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Japanese Earnings

Major chemical companies are seeing their profits shrink

by Jean-François Tremblay
November 19, 2007 | A version of this story appeared in Volume 85, Issue 47

JAPAN HAS BROKEN its winning streak. Most of the country's major chemical companies posted lower earnings in their fiscal first half after enjoying steady growth in profitability for most of this decade.

Sumitomo Chemical led the losers, with a 50% drop in earnings in the April-September portion of the fiscal year, which will end on March 31, 2008. Whereas the company had netted more than $463 million in the first half of the previous fiscal year, it took home only $230 million in the same period this year.

Evaporating margins in the highly cyclical electronic materials business hit Sumitomo. The company says the price of polarizing films used to make liquid-crystal displays declined at a time that it was spending money on capacity expansion. As a result, last year's $55 million profit from electronic chemicals turned during this year's first six months into a $55 million loss. Sumitomo also suffered a 72% collapse in margins in its petrochemical operations.

At Teijin, net earnings shrank 43% compared with a year ago. The drop was largely due to shrinking margins in the company's films and plastics business. Teijin says an increase in the price of bisphenol A hurt its polycarbonate business in China; in the U.S., demand for polyethylene terephthalate (PET) films was sluggish and prices for raw materials rose. Teijin also booked a special loss for restructuring its global PET business.

At Mitsubishi Chemical, Japan's largest chemical company, net earnings tumbled 38% even though operating income rose 17%. In the company's bread-and-butter petrochemical business, profit margins more than doubled. The company reports that its plants operated more smoothly than they did last year, and its bottom line was further boosted by high profits on sales of 1,4-butanediol. The drop in net earnings was mostly due to a change in tax treatment, the firm says.

In contrast with other major firms, Shin-Etsu Chemical increased its net earnings by 27%. The firm, the world's largest producer of polyvinyl chloride (PVC) and silicon wafers, is on track to achieve its 13th consecutive year of record profit.

Shin-Etsu says its U.S. PVC subsidiary Shintech countered weakening demand from the North American construction industry by focusing on customers abroad. Meanwhile, demand for silicon wafers has remained strong, particularly in the 300-mm-diameter segment that Shin-Etsu dominates.

Japanese majors remain optimistic about their full-year results. Sumitomo expects to raise its net earnings by 32% compared with the previous fiscal year through a combination of cost cuts and price increases. Even more bullish, Mitsubishi forecasts that it will increase earnings by more than 85%, primarily by booking a capital gain earned in last month's merger of Mitsubishi Pharma and Tanabe Seiyaku.



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