More action needed at Mitsubishi Chem

Analysts Reports, Business, Company Strategy, Japan, M&A

By Malini Hariharan

Japan’s largest chemical company Mitsubishi Chemical Holdings has been actively restructuring this year but more needs to be done to complete its transformation.

High on the list is reorganization of its cracker operations at Mizushima. Mitsubishi and Asahi, which also has a cracker at the same site, have been talking since 2007 about unifying operations.

The two had even made an announcement in June that a study on this would be completed within two months. But that deadline has passed and it is uncertain if they can start joint operations at the site from the earlier target date of April 2010.

The official line from the two companies is that the study is still in progress.

Industry players in Japan acknowledge that 1-2m tonnes of ethylene capacity in the country will need to close given the rising competition from the Middle East. But while companies have announced plant closures for derivatives they have been hesitating when it comes to crackers.
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The biggest reason for the slow pace is culture, says one industry analyst. In addition to this, cracker structure at most Japanese sites is complicated with many companies involved in offtake contracts. It is difficult to move quickly, he adds.

Mitsubishi’s other challenge will be to digest the proposed merger of Mitsubishi Rayon Co (MRC). The Yen228bn ($2.57bn) deal, due to be completed in March 2010, gives Mitsubishi access to the methyl methacrylate (MMA), polymethyl methacrylate (PMMA) and carbon fibre businesses.

Mitsubishi’s aim is to achieve a cost synergy of Yen3bn and operations synergy of Yen7bn by fiscal 2012-13.

But analysts are not convinced about the synergies especially as buying into MMA takes Mitsubishi away from its strategy of expanding in specialities. Even carbon fibre, they say, is not very exciting.

Carbon fibre is a value added product and demand is quite promising. But competition is likely to be intense,” says a second analyst.

Analysts say that the merger was driven by financial reasons and pushed through by Bank of Mitsubishi-Tokyo which had funded MRC’s $1.6bn acquisition of Lucite earlier this year.

In a recent research report analysts at Nomura said that while major synergies are unlikely, the merger gives Mitsubishi an opportunity to reconfigure its business portfolio for higher growth.

“If Japanese chemical makers are to capitalize on growing overseas demand, we think they will need to create a portfolio of businesses that are among the global leaders in terms of market share. The merger will make Mitsubishi the world leader in MMA and could facilitate major progress in compiling a full line of LCD [liquid crystal display] materials, leveraging comprehensive strengths in carbon fibre, and going on the offensive in water-treatment products. We think the merger is really aimed at leveraging MRC’s strengths more fully than it can do on its own.”

They pointed out that MRC did not have the capital to scale up its carbon fibre business on its own.

But they also emphasised the need for further restructuring at Mitsubishi.

“If the company can put together an all-Japan team comprising olefins, polyolefins, terephthalic acid, phenol, and polycarbonate resin, we think it could see sharp cost reductions and a business platform capable of competing worldwide.”

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