Outlook Improves for Japanese Firms

There is a light at the end of the tunnel for Japanese petrochemical producers. It could still be a freight train, but for now it appears to be a respite from the tough times in which they have found themselves since the mid-1990s.

Major Japanese petrochemical producers reported encouraging performance for the first nine months of the fiscal year that will end on March 31. Mitsui Chemicals did warn that it would post losses for the full year, but most companies' results were better than they have been in years.

"The supply-demand balance is tight, particularly in East Asia, and especially in China," says Masahiro Yoneyama, representative director of the Tokyo office of SRI Consulting.

Yoneyama's colleague Goro Toki, a senior consultant in the chemicals and health business, contends that the improvement in profitability is also the result of steps taken to streamline operations. "There has been some rationalization of businesses and new alliances between companies. The producers are also being more selective about what they produce," he says.

Despite the improvement, producers in Japan are still looking for ways to boost their competitiveness. One recent development was the announcement last month by Mitsui Chemicals and refiner Idemitsu that the two firms will attempt to create a "cooperative setup" at their Chiba facilities.

Despite the vagueness of their recent announcement, Yoneyama believes that Mitsui and Idemitsu are considering a fairly comprehensive future relationship.

"They will likely share feedstock at first," he says. "Next will be common utilities and some common facilities, and in the future perhaps the integration of downstream products like polyolefins," which they both produce at Chiba. Last year's failure of merger talks between Sumitomo Chemical and Mitsui Chemicals prompted Mitsui to consider another partner, Yoneyama believes.

The announcement could encourage similar tie-ups at other locations in Japan, Yoneyama says. One possibility is the Mizushima area, which is home to facilities owned by refiner Nippon Oil and chemical companies Asahi Kasei and Mitsubishi Chemical.

With the notable exception of polyvinyl chloride producer Shin-Etsu--which has been declaring record profits for more than 12 years--the performance of Japanese petrochemical producers has been lackluster for nearly a decade.

To improve their petrochemical bottom lines, the Japanese firms have taken a number of steps in recent years. They have swapped businesses with each other in a manner reminiscent of a game of cards. They have expanded their most profitable operations and shed their least promising ones. Japanese producers have also strived to develop new production processes to lower costs or produce more differentiated materials.

Japanese firms have cut down on their production of commodity-grade petrochemical products such as polyethylene films, says Yosuke Ishikawa, a senior adviser at SRI. Such materials, he says, are made more cheaply at newer facilities in Taiwan, South Korea, or the Middle East. On the other hand, Japanese companies have added value to the products coming out of their petrochemical plants.

For example, instead of trying to compete as producers of general-purpose polypropylene, Japanese companies now increasingly make propylene block copolymers. "By turning a petrochemical material into a specialty product, Japanese producers can remain competitive," Ishikawa maintains.

What Japanese companies have not done in the past 10 years is build large new ethylene crackers, either in Japan or in other parts of Asia. The only exception is Sumitomo Chemical, which in 1997 completed construction of its second Singapore cracker in a joint venture with Shell. In China, Japanese producers are most remarkable for their low profile.

The main reason for this odd absence by Japanese firms, Yonekawa says, is money. He explains that, although the likes of Sumitomo and Mitsubishi report annual sales of more than $10 billion, their petrochemical sales are less than half that amount. And as other businesses--electronic materials and pharmaceuticals in Sumitomo's case--account for the bulk of the profit, executives can't justify a major investment in petrochemicals.

Although steps taken by Japanese producers in recent years have set their petrochemical businesses on sounder footing, their future prosperity still is not ensured. Demand in Japan remains slack, making producers vulnerable to a slowdown in China's economy.

Competition in the Japanese petrochemical market will increase this year with the lowering of import tariffs to 6.5%. In a few years, new petrochemical complexes in China and the Middle East will go onstream, threatening Japanese industry if regional demand is not as strong as projected.

But there is little chance that the current improvement in petrochemical profitability will lull Japanese producers into dropping their restructuring efforts, particularly the integration projects between refineries and petrochemical complexes. Yoneyama says, "It's a human impulse to slack off, but this is business."

NO STATUS QUO

Major Japanese petrochemical producers implemented numerous changes in the past few years