Returning to a positive trend

Things seem finally to be looking up for the Japanese chemical industry. In the first quarter of the current financial year – April to June 2014 – the seven leading Japanese chemical companies reported a recovery in their financial results, 
reflecting the upswing in the domestic economy, the weaker yen and rising stock prices.

The slump has continued in caprolactam (capro), phenol and urethane materials, but 
purified terephthalic acid (PTA) has seen some recovery as determined pricing policies by producers have borne fruit. Ethylene earnings have also improved after producers succeeded in passing on higher fuel and naphtha costs, so much so that operating profits have improved compared with earlier expectations.

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Under their medium-term business plans, the major Japanese chemical companies emphasise those petrochemicals and materials businesses in which they have large global market shares and next-generation products and materials with high growth potential, including lithium-ion secondary batteries, healthcare products such as pharmaceuticals and agrochemicals, and automotive parts and materials.

Under its APTSIS15 medium-term business plan extending from fiscal 2011 to 2015, Mitsubishi Chemical Holdings categorises its business operations into four groups: next-generation businesses, growth businesses, cash-generating businesses, and businesses to be restructured. These categories are based on the point in the commodity business cycle and the growth potential and profitability.

Growth and high profitability are expected from polyester film, polyvinyl alcohol/
ethylene vinyl alcohol, engineering plastics, methyl methacrylate (MMA)/polymethyl methacrylate (PMMA), pharmaceuticals, 
carbon fibre/composite materials, white-colour light-emitting diodes (LEDs) and related materials and lithium-ion battery (LIB) materials.

The company is targeting annual sales of Yen4,300bn (€30.9bn) and operating profits of Yen260bn for fiscal 2015 (ending 31 March 2016). This sales target is within reach following the recent buyout of industrial gas major Taiyo Nippon Sanso. However, the operating profit target is looking less attainable in the timeframe as delays in the widespread adoption of electric vehicles have hit sales of lithium-ion battery materials such as electrolytic liquids, separators and anode materials.

Sumitomo Chemical’s medium-term business plan runs from fiscal 2013 to fiscal 2015 under the slogan “Change and Innovation”. 
It is aiming to achieve annual sales of Yen2,400bn and operating profit of Yen140bn for fiscal 2015 by restructuring its basic chemical business in Japan and expanding sales and profits from its specialty chemicals businesses, which include information/electronics chemicals, pharmaceuticals and agrochemicals.

It also needs to ensure stable operations at its PetroRabigh joint venture in Saudi Arabia and manage a smooth start-up of the second-phase project to keep its finances on track.

Mitsui Chemicals is aiming to restore its business to profitability with its fiscal 2014-2016 medium-term business plan “Creating new customer values”. The company reported a loss of Yen25.1bn in fiscal 2013, and is targeting a net profit of Yen30bn in fiscal 2016. It is focusing on applications related to mobility, healthcare and food and packaging. Its main efforts are aimed towards its businesses in polypropylene compounds, its Tafmer resin modifier and Evolue metallocene polymer, dental materials, non-woven fabrics, spectacle lens materials and agrochemicals.

PERMANENT SHUTDOWNS

Restructuring of the core Japanese petrochemical infrastructure is playing an important role in the recovery. This year marked the first permanent shutdown of a Japanese cracker since 2001. Two more crackers will be permanently shut down in the next two years, reducing 
Japan’s total to 12 and its ethylene capacity to 6.7m tonnes/year by the end of 2016, down 15% from the end of 2013.

Domestic demand is steadily shrinking in Japan as downstream user industries such as automotive, electrical appliances and semiconductors transfer production overseas.

In May, Japan’s largest petrochemical company Mitsubishi Chemical permanently stopped operations at its No 1 ethylene plant at the Kashima complex, leaving just its No 2 cracker in operation. Sumitomo Chemical is scheduled to permanently shut its cracker in 2015, and Asahi Kasei Chemicals will shut down a cracker in 2016 
and consolidate its ethylene business into 
Mitsubishi Chemical’s.

Production of derivatives is to be stopped along with such moves (see table on page 29). In addition, Mitsui Chemicals is scheduled to withdraw by the end of March 2015 from the Keiyo Ethylene joint venture with Maruzen Petrochemical and Sumitomo Chemical, which operates a 740,000 tonne/year cracker.

Most of facilities already mothballed or to be permanently shut down are outdated and less profitable. Low ethylene operating rates reduce earnings of the petrochemical business while optimisation of ethylene production leads to improvement of business performances.

The weaker yen that has resulted under the present government’s economic policy, known as Abenomics, has helped companies increase exports and has reduced imports. Domestic ethylene plants returned to the point of breakeven in December 2013 when operating rates recovered to above 90% for the first time since September 2011. These utilisation rates have been maintained so far in 2014.

At the same time, petrochemical companies have been adjusting their product ranges to keep pace with changing market requirements. The diversification of cracker feedstocks including the shale oil/gas revolution is both a challenge and an opportunity for them to expand overseas, pioneer new processes and develop new biomass-based routes.

Nonetheless, these new trends are challenges. New competitive cracker feedstocks will be available from the US shale oil/gas revolution, China’s production of olefins from coal and the Middle East’s petrochemicals derived from associated gas produced at oil fields.

To help improve the competitiveness of the domestic manufacturing industry, Japan’s Ministry of Economy, Trade and Industry (METI) set up early this year a study team under the Industrial Competitiveness Enhancement Law to analyse the market structure of the petrochemical industry and examine measures to improve its long-term competitive position.

In addition, the Japanese government is steering a process of consolidation for domestic refineries, which in Japan’s highly integrated infrastructure lie at the core of its petrochemical complexes. Domestic demand for petroleum is shrinking, and METI is appealing for the industry to reduce oil-refining 
capacity and reorganise.

“Reorganisation of the petrochemical industry is also gathering momentum,” according to one petroleum refiner. “The [Japanese] petrochemical industry’s strength lies in its capability to change its product portfolio in accordance with the needs of the times,” says Kazuya Inaba, professor at the graduate school of Yamaguchi University. In his opinion, the industry’s Achilles’ heel is its dependence on imported naphtha. It has also regularly confronted problems of overcapacity.

However, the industry has been able to maintain its global position by withdrawing from unprofitable derivatives and shutting down out-of-date production facilities. Furthermore, its innovative production and catalytic technologies are rated highly in both 
domestic and overseas markets. The ability of the industry to innovate has the potential to offset the handicap of its heavy reliance on imported feedstock, Inaba says.

Overseas investment is also essential as domestic demand shrinks. Shin-Etsu Chemical and Mitsubishi Chemical Holdings are looking at the US (see page 39. Sumitomo Chemical is progressing the second-phase of PetroRabigh in Saudi Arabia and Asahi Kasei is seeking to commercialise derivatives using China’s coal chemistry. Mitsubishi Gas Chemical and Idemitsu Kosan are also increasing their overseas operations.

FINANCIAL RESULTS IMPROVE

Six of the seven leading chemical companies in Japan reported an improvement in earnings in the first quarter – April to June – of the current financial year (FY2014, ending 31 March 2015). The exception was Ube Industries, which was hit by a slump in market prices and sales for its core staple caprolactam (capro).

Sumitomo Chemical scored a sharp increase in earnings as the company offset a reduction in domestic pharmaceutical prices with increased sales abroad of anti-schizophrenic agents. Mitsui Chemicals expanded sales overseas of agrochemicals and materials for spectacle lenses while Shin-Etsu Chemical saw its US subsidiary successfully promoting its polyvinyl chloride (PVC) business worldwide. Asahi Kasei broke its quarterly sales record.

Earnings were also boosted by high cracker operating rates coupled with a recovery of domestic business. Mitsui Chemicals and Sumitomo Chemical saw petrochemical sector earnings increase by Yen31.9bn and Yen21.7bn year-on-year respectively. Mitsubishi Chemical’s chemicals sector reported a baseline increase in sales and profits but the final result was impacted by large-scale scheduled maintenance shutdowns. Tosoh’s petrochemical business turned in a poor performance but the company compensated with an expansion of sales of performance chemicals including high-silica zeolite.

Capro was plagued by a continuing slump in market prices. Sumitomo Chemical and Ube Industries saw a further decline in earnings from their capro businesses and both reported an operating loss. Mitsui Chemicals’ urethane materials business was in the red and Tosoh’s suffered from a decline in operating profits. Mitsubishi Chemical was hit by a drop of earnings from polycarbonate but the company managed to increase earnings in other areas, for example by improving price spreads in PTA in India and China by implementing a new pricing formula.

Operating and ordinary profits varied by company. A decrease in Asahi Kasei’s operating profit was due partly to large-scale maintenance shutdowns at the Mizushima complex and also to slower growth in its styrene monomer and synthetic rubber businesses.

The increase in the consumption tax with effect from 1 April affected domestic sales of Sumitomo Chemical’s agrochemicals. Sales were also flat in the Americas because of bad weather. On the other hand, Sumitomo Chemical’s PetroRabigh joint venture in Saudi Arabia began to generate profits on a regular basis and reported an increase in ordinary profit.

Mitsui Chemicals and Asahi Kasei have revised upwards their business forecasts for the April-September 2014 period. Mitsui Chemicals expects better profits as sales of lucrative high-performance products are growing beyond initial projections. Asahi Kasei expects brisk sales in the chemical, fibre and healthcare segments.

All seven companies have left their original forecasts for the full fiscal year 2014 unchanged.