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Chemical Industry Overview

11, 01. 2004

Current State

The Chemical Industry Picking Up through an Increase in Exports to Asia

The value of shipments of petrochemical products reached 7.6 trillion yen in 2001, a total of 23.2 trillion yen when plastic products, synthetic fibers and chemical fibers are included.
   Looking at the domestic production volume of ethylene, which is representative of petrochemical products, production in Japan peaked at 7.61 million tons in 2000 but continued to decline thereafter, falling to 7.15 million tons in 2002. However, domestic demand centering on automotives picked up in 2003, and exports also increased through expanded demand in Asian countries, such as China. As a result, total domestic production recovered to 7.36 million tons. Japanese ethylene production capabilities were estimated to be 7.60 million tons as of the end of 2002, but domestic consumption in Japan was only 5.47 million tons. The surplus production capabilities are currently being compensated through overseas exports.

Focus Being Placed on the Expansion of Hi-tech Fields

   The so-called "Big Three" players leading the chemical industry are Mitsubishi Chemical Corporation, Sumitomo Chemical Co., Ltd., and Mitsui Chemicals, Inc, Inc. Mitsubishi Chemical has its eyes set on strengthening its pharmaceuticals business through genome-based (genetic information-based) drug discovery. Sumitomo Chemical and Mitsui Chemicals are focusing on expansion through hi-tech materials, such as LCD color filters and filters for plasma display panels, respectively.
   Other than the Big Three, Shin-Etsu Chemical Co., Ltd. is concentrating its managerial resources on polyvinyl chloride resin for use in construction and other applications, silicon wafers used for semiconductors, and preforms which is an intermediate fiber optical material. Tosoh Corporation is currently expanding its polyvinyl chloride business through business mergers with other companies, while Showa Denko K.K. is aggressively developing its electronics, electronic materials and specialty chemicals products businesses and implementing a major reorganization of its business.

History

Petrochemical Industrial Complexes Established

Iwakuni-Ohtake Works of Mitsui Chemicals, Inc. facing the Inland Sea of Japan
Iwakuni-Ohtake Works of Mitsui Chemicals, Inc. facing the Inland Sea of Japan

 The chemical industry is often also referred to as the petrochemical industry. This is because many chemical products are produced from petroleum.
   The flow of chemical production is as follows. Naphtha is first produced from crude oil. Naphtha is then used to produce basic products, such as ethylene and propylene. The basic products are then used to produce derivative products such as polyethylene, vinyl chloride and styrene monomer. These derivative products are then processed, and they become the processed plastic used as materials to manufacture such items as automobile bumpers, structural parts of television sets and refrigerators, and piping for homes.
Petrochemical industrial complexes were established by bringing companies that handle each of these manufacturing processes together at one location. There are giant industrial complexes dotting Japan in areas such as Chiba Prefecture, Kanagawa Prefecture, Mie Prefecture, Okayama Prefecture, Yamaguchi Prefecture and Oita Prefecture.

Reorganization of the Industry Advances upon the End of the Post-war Era of High Growth

  The chemical industry, like steel, was once representative of Japan's smokestack industries. However, with the end of Japan's era of high growth, the chemical industry was forced to reorganize through business alliances that went beyond business affiliations as well as the consolidation of surplus facilities. For example, Mitsubishi Kasei Corporation merged with Mitsubishi Petrochemical Co., Ltd. in October 1994 to form Mitsubishi Chemical. Mitsubishi Chemical merged with Tokyo Tanabe Co., Ltd. in October 1999 and later spun off its healthcare division to establish Mitsubishi-Tokyo Pharmaceuticals, Inc. Mitsui Petrochemical Industries, Ltd. merged with Mitsui Toatsu Chemicals, Inc. in October 1997 and became Mitsui Chemicals, Inc.
   A series of business consolidations, such as through the establishment of product-area-specific subsidiaries (e.g. polyethylene, polystyrene, polypropylene and ABS resin), also occurred. In July 1995, Showa Denko and Nippon Petrochemicals Co., Ltd. merged their polyethylene and polypropylene business and established a joint venture-Japan Polyolefin Co., Ltd. In the same month, Mitsui Petrochemical Industries and Ube Industries, Ltd. merged their polyethylene business and established Grand Polymer Co., Ltd. In response to this, Mitsubishi Chemical and Tonen Chemical Corporation merged its polyethylene and polypropylene business in May 1996. In October 1998, Mitsubishi Chemical and Asahi Chemical Industry Corporation (presently Asahi Kasei Chemicals) merged their polystyrene businesses. In April 1999, Denki Kagaku Kogyo K.K. (DENKA), Nippon Steel Chemical Co., Ltd., and Daicel Chemical Industries, Ltd. merged their polystyrene business to establish Toyo Styrene Co., Ltd. Sumitomo Chemical and Mitsui Chemicals merged their ABS resin business in July 1999.

Three Key Points towards the Future

Point 1
Can the Industry Overcome Reduced Tariff Rates?

It has been said for some time that the "2004 Issue" and "2006 Issue" have been sitting in the wings of the chemical industry. Domestic demand for petrochemical products has been declining since around 2000, and companies have been maintaining the operating rate of their plants by exporting surplus products to countries in Asia and elsewhere. However, leading American and European chemical manufacturers have recently been transferring their bases of production to Asia, especially China, thereby making export from Japan more difficult.

Things were made even worse by the 2004 Issue. This refers to a joint-framework agreement of the Uruguay Round (multilateral GATT trade talks) through which Japan was to lower its tariffs on petrochemical products, in stages, by 2004. Through this agreement, Japan was to lower its tariffs on chemical products to 6.5 percent, a level equal to that of the United States and Europe, by 2004. This has raised increased speculation that a 10 to 20 percent share of the domestic chemical products market will be overtaken by imports. In fact, it seems that there is quite severe competition going on between Japanese manufactures and overseas manufactures, something that is being compounded by the continued appreciation of the yen.

Point 2
Can Export from Japan Continue?

2006 brings forth another problem for those in the Japanese chemical industry. America and European manufacturers, such as the BASF Group and BP (British Petroleum), are scheduled to open large-scale ethylene plants in China and the Middle East between 2005 and 2006. The resulting deterioration of supply/demand relationships is thought to have a direct effect on Japanese manufacturers in terms of price and volume.

The increased manufacturing capacities that will be launched overseas between 2005 and 2006 is said to be 8 million tons in terms of ethylene supply. This is a level that easily surpasses Japan's annual output. The current situation in Japan is that the chemical industry is already depending on exports to compensate for its domestic surplus. If manufacturing is launched in China and the Middle East as scheduled, it will become that more difficult for Japan to export its surplus. It is inevitable that issues related to excessive production facilities in Japan will escalate. This is the root of the 2006 Issue.

Point 3
Partial Consolidations in Same Fields May Become Mainstream

  It is highly probable that chemical companies will merge or reorganize their businesses in order to survive in preparation of such circumstances. However, talks between Sumitomo Chemical and Mitsui Chemicals for merger in October 2003 ended in a de facto break-off since they could not reach agreement in the conditions of the merger. There had been high expectations placed on the large synergistic effects of a merger between Sumitomo Chemical, with its strengths in fine chemicals, such as pharmaceuticals and agrichemicals, and Mitsui Chemicals, known for its strength in basic chemicals. The shelving of the merger became a temporary damper on the move towards reorganization within the industry. It is thought that the reason that the merger did not proceed as planned was a decision that there was no need to consolidate under disadvantageous conditions since performance has been recovering recently through a boom in materials for IT use.
   With this said, however, there is no avoiding the launch of the overseas mega plants. The trend toward the dissolution of surplus facilities - that is to say the reorganization of Japanese chemical companies - is seen to be irreversible. The mainstream future reorganization of the chemical industry will probably not be company-based mergers like the aborted merger between Sumitomo Chemical and Mitsui Chemicals. Rather, they will most likely be partial consolidations of business segments in the same field, like those seen in the 1990s.

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