Japan petchem's profits thin due to expensive feedstock

Japanese petrochemical producers are expected to suffer sharp profit declines this fiscal year due to surging raw material costs. "Petrochemical divisions of almost all chemical firms are expected to dip into the red this fiscal year," said Yoshiko Ohe, senior analyst with Daiwa Institute of Research. "The situation is likely to worsen, and a recovery is not expected until after mid-1998," he said.
Japanese output of petrochemical products has boomed in the past year, with production of major products such as ethylene, low-density polyethylene, high-density polyethylene and polypropylene hitting record highs in 1996. Production of ethylene totalled 7.14 mm tonnes in 1996, up 2.8 % from the previous year. Demand has been fuelled by increased domestic use from automobile makers and for supermarket carrier bags, combined with strong demand from neighbouring Asian countries, Japan's Petrochemical Industry Association said. However, despite booming sales, profit margins have slumped due to surging prices for naphtha, the main feedstock used to make petrochemicals in Japan, industry sources said. "The increase in naphtha prices was much larger than expected, and petrochemical makers have not been able to pass on the higher costs to wholesale prices," Masami Sawato, analyst with BZW Research Ltd said. Strong opposition from end-users and competition among numerous petrochemical firms to secure market share has prevented producers from passing higher costs on, he said. Analysts said Mitsubishi Chemical, the industry's largest naphtha consumer, was expected to suffer greatly. Daiwa's Ohe forecast that Mitsubishi Chemical's operating profits would be around Y 1 bn in the current 1996/97 fiscal year ending March 31. This compares with Mitsubishi Chemical's forecast of Y 6 bn. It posted an actual parent operating profit of 35.02 billion yen in 1995/96. For the October-March second-half of the current fiscal year, Mitsubishi Chemical had forecast it would buy naphtha at an average 16,400 yen. Recently it has been buying naphtha at around 20,000 yen per kilolitre. From April-September 1996, Mitsubishi Chemical bought naphtha at an average 13,500 yen per kilolitre. In order to prop up ethylene prices and in turn cool the naphtha market, Mitsubishi Chemical said last year it would cut ethylene output by about 10 % from January. Showa Denko KK and Sumitomo Chemical Co Ltd, have also said they plan to take similar measures.