13:45 PM | April 16, 2018 | Robert Westervelt
Japan’s chemical makers are shaking off their doldrums. Strong global demand, including modest domestic growth, and strong petrochemical profitability have improved results. Producers continue to deemphasize basic chemicals and focus on higher-value segments in agricultural, electronics, health care, mobility, and specialty materials.
Japanese chemical makers enjoyed solid growth at the start of 2018, benefiting from global economic expansion and decent fundamentals in domestic markets.
Global markets remain strong, says Mitsubishi Chemical Holdings President and CEO Hitoshi Ochi. “Although [US] shale- based product will arrive in the near future, the Chinese market, where consumer spending is steady and the plant operation is reduced due to tightened environmental regulations, will absorb the potential impact. We think a good environment for Japanese chemical industry will continue.”
IHS Markit has set its outlook for Japan’s GDP growth at 1.4% in 2018 and 1.0% in 2019. Industrial production was exceptionally strong in 2017 with growth of 4.7 % and IHS Markit expects it to remain above 2% for 2018 and 2019. “Forward-looking indicators suggest the current upturn [in Japan] has more room to go,” said Bernard Aw, principal economist, IHS Markit. “New business growth remained solid while optimism [in early 2018] was the highest for over four-and-a-half years.”
Strong naphtha-based margins and tight markets have boosted petrochemical margins. “Last year, there was a tightening of petrochemical supplies in relation to demand because of the impact of hurricanes in the United States, production outages, and environmental regulations in China,” says Sumitomo Chemical president Masakazu Tokura. Tailwinds should moderate next year as US capacity increases, “but due to a steady increase in demand, we do not expect a significant decline in margins.”
Japanese producers welcome the lift from strong global GDP expansion, but realize strategies must account for a slow-growth home market. “Growth is not big in Japan, but we are seeing gains even if they are moderate,” says Mitsui Chemicals CEO Tsutomu Tannowa. “Demand in 2018 seems strong, but we need to keep an eye on geopolitical risks.”
China’s environmental crackdown has helped tighten supply. “Some plants in China are required to shut down, or there is a restriction on burning coal as a raw ingredient,” Tannowa says. “There are limitations or constraints and this could be an opportunity on the supply side. We have to keep an eye on what’s going in China with regards to regulation.”
For now, however, China is aiding recovery, producers say. “We expect the chemicals sector in Japan to be firm in 2018, based on supply and demand and economic conditions,” says Yuzuru Yamamoto, Ube Industries president. “In addition, the supply of certain products is decreasing due to environmental regulations in China, which are helping Japanese chemical companies. We expect this to continue for the short term.”
Global economic conditions are steady, including in the United States and China, and markets in Japan continue to recover gradually, says Jun Suzuki, CEO of Teijin. “Tight supply-and-demand is expected to continue this year as long as global markets remain [strong] and currency exchange rates and crude oil prices are maintained.”
Demand and economic growth should remain solid in 2018 with conditions similar to last year, says Kohei Morikawa, Showa Denko (SDK), president and CEO. Morikawa adds that focus on reliability is critical when conditions are strong to capture full benefit of the upcycle. “While high operating rates continue, it becomes more and more important for us to maintain stable operation,” Morikawa says.
Appreciation of the yen and concern about the impact of new US supply are a concern, but supply remains fundamentally tight in the ethylene and propylene chain, says Nippon Shokubai president Yujiro Goto. Fine and chemicals performance remains relatively more uneven, he adds. Steps must still be taken to improve competitiveness. “In Japan’s chemical industry, small- and medium-sized companies each have distinctive businesses,” Goto says. “However since these companies operate individually they retain [limited] power and resources. The Japanese chemical industry as a whole is not highly competitive on a global scale as a result,” he adds. “There is no doubt that some kind of collaboration and integration movements will have to accelerate in the Japanese chemical industry.”
Japanese producers are also encouraged by development in Southeast Asia, and have made investments in the region. “From a demand-oriented view, specifically in Southeast Asia, income is increasing above the $10,000/year threshold, which implies that are there more middle class citizens,” Tannowa says. “That should trigger demand greater than the economic growth.”
For more than a decade, Japanese chemical makers have shifted toward differentiated and specialty chemicals in more defensible markets such as automotive, electronics, life sciences, and greener chemistry. Strategies, however, must remain flexible to account for ongoing global shifts to address environmental challenges increase, an acceleration of digitization, and the emerging middle class in developing economies, particularly in Southeast Asia, a key focus for Japanese chemical makers.
“Technological innovation such as artificial intelligence Internet of Things [IoT] and robotics will make Japan a data-centric society and the industrial structure will dramatically change,” Ochi says. “The direction of value creation will change, for example, you need to create added value by new services or solutions by combination of ‘real’ and ‘virtual’.”
Sumitomo Chemical will focus resources on the fields of environment and energy, electronic materials, and life sciences where it can benefit from technological advantages. “There are also rapid advances in a data-driven world that generate solutions based on artificial intelligence analysis of the huge volumes of data collected through the IoT, and there is a possibility that our business model could change,” Tokura says.” Because we can provide a variety of solutions, we should take on the challenge of the environmental area.”
More effective innovation capabilities and agility are key, agrees Asahi Kasei CEO Hideki Kobori, citing three important changes he is trying to drive at the company. “First of all, it’s faster decision making. We need to identify what needs to be done and move more swiftly. Second, when we’re getting into a new area, we need to clearly identify exactly what is our strength, what of our own technologies that we can apply and if there’s a shortcoming, and where we can get that externally. And, of course, we have to reduce the time it takes to go to market.”
Products and technologies that enable clean energy and environmental improvement and products targeted at comfort and longevity with peace of mind for society are important. “We are looking at businesses where we have a competitive advantage that can be leveraged in these fields,” Kobori says.
Diversified products include an extension into services, he adds. “Traditionally we’ve been a manufacturer, but now we’re going to look beyond just production with more emphasis on services,” Kobori says. One area is leveraging manufacturing knowhow. The company is working with cargo operator Mitsui O.S.K. Lines to jointly implement a project for predictive detection of signs of abnormality in rotating equipment on ships. The project will utilize vibration analysis technology accumulated by Asahi Kasei in its own plants.
Another example is water electrolysis to produce hydrogen. “This is based on the technology that we have had for many decades,” Kobori says. Surplus renewable energy, in Europe for example, can be converted to hydrogen using this system. “We are now operating a demonstration in Germany,” Kobori says.
Asahi Kasei, which operates a home building business in Japan, is also looking to blend home construction and design, medical devices, electronic sensors, and materials into connected homes. “This may take time, but we believe this is the area where we can get growth,” Kobori says.
Sumitomo Chemical’s Tokura also says speed is critical. “In addition, amid these initiatives to increase the speed of innovation, in each business area we are working on open innovation with universities and outside research institutes, as well as actively pursuing partnering opportunities with start-up companies,” Tokura says. “For a diversified chemical manufacturer like Sumitomo Chemical, a variety of business opportunities will emerge. Our focus is on converting them into real businesses.”
Japan’s long-suffering petrochemical businesses are now highly profitable thanks to favorable feedstock costs, strong demand in Asia, and significant rationalization earlier this decade. Three naphtha crackers—operated by Asahi Kasei, Mitsubishi Chemical, and Sumitomo Chemical—were shut down since 2014, eliminating roughly 1.2 million metric tons, or 15% of ethylene capacity.
There is even some early talk of “scrap and build” petrochemical projects to support derivative production that remains in Japan. Tannowa adds, however, that the time may be right to evaluate investment to support higher-value derivatives. “Obsolete and aged facilities may require spending to renew our facilities,” Tannowa says. “At a certain point in the future we may need a large facility so that demand can be met.” Joint ventures and alliances are one route. “Specific discussions have not been started but we are moving to the stage where we may discuss this. Value-added derivatives remain the focus,” Tannowa says.
Mitsubishi Chemical’s Ochi says the company may consider such investment. “We will make investment for the scrap and build of the petrochemical business in Japan if it is necessary to promote the shift to high value-added products,” Ochi says.
Conditions are favorable now but more consolidation may be needed, he adds. “While it is true that operating rate of ethylene plants in Japan increased due to some capacity reductions after 2014, it depends on, to a certain extent, exports, thanks to the steady overseas economy,” Ochi says. “However, the Japanese chemical industry as a whole might need further restructuring including consolidation depending on future market conditions.”
Japanese chemical makers such as DIC, Kuraray, and Shin-Estu have enjoyed success by building strong global positions in core businesses. Shin-Etsu has built a leading global position in vinyls and a strong position in polysilicon and silicones. “All segments exhibited strong results,” says Yasuhiko Saitoh, president of Shin-Etsu. Polysilicon and vinyls have seen stronger price and volumes, and other key businesses such as silicones, methylcellulose, and electronic materials all had solid volumes. A polysilicon rebound is welcome after a “brutal” 10-year period that saw pricing drop to less than one-fifth of the previous peak. “We have a more balanced earnings profile and we would like to keep it that way,” Saitoh says.
Shin-Etsu, the largest global maker of polyvinyl chloride, is on track to start its new US cracker at Plaquemine later this year. “We expect that we will be starting up toward end of year,” Saitoh says. Saitoh says the company is evaluating significant investments across most of its portfolio, citing a need for additional capacity in vinyls, silicones , and polysilicon.
“Our business model is relatively simple,” Saitoh says. “We are determined to increase our bottom line. And to grow the top line we have to expand market position.”
All segments are doing well and we’d like to keep that momentum and extend our performance,” Saitoh. “We have not made any announcements of capital projects but there are a number of them in the pipeline. We will keep investing to grow our operations and make announcements accordingly.”
Growing environmental and social challenges present at increasing opportunities and therefore our sector solutions to the issues, says Kuraray president Masaaki Ito. Innovation is critical to find new ways of addressing market needs.
The company has a leading position in vinyl acetate and intends to continue to grow there while developing other businesses. “We are more mindful that it is time for us to start thinking more actively about other pillars such as isoprene or activated carbon,” Ito says.
Kuraray’s MonoSol division will invest $72 million to build a 150,000-square-foot water-soluble polyvinyl alcohol (PVOH) film manufacturing facility in Lebanon, Indiana. MonoSol says it will have the ability to expand the site to over 400,000 square feet. Construction is expected to begin in the second quarter of 2018 and be completed by mid-2020. The dissolvable films are used to create preportioned packets for several applications, including detergents and cleaners. The Lebanon plant, which will become MonoSol’s third production site in Indiana, will add approximately 18% to existing global capacity.
Kuraray also recently completed its $1.3-billion acquisition of Calgon Carbon, giving it a global presence in activated carbon and filtration media. Calgon Carbon will operate as a separate subsidiary within Kuraray’s functional materials business, which also includes methacrylate and dental materials.
Innovation remains key to supporting growth, he adds. Ito cites Proctor & Gamble’s development of single-dose detergent packs, which has provided a significant boost to its water-soluble PVOH films business, supporting the Indiana expansion. “Unless we are able to come up with those solution growth will be constrained,” Ito says.
Areas of growth for DIC include thin-film-transistor liquid-crystal display materials, functional pigments, polyphenylene sulfide (PPS) engineering compounds, and jet inks. DIC CEO and president Kaoru Ino says the company will focus on automotive, electronics, food packaging, and housing with solutions that contribute to environmental protection and sustainability. “DIC is working to develop products that contribute to a low-carbon society,” Ino says.