Basic Materials Business Sector
By leveraging the competitive advantage of our domestic bases and tapping into the Asian market in added-value fields, we aim to secure stable earnings and build a framework that serves as a cornerstone business and supports the Group as a whole.
Fiscal 2018 Business Overview
Sales by product
Sales by region
Trends in net sales and operating income (¥ bn)
Fiscal 2025 target
Operating income of ¥300 billion
The impact of new and expanded facilities for mainly polyethylene derived from shale gas is expected to be felt in Asia from 2019 through 2020. Still, we will aim to build a basic materials business with a strong presence in the Asian market by reinforcing our cost competitiveness through constant implementation of cost reductions, as well as shifting to high value-added products.
- We aim to further boost earnings by deepening our cornerstone business, while expanding our differentiated products and derivatives with high profit margins in the Basic Materials domain.
- We plan to sustain and further enhance our competitiveness by establishing a local production for local consumption system and an optimal production system for bulk and commodity products.
- Given that our upstream crackers have been confirmed to be highly competitive, we plan to carry out the large-scale investments we have examined thus far in order to reduce costs.
Fiscal 2019 plan
Despite concerns of an economic slowdown, we expect our naphtha crackers and production plants for derivatives to continue operating at high capacity on the back of stable domestic demand for petrochemicals. At our overseas bases we anticipate strong sales of EVOLUE™, commercial operation of which started in fiscal 2016 in Singapore, and we expect operating rates to increase up ahead.
We have transformed the earnings structure for basic chemicals and polyurethane materials into one that is resistant to market price volatility by having optimized their production structure. We will continue to take measures aimed at strengthening the business platform for Basic Materials.
1. Building a stable earnings base
(1) Improving resistance to price volatility
Ever since the global financial crisis of 2008, there has been a supply glut for many products in the Asian market owing to the construction of new production facilities for various petrochemical products as part of China’s enormous economic stimulus package. We previously maintained a high export ratio for commodity products like phenol, purified terephthalic acid (PTA), and polyurethane materials, but deteriorating profitability on exports to Asia meant earnings on these products fell sharply into the red.
In response, we made the decision to embark on structural reforms followed by booking large extraordinary losses in fiscal 2013 and since then we have continued to take steps towards building a stable earnings base. We downgraded the size of our production capacity to meet domestic demand through measures such as retiring our production facilities for the aforementioned phenol, PTA, and polyurethane materials, which also included the closure of plants based on a strategy of local production for local consumption. At the same time, we have introduced a formula method to automatically link changes in raw material cost to product prices for those three products and other key materials such as domestic polyolefins in an effort to improve our resilience against fluctuations in market prices. As a result of these initiatives, earnings volatility has been greatly reduced—the weighting of local production for local consumption for phenol, PTA, and polyurethane materials has now reached 80%, while the price formula ratio of mainstay products together with domestic polyolefins now stands at 70%.
(2) Preparing for the risks posed by shale
Currently there are concerns that the supply-demand balance for ethylene and polyethylene in Asia will deteriorate as a result of an influx in cheap polyethylene as more shale gas-based crackers are expanded or newly built in North America. To counteract this, we are working to increase our ratio of captive ethylene consumption and develop derivative products with more added value. In 2014 we withdrew from Keiyo Ethylene Co., Ltd., closed our general-purpose polyethylene plants, and took steps to expand capacity for the production of EVOLUE™ and other ethylene-based high value-added polymers. As a result, our captive consumption of ethylene is now quite high at 80%, while the export ratio, which is susceptible to overseas market conditions, is less than 10%. In addition, our weighting of ethylene-based high value-added polymers has reached 90%. This has enabled us to shift to a product mix which makes it difficult for shale-derived polyethylene, most of which is for general use, to take the place of. Going forward, we will make every effort to minimize the risks posed by shale with various measures that enable us to provide more added value.
Reducing volatility through steady restructuring
Carrying out business reforms to establish stable earnings base with operating income of around ¥30bn
2. Further strengthening our competitiveness and exploring growth potential
The competitiveness of our crackers compares favorably with the new large-scale crackers in Asia and have been rated highly by specialized overseas agencies for their superior energy efficiency. This is the source of competitiveness in our derivative products including our lineup of high value-added products outside of the basic materials field. Up ahead, we intend to further reinforce this competitive advantage mainly by reducing and stabilizing input costs through diversification of raw materials and improving energy efficiency with the installation of gas turbines. We also plan to streamline production and distribution in our existing businesses by actively employing AI, IoT, and other highly-advanced technologies.
For our distinctive added-value products, we will work on achieving business growth by maintaining and expanding our share in growth markets. Moreover, we aim to explore the growth potential of this cornerstone business by acquiring new business opportunities. To this end, we will further beef up initiatives for addressing environmental issues and strengthen collaboration with customers.