Page 135 - CW E-Magazine (17-10-2023)

Point of View

Japan’s chemical industry: Reorganising to stay

relevant

Japan’s chemical industry is the second largest in Asia – ranking only behind China – but for more than a decade it has been
grappling with low growth, poor competitiveness stemming from lack of access to advantaged feedstock, and the challenges posed by
other production hubs in Northeast and Southeast Asia, notably, China, South Korea and Taiwan. In these respects, the industry seems
to share many of the problems that now plague Europe’s chemical industry.

The demographic changes in Japan are a major contributor to the decline in demand for all sorts of goods (especially commodities).
The depopulation of Japan started in 2004 and the decline has continued almost unabated since. The 2022 population of about 125-mn,
was a 0.5% decline over the previous year, and, to compound matters further, Japanese society is now ageing faster than any other on
the planet. Both these factors have significant implications for consumption. Indeed, Japan is the test kitchen for ‘shrinkonomics’ – a
laboratory from which other countries are beginning to draw lessons.
Despite the challenges, the Japanese chemical industry did well in the past. According to an analysis by McKinsey, a consultancy,
Japanese chemical companies delivered strong Total Shareholder Returns (TSR) from 2014 to 2017, but since then (2018-2021) the
industry has lagged global peers, be they in the business of speciality or commodity chemicals. This is largely because of flat (or declining)
revenue growth and poor returns on invested capital, possibly reflecting the high cost environment in which companies operate.

Japan’s chemical companies have responded to these challenges by attempting to move up the value chain – ditching energy-intensive
chemical commodities and moving into speciality products, materials and technologies; by investing in other growth regions, notably
China (though not India, but for a few scant investments); and, by rationalisation of capacity through mergers, acquisitions and outright
closures. Whether these will be enough to sustainably set the industry on a new growth path, is up for debate.

Falling output and demand
According to estimates by the Japan Petrochemical Association (JPCA), an industry lobby group, output of several basic
petrochemicals fell sharply in 2022, as compared to the previous year (see figure). Ethylene production – a widely accepted barometer
for the petrochemical industry – fell 14.2% to 5.449-mt in 2022 – a historical low worse than the 2020 pandemic-ravaged output. Output
of the five major plastics – LDPE, HDPE, PP, PS and PVC – fell 10.2%, to 6.336-mt – again a record low. Demand for ethylene also showed
a similar downward trend – dropping 5.3% to 4.390-mt in 2022. In the case of aromatics – benzene (B), toluene (T) and xylene (X) – the
situation was no different. While production of all three combined declined by 5% in 2022, demand fell 4% (over the previous year).

2023 outlook
-1.9 Xylene
-4.3 Vinyl chloride JPCA’s 2023 outlook does not offer much to cheer. While
-6.9 Toluene there are some hopes that demand for petrochemicals may
-7.0 Syn rubbers show a small recovery from the lows of 2022, many things
-20.9 Styrene
-4.9 PVC can turn the numbers on its head: the war in Ukraine; the high
-10.07 PS prices for energy; the weak economic outlook; high interest
-13.8 Propylene rates, amongst others. The capacity build-up in several value
-13.9 PP
-2.6 Phthalic anhydride chains in China, albeit at a slower pace than in the past, will also
-10.0 Phenol have repercussions for the industry in the rest of Asia, including
-8.9 LDPE Japan. Cracker capacity build-up in China, for example, will be
-11.6 HDPE
-14.2 Ethylene well above incremental demand growth.
-34.4 Ethylene glycol
-12.7 Butadiene Operating rates for Japan’s ethylene crackers have stayed
-8.6 Benzene
-6.0 Acrylonitrile below 90% since August last year, and the outlook for the rest
-18.6 ABS of this year does not seem to be much better. Many Japanese
-40 -35 -30 -25 -20 -15 -10 -5 0 companies produce a large share of petrochemicals, from
relatively expensive feedstocks (mainly naphtha), putting
Japan 2022 chemical output (% change over 2021)
Source: JPCA pressure on margins. US-sourced ethane is also increasingly

Chemical Weekly October 17, 2023 135

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