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Outlook Improves for Japanese Firms

After a decade of restructuring, Japan's petrochemical producers are looking less wobbly

by Jean-François Tremblay
March 15, 2004 | A version of this story appeared in Volume 82, Issue 11



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."


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

2004* Sells stake in polycarbonate electronic chemicals venture to Chi Mei. * Acquires Sumitomo's flocculants business.* Expands plants in Korea and Taiwan.

* Becomes a holding company made up of seven firms.

* Transfers trinitrocellulose business to SNPE.

* Reports $600 million net loss.

* Merges polyethylene business with Japan Polyolefins' and Mitsubishi Shoji's.

* Merges polypropylene business with Chisso's.

* Ends merger talks with Sumitomo.

* Polyolefins venture with Sumitomo is dissolved.

* Studies feasibility of building a third cracker with Shell in Singapore.

* Sets up venture to produce agchem intermediates in China.


* Builds spandex unit in China.

* Merges polytrimethylene terephthalate business with Teijin's.

* Withdraws from acrylic fiber business.

* Reports $410 million net loss.

* Ends ammonia production in Kurosaki.

* Merges Japanese terephthalic acid business with Mitsubishi Gas's.

* Polystyrene venture with ven Asahiabsorbs Idemitsu's polystyrene business.

* Sells agchem business to Nihon Nohyaku.

* Boosts output of propylene in Osaka.

* Opens Singapore elastomer plant.

* Rebuilds polypropylene capacity in Japan.

* Launches Sumitomo Mitsui Polyolefins.

* Commits $320 million in South Korean electronic chemical expansion.

* Polymethyl methacrylate venture with Itochu opens in Thailand.


* Reorganizes, making chemicals and plastics an "internal company."

* Rebuilds old styrene unit in Japan.

* Builds polycarbonatediol unit in Japan.

* Acquires Nichimen's 51% stake in Chinese plastic compound unit.

* Shuts Yokkaichi cracker.

* Merges acrylonitrile and derivatives business with Mitsubishi Rayon's.

* Decides to produce acrylic acid and acrylates in South Africa.

* Launches fullerene venture.

* Merges urethane materials business with Takeda Chemical.

* Collaborates with Cargill in polylactide polymer business in Japan.

* Builds methionine plant in Japan with new process.

* Reorganizes electronic chemicals business.

* Swaps acrylic acid and methyl methacrylate plants with Nippon Shokubai.


* Teams with Mitsubishi Chemical in polyphenylene powder in Singapore.

* Trebles acrylonitrile capacity at South Korean subsidiary.

* Purified terephthalic acid venture opens in Calcutta.

* Sells photoresist business to Rohm and Haas.

* Builds two more bisphenol A plants in Singapore.

* Builds second purified terephthalic acid plant in Thailand.

* Expands polyethylene terephthalate production in Indonesia.

* Announces merger with Mitsui Chemicals.

* Sets up agchem production subsidiary in India.

* Builds propylene oxide and caprolactam plants in Japan with new process.

SOURCE: Company information


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