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Cheaper Oil And Yen Boost
 Chemical Earnings In Japan

Finance: Major Japanese firms mostly improved their profits in first half

by Jean-François Tremblay
November 9, 2015 | A version of this story appeared in Volume 93, Issue 44

A table of Japanese chemical company earnings.

Large Japanese chemical companies reported better profits in the first half of the fiscal year that ends on March 31, 2016. Several of them credited the weakening yen and cheaper crude oil prices for the improvement. Restructuring moves undertaken by Japanese firms in recent years also contributed.

For example, Teijin, a synthetic fibers and advanced materials producer that reported a loss a year ago, now boasts a net profit margin of 6.2%. The company’s electronic materials and performance polymers business, which lost money a year ago, has turned around, partly owing to strong sales of p-aramid fibers to the auto industry. The company said it benefited from lower costs for raw materials and fuels.

Sumitomo Chemical, a producer of basic chemicals, agrochemicals, and electronic materials, will boost its dividend to shareholders after nearly tripling its net earnings, even though its sales flagged. Sumitomo explained that sales shrank because of a reduction in the price of many of the chemicals it sells. On the other hand, because of the weaker yen, the company earned higher profits from its foreign sales.

Over the past year and a half, falling energy prices have buoyed Japanese chemical producers, according to Shigeki Okazaki, head of the basic materials research team at the investment firm Nomura Securities.

Unlike in the U.S. and the Middle East, where natural gas is the chemical industry’s basic feedstock, naphtha from crude oil is the foundation of the Japanese industry, Okazaki explains. Because oil prices have fallen more than natural gas prices since last year, Japanese chemical firms have improved their competitiveness against U.S. and Middle Eastern producers, even if gas remains the cheaper feedstock, he says.

Japanese chemical producers are also reaping the rewards of the closure of several older and uncompetitive plants, a process that has been going on for several years. In recent months, Okazaki notes, the country’s petrochemical industry has been operating at levels approaching full capacity.

But all is not well in Japan. At the end of last month, the Bank of Japan lowered its growth forecast for the economy this fiscal year from 1.7% to 1.2%. And in recent months, surveys measuring business sentiment among Japanese manufacturers have revealed a general lack of confidence about the future.

Paradoxically, a slowdown in the Japanese economy could benefit the country’s chemical manufacturers, at least in foreign markets. The value of the yen, whose weakness is one of the major factors behind the improved profitability of Japanese producers, would be unlikely to change if the economy starts to stagnate.



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