.

Alongside efforts to restructure the domestic petrochemical industry, chemical companies are striving to shift to high value-added products and enhance their competitiveness through regional alliances. One opportunity is to find ways to expand production of petrochemical streams other than ethylene, such as propylene, butadiene and aromatics, that will be left in short supply due to the move towards ethane-based cracking. Mitsubishi Chemical, Asahi Kasei Chemicals and Mitsui Chemicals are developing new catalytic oxidative dehydrogenation processes for butene, for example, while Showa Denko plans to produce butadiene from acetaldehyde.

Plans to form alliances between petrochemical complexes are also underway, though they are proceeding at a gradual pace. One such example is the Ohita Industrial Complex Corporations Association Council, which was jointly established in July 2012 by Oita Prefecture, Oita City and 10 chemical companies including Showa Denko, JX Nippon Oil & Energy, Kyushu Electric Power, Nippon Steel & Sumitomo Metal and Sumitomo Chemical. The intention is to create an optimised regional cooperation framework, focusing on human resource development, logistics and sharing of utilities. Showa Denko and JX Nippon Oil & Energy, for example, plan to build a pipeline to share fuels and feedstocks.

The Mizushima Complex in Okayama Prefecture, which consists primarily of Mitsubishi Chemical, Asahi Kasei Chemicals and JX Nippon Oil & Energy, has been sharing fuels through RING (Research Association of Refinery Integration for Group Operation). In addition, the complex launched a system in quarter two in which a C4-rich fraction produced by JX Energy’s oil refinery is supplied to ethylene crackers of Asahi Kasei Chemicals and Mitsubishi Chemical.

“To survive competition,” says a representative of Mitsubishi Chemical, “the complex will continue to explore every possible means to enhance its competitiveness.”

In the Sakai Senboku Industrial Complex in Osaka, nine companies including Mitsui Chemicals, Ube Industries, JX Energy, Cosmo Oil, TonenGeneral Sekiyu and Osaka Gas plan to promote sharing of fuels and feedstocks. Likewise, plant managers of Idemitsu Kosan, Tosoh Corp, Zeon Corp and Tokuyama Corp are looking at expanding their partnership in the Shunan area in Yamaguchi Prefecture through a complex liaison council. There is also a plan to apply for a permit to establish an industrial zone to build a thermal power plant and share electricity.

Author: Yohei Tada

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