Review of Operations: Petrochemical Group

Significantly Improved Profitability

The Petrochemical Group’s net sales decreased 21.6% from a year earlier, to ¥175.4 billion (US$1.5 billion). The group’s contribution to Tosoh’s consolidated net sales likewise declined, from 27.6% to 23.3%. In contrast, operating income rose ¥4.7 billion, or 67.7%, to ¥11.6 billion (US$103.0 million), owing to increased sales volumes, and accounted for 16.7% of Tosoh’s consolidated operating income. The group’s operating margin was 6.6%, up from 3.1% a year earlier.

Among shipments of olefin products, cumene shipments rose because of increased demand for derivatives. The cumene market, though, weakened abroad, and decreases in the cost of raw material feedstocks translated into low prices for cumene products in the Japanese market.

Shipments of polyethylene resin increased amid improved trade conditions for exports because of the weak yen and lower raw material prices. But polyethylene resin product prices in Japan declined, reflecting falling naphtha prices. The weak yen, meanwhile, improved export prices for CR and CSM.

During the period under review, Tosoh allocated around ¥1.9 billion to Petrochemical Group R&D. The group, in turn, continued and continues to develop and commercialize new grades of polyethylene suited for use in infusion bags that are heat-resistant and transparent and that meet Japan’s safety standards. The group also plans to develop and sell variations of its two newest polyethylene grades for application in medical bottles, ampoules, and unit-dosage dispensers for eyedrops and other medicines. Sampling is under way.

The Petrochemical Group, meanwhile, continued its development in fiscal 2016 of a CR grade with well-balanced heat-resistance and dynamic properties. Its work on developing a new rubber polymer with enhanced oil resistance was and is likewise ongoing. R&D during the year under review also encompassed developing specialty PVC paste grades for wallpaper, flooring, and automotive materials. As well, work continued on the development of new polymers based on proprietary concepts for liquid crystal optical materials, flexible display substrate materials, and other applications.

Olefins

One of Tosoh’s domestic competitors shut down its ethylene plant in fiscal 2015 and thereby improved the supply and demand for olefins in Japan. The resultant decline in supply has allowed Tosoh’s Nanyo Complex to raise the operating rates of its ethylene production facilities and to thereby lower costs at those facilities.

In Asia, the Petrochemical Group sees olefins as a growth market in the long term despite rising competition from Middle Eastern and Asian suppliers. Developing economies invariably consume increasingly large amounts of olefins, as is happening throughout the Asia-Pacific region, and the group maintains some advantages over competitors in many markets.

The Petrochemical Group relies on its refinery and petrochemical modeling system (RPMS) to deal with a changing business environment. It adjusts the mix of its cracker output, for instance, to maximize profitability. As a result, it is prepared to expand by taking advantage of opportunities that arise from managing the balance among production rates, product mix, and market prices.

Polyethylenes

A significant amount of polyethylene from the United States should flow into the Chinese and other Asian markets in the year ahead. This could affect cracker operating rates, but those markets should be able to absorb the surplus polyethylene.

The Petrochemical Group’s strategy for its core polyethylene products is differentiation. It will focus on high-value-added grades, new products, and customization for market segments and major customers.

Functional Polymers

The Petrochemical Group is repositioning itself in the technically advanced segment of the CR market by expanding its line of superior-grade products. This includes introducing injection-mold and sulfur-modified CR grades.

Even without the advantage of a weak yen, Tosoh has been the world’s top supplier of CSM to the high-end market for many years. To maintain and further that position, the Petrochemical Group has an ongoing product development program and plans for production capacity expansion in line with sales growth.

Demand for PPS resins from the principal customer for these products, the global automobile industry, is estimated to grow over the medium term. The Petrochemical Group is poised to meet that demand and continues to develop PPS grades for new applications in automotive parts to aid automakers reduce vehicle weight. The latter include already-developed Susteel^®-brand PPS, which features superior metal bonding for automotive applications. Also included is SGX-grade PPS resin, which a leading smartphone maker began using in its mobile phone casings in 2013. Several Chinese smartphone makers have subsequently also begun using SGX-grade PPS resin.

Tosoh’s medium-term business plan has as an objective ¥17 billion in operating income for the Petrochemical Group by fiscal 2019. This represents a 46.6% rise over the three years from fiscal 2016. The plan also aims for an operating margin of 10.4% for the group, an increase of 3.7 percentage points over fiscal 2016.

The plan’s focus in olefins is on ethylene, propylene, and cumene. A priority will be to optimize earnings by maintaining high-capacity utilization rates for the Petrochemical Group’s naphtha crackers. As part of that effort, the group will work to enhance its energy-intensity competitiveness and to build a pricing structure that incorporates an appropriate spread. The Petrochemical Group relies on its RPMS to deal with a changing business environment. It adjusts the mix of its cracker output, for instance, to maximize profitability. As a result, it is prepared to expand by taking advantage of opportunities that arise from managing the balance among production rates, product mix, and market prices.

Polymers, too, figure in the medium-term business plan, where the emphasis is on polyethylene and the functional polymers CR and CSM. The Petrochemical Group’s overall thrust in polymers is on differentiating its offerings and ensuring high added value. Its aim specifically for polyethylene is to expand domestic sales of specialty offerings for food, medical, and electronics applications and to cultivate overseas markets. Another priority for polyethylene is to boost quality to penetrate high-end markets.

The focus in functional polymers is to expand sales of special grades of CR, particularly of sulfur-modified and injection-mold CR. The group will also establish a second CSM plant and carry on with its plan to introduce a polymer with enhanced oil resistance.