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Japan: Producers look to innovation and weaker yen to spark rebound

11:31 AM MDT | May 9, 2013 | —Robert Westervelt in Tokyo

Abenomics: Prime minister Abe seeks to wave away to deflation with aggressive fiscal policies.

Japan's chemical makers are hoping that their strong commitment to innovation and new aggressive government stimulus will recharge growth. Japanese chemical makers still need to shift to higher-performance materials, for which value is not determined by feedstock costs, as new large-scale units in Asia and the Mideast take marketshare in commodity markets.

Japan' economic spirits have lifted as Prime Minister Shinzo Abe, who returned to office in December, launched aggressive fiscal and monetary stimulus to reverse nearly 20 years of deflation and flat economic growth. Japan’s central bank, at the urging of Abe, has announced that it will target a 2% inflation rate within 2 years. ‘Abenomics’ has brightened the mood in Japan, producers say, and they now hope that a sustained recovery follows.

Japanese producers say business conditions were muted in 2012. Domestic businesses, aided by earthquake reconstruction efforts, met modest expectations, but export-oriented businesses suffered because of weak global demand, including a slowdown in China. “The yen is getting weaker and stocks are rising,” says Asahi Kasei president Taketsugu Fujiwara. “There is a brighter mood. What is more important, however, is to see real economic growth. The economic growth still has to be turned from strategy into reality.”

Ito: End to deflationary environment welcome.
Nakanishi: Systems solutions needed.
Japan’s domestic economy is showing signs of recovery backed by the weaker yen and a pickup in personal consumption, says Shigeo Ohyagi, president and CEO of Teijin. “In terms of enhancing overall competitiveness, however, there are still big challenges in Japan, including corporate tax rates, energy policy, and the need for reform of employment systems.”

Japan's domestic markets have seen mild upturn supported by rebuilding efforts after the March 2011 earthquake, says JSR president Nobu Koshiba. “We also see signs of recovery in the North American economy and moderate growth in emerging countries, such as China. However, sluggishness in the European economy and volatile prices of crude oil and petrochemical raw materials are leading to continuing uncertainty.”

Koshiba warns that the yen’s weakness is not entirely favorable for Japanese chemical makers since it makes investment overseas more expensive. “I welcome the strong yen. Financing is more favorable,” Koshiba says. “Regardless of domestic political conditions, I want to create a sound, diversified, and globalized business. Even if the yen gets weaker, I still need to grow outside of Japan.”

Conditions in 2012 were subdued, but conditions have improved since the start of the 2013 calendar year, says Fumio Ito, president of Kuraray. “With yen depreciation and the rise of stock market there are some positive signs,” Ito says. It is too early to judge if the rebound is sustainable, but Ito says the weaker yen will help exports, and the market rally is increasing confidence for Japan’s domestic consumers. “More than anything, I welcome the target inflation rate of 2%,” Ito says. “Since 1993, we have been at zero, if not negative. No one is willing to spend in a deflationary environment, so we become occupied with expense cuts. With recovery, I would hope companies would be looking to increases in capital spending, where warranted, and R&D.”

Japan’s stimulus efforts will add about 0.6% to GDP through March 2014, says Harumi Taguchi, Japan economist with IHS. IHS estimates that would bring Japanese GDP growth to 0.8% in 2013 and help increase it to 2% by 2015. Industrial production should accelerate at even faster rates in 2014, reaching 6%.

Fujiwara: Grow by fusing capabilities.
Tokura: Growth shift toward emerging economies.
The Abe government has also committed to eliminating Japan’s budget deficit by 2020, which could curb growth later in the decade, Taguchi adds. “The current [account] deficit is about 6.8% of GDP,” Taguchi adds. “Even though the government is expecting more revenues from tax increases and economic recovery, they cannot reach the target without spending cuts. Reducing government consumption and fixed investment after 2015 will likely have negative impact on growth.”

Japan’s exporters, including chemical makers, should benefit. “A weaker yen is also likely to benefit export sectors such as automotive, machinery, shipbuilding, and medical devices, she adds. “Chemical makers will see some benefit in export-oriented sectors,” Taguchi adds. Japan, however, imports nearly all of its hydrocarbon-based raw materials, which become more expensive in yen terms if the currency depreciates. “Many Japanese chemical producers tend to be more domestic-oriented so that they may suffer from price increases for imported raw materials.”

Producers are more optimistic about the outlook. “The yen’s excessively high valuation has moderated and the government’s emergency economic measures are having some effect,” says Masakazu Tokura, president of Sumitomo Chemical. “Movement toward economic recovery seems to be accelerating. A number of risks do still remain, including Europe’s fiscal problems, so we cannot be overly optimistic, but we are hopeful that we will move toward genuine recovery as measures that will increase Japan’s competitiveness take hold.”

Producers welcome stronger conditions in Japan but acknowledge that the share of sales outside of Japan still must grow quickly.  Mitsui Chemicals CEO Toshikazu Tanaka notes that there has been “a complete paradigm shift of global growth to emerging nations.” Japanese producers of higher-value-added products have strong opportunities targeting middle-income consumers in high-growth economies, which will become a primary driver of global demand, he adds.
“Domestic industries are faced with the serious threat of hollowing out due to yen appreciation, corporate tax rates, high electricity prices, and so on,” Tanaka adds. “Although the new administration is undertaking efforts to rationalize yen appreciation, the trend to make large investments overseas has to continue.” In the domestic market, meanwhile, “thorough restructuring of low-profit businesses is essential.”

Petchem consolidation

Japan is slowly consolidating loss-making petrochemical operations, perhaps its biggest challenge. “It’s clear that more companies need to exit petrochemicals,” says one Japanese CEO. “Current production is 7 million m.t./year, and the predictions have demand at 4.5–5 million m.t./year. Industry has to change. More need to leave petrochemicals, but it is a very sensitive issue.” Producers with operations in Chiba and Mizushima have announced plans to consolidate, but rationalization remains challenging in other regions. Japan’s diversified chemical makers largely built heavy-feed crackers—which are now subscale and lack access to competitive feedstock—integrated into operations at a single site. The country does not have the pipeline networks that exist in the United States and Europe, so it is difficult to shut cracker production without impacting downstream derivatives.

Tanaka: Investment shifts outside of Japan.
Kanagawa: Make products customers want.
Sumitomo announced plans in February to shut an ethylene plant at its Chiba Works site by September 2015. The company will procure ethylene needed for downstream derivative production at Chiba from Keiyo Ethylene, a joint venture among Maruzen Petrochemical, Mitsui Chemicals, and Sumitomo Chemical, at Chiba. Mitsui Chemicals has announced plans to exit the Keiyo jv by the end of 2014. Mitsui Chemical and Idemitsu Kosan formed a 50-50 jv in 2010 to combine Mitsui Chemicals' 553,000-m.t./year steam cracker at Chiba with Idemitsu’s nearby 374,000-m.t./year ethylene plant.

“Operations at domestic naphtha crackers have been affected by the influx of low-priced materials from the Middle East and the construction of new large-scale facilities in China as well as the shale gas revolution in the United States,” Tanaka says. “Restructuring measures cannot wait. Our withdrawal from Keiyo is one measure. We will continue to undertake further business restructuring.”

Sumitomo will maintain production for higher-value derivatives at Chiba, and the site will remain a vital for process R&D and application development. Sumitomo’s Chiba site in an example of what Japanese producers call the “mother plant” or “mother lab” concept. Research at Chiba will support Sumitomo’s global operations, including new production hubs in Singapore and its Saudi Arabia Petro Rabigh jv with Aramco.

Japanese chemical makers should maintain a strong R&D emphasis, one area where domestic investment can be sustained and grown, Tanaka says. “We believe it is important to create a circulatory system where domestic ‘mother’ research and production sites create state-of-the-art products and technology for overseas markets,” Tanaka says. “The profits from these overseas markets are returned to Japan to support further innovations and new technology development.”

Takahashi: Flexible feedstocks competitiveness.
Koshiba: Diversify to mitigate risks.
Asahi Kasei and Mitsubishi Chemical have formed a 50-50 jv company for integration of their respective naphtha cracker operations at Mizushima. Each had 500,000 m.t./year of ethylene capacity at Mizushima. Capacity at 1 of the units has already been reduced by 30%, and eventually operations will consolidate at a single naphtha cracker.

“There is, frankly speaking, no advantage to producing commodity products in Japan,” Ashai Kasei’s Fujiwara says. “It is more important to provide chemicals that provide [societal] value. I think chemical companies need to seek businesses that can change the world with the power of our products,” Fujiwara says.

Showa Denko has invested to modernize its Oita cracker, which cannot be easily integrated with other producers or pipelines. The company installed two new furnaces that can crack non-naphtha feedstock such as more advantaged natural gas liquids, gasoil and liquefied petroleum gas. Roughly 40% of the cracker feedstocks it uses are alternatives to naphtha, by far the highest ratio in Japan, says Showa Denko CEO Hideo Ichikawa. This has helped stabilize its basic chemicals business, while the company focuses capital investment on its hard-drive media and graphite electrodes business.

Japan’s chemical sector remains more fragmented than other mature regions, such as the United States and Western Europe. That fragmentation leads to groups of producers chasing similar growth opportunities. Several Japanese chemical makers are investing heavily in energy storage and advanced battery material technologies, such as electrolytes and specialty films. In solution styrene butadiene rubber (S-SBR), another example, there are four Japanese producers currently building separate world-scale plants in Southeast Asia that will start operations over the next two years. Asahi Kasei, Sumitomo Chemical, and Zeon Chemical are building in Singapore. JSR is building a plant in Thailand.

“There will be some tenuous supply/demand balances initially in S-SBR, but demand has been picking up,” Fujiwara says. “We have not changed our strategy.”

JSR also remains committed to S-SBR, targeting growth in applications such as greener tires. S-SBR sales have been hurt in 2012 and early 2013 by inventory destocking, but Koshiba says that it should recover starting in April. In areas such as S-SBR, access to competitive raw materials and technology provide a defensible market position, he adds. The company focuses on batch S-SBR, targeting higher-value applications such as green tires, for which it estimates it has a 40% market share. In Thailand, the country has partnered with a butadiene supplier.

S-SBR remains attractive because it is an area where JSR can bring technology and feedstock advantage together. The company’s jv partner in Thailand, Bangkok Synthetics, brings access to competitively priced butadiene. Supplies for butadiene are tight globally, in part because of the shift to lighter feedstocks in the United States, but supply should be available for the next four or five years, Koshiba says. “We think there are enough butadiene molecules around that can be drawn into the market through 2017–18,” Koshiba says. “Beyond that, however, on-purpose butadiene production is certainly in our scope to meet supply needs. There are so many different routes that we have not narrowed the focus yet. The best route depends on the raw materials available and where the plant is sited. There is also potential in biobased routes.”

Japanese chemical makers continue to place a strong emphasis on electronic chemicals and materials. In electronics, smartphones are driving demand as demand in PCs weakens. JSR’s Koshiba says mobile-device demand is accelerating quickly, but device prices are falling as consolidation increases. “We see very good potential in mobile, but there is a lot more pressure on price,” Koshiba says. “The market is becoming more consolidated and there are risks if you are too closely tied to one customer.” Digital technology is easily commoditized and copied, Koshiba adds.

JSR has had strong success in electronic chemicals but is looking for the next growth driver, Koshiba says. “I want to build our next segment while [electronic chemicals] is still healthy,” Koshiba says. The semiconductor boom sparked by the introduction of the PC is now 30 years old and the sector becoming more commoditized, he adds. Koshiba sees value in a greater focus on analog technologies in areas such as life sciences and energy storage. “I see some similarities between pharmaceuticals today and semiconductors in the 1980s,” Koshiba says. “There are a lot of players and the industry has yet to consolidate.”

Japanese companies continue to make the most of their overseas investments in China and Southeast Asia, but US opportunities are attractive, producers say. Koshiba says the United States is also a target for growth for JSR. The company has about half of sales outside of Japan. North America is currently 6% of sales. “That’s too small. I spend a lot of time in North America. I do believe the US is becoming even stronger and more competitive.” The United States will be a primary development area for its emerging businesses in life sciences and advanced materials.

Shin-Etsu has had strong success in the United States, becoming the world’s largest polyvinyl chloride (PVC) producer through its US-based Shintech subsidiary, which celebrates its 40th anniversary in 2013. Initially a jv with 150,000 m.t./year of capacity, Shin-Etsu now makes nearly 2.8 million m.t./year of PVC at 3 sites in the United States. The company may evaluate further expansion due to low US feedstock costs. “We haven’t decided to advance expansion at Shintech, but we are preparing for it,” says Shin-Etsu executive chairman Chihiro Kanagawa. “If demand increases and we are certain we can sell into the market, then we will advance a project.”

Kuraray earlier this month broke ground on a 40,000-m.t./year polyvinyl alcohol (PVOH) plant at La Porte, TX, which is expected onstream in September 2014. Kuraray says the investment is in line with the company’s global strategy for vinyl acetate and PVOH-related products. The company also has PVOH production in Japan, Singapore, and Germany, and  the US plant will add an advantaged production base in North America, where shale gas has lowered feedstock costs. Kuraray last year agreed to acquire MonoSol (Merrillville, IN), a manufacturer of PVOH films. MonoSol is a leading manufacturer of PVOH films for industrial applications such as packaging films for unit-dose detergent products as well as agchems and dyes, and mold-release films for synthetic marble, Kuraray says.

Several diversified Japanese firms also retain health-care operations and have looked to the United States and Europe to build out global positions. Asahi Kasei entered the market for critical-care devices such as defibrillators through its $2.2-billion acquisition of ZOLL Medical. Sumitomo Chemical recently agreed to acquire Boston Biomedical, a US venture firm specializing in cancer treatments, in a deal valued at $200 million. Mitsui Chemicals earlier this month agreed to purchase the dental materials operations of Heraeus Dental for €450 million ($578 million).

Asahi Kasei says the ZOLL deal fits with its strategy to focus management and R&D resources on its environment and energy–, residential-, and health-care-related businesses. Asahi Kasei has businesses in pharmaceuticals, medical devices such as dialysis, and critical-care devices such as defibrillators through its acquisition of ZOLL. Asahi Kasei maintains a large home-building business in Japan. Fujiwara says the company sees the potential of using the knowledge to build residences optimized for medical treatment. “If you combine home and health care, you can do health care at home. You can do dialysis at home. And the necessary vital information is available to physicians. Through this kind of linkage we can realize a more comprehensive business.”

Asahi Kasei will continue to make acquisitions but indicated that they would not be large in scale. “In M&A, you can buy the seeds that grow future business or buy marketshare,” Fujiwara says. “We think the right way for us is to use technology seeds as platforms to increase our business.”

Mergers remain rare in Japan. There is, however, the potential for product line consolidation, says Ube president Michio Takeshita. “It remains difficult to merge companies in Japan,” Takeshita says. “There are opportunities for alliances and combinations in specific product lines. I think you will see more of that.”

Japanese chemical makers also continue to develop a systems approach to businesses, says Yoshiyuki Nakanishi, CEO of DIC. The company has had success shifting from a product-specific to a market-focused management. This has enabled it to respond to market needs by providing customers in automotive, electronics, food packaging, and housing  with solutions that address design or efficiency challenges. The company’s graphic arts business also continues to perform well. The company had leading marketshare in green pigments, around 70%, and is set to launch a higher-performance blue pigment at the end of 2013.

Polyphenylene sulfide (PPS) remains a strong area, DIC says. The company will complete a new PPS plant in Kashima and add compounding. “PPS continues to grow, especially in auto applications,” Nakanishi says. “When Kashima is complete, PPS will be up 40%. Austria will expand compounding capacity by 20%.”

Paths to growth

“When it comes to value add and technology, Japan is a reliable supplier,” Ito says. “The most important thing is to be quicker in terms of anticipating and capturing needs where we have technology we can apply. That is strategic thinking I would like to uphold,” Ito says.

Japan should focus on a problem-solving model of innovation, Tokura says. Japan’s greatest strengths are in addressing environmental and energy efficiency challenges at home that have global relevance. Japan’s aging population “has placed great expectations on the information technology and health-care sectors to deliver the prosperous life styles they want. These issues and expectations are shared by many other countries around the world. But Japan is in the forefront of actually dealing with these issues,” Tokura says.

For Japan, a nation that is dependent on trade and investment, it is essential that the country open itself up and promote the liberalization of trade and investment flows, Tokura says. “Capitalizing on the rapid growth of the Asia/Pacific region is an urgent issue, and in moving toward the creation of a free trade area of the Asia/Pacific in 2020, we believe that the promotion of economic partnership agreements, such as the TransPacific Partnership, a free trade agreement among Japan, China, South Korea, and the Asean+6 trade zone, is beneficial for Japan as well as each nation in the region,” Tokura says.

Asia sales outside of Japan currently account for 30% of Mitsui Chemicals’ revenues. “By the end of our 2013 fiscal year, approximately 60% of the growth investments under our current business plan will be carried out in China and Southeast Asia. Asia is a very important market,” Tanaka says.

“We need to conduct policy for industrial development of Japan’s economy. But I think company’s must not depend on Japan and its policies,” Kanagawa says. “Two-third of sales are overseas, so we don’t expect much in Japan. There is demand in Japan and we will capture it. If the recovery from Great East earthquake shifts into full swing, the demand of building-related products will rise.”

Japanese producers need to enhance price competitiveness and develop creative products with strong market pull, Kanagawa adds. “We also need to produce in the most appropriate areas of the world—not just in Japan,” Kanagawa adds.

Now that emerging companies have advanced their technologies, it is quite natural that manufacturing is shifting from Japan, Ohyagi says. “Developed countries such as Japan will play a role of making high-value-added products or services that are not affected by labor cost or exchange rates,” he adds.

The key in Japan is to diversify to mitigate risks. “The best way to alleviate risk or unfavorable conditions is to have a diversified business,” Koshiba says. “Companies need to diversify by product, by region and in their workforces.”

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