1/84 PETROCHEMICALS - Structurally Recessed Industry Law - Cartels

The Japanese petrochemical industry is in rather lackluster shape. The over 40 companies in the industry lost 150 billion yen in 1981 and near that amount in 1982 as Japan had a trade deficit in petrochemicals for the first time since the mid-1960s. The Japanese industry can not compete with US and Canadian makers as they use natural gas based ethane. which is cheaper than the naphtha based Japanese industry. Moreover, as the Japanese government has long viewed the oil refining industry as "strategic" the government has been forcing the petrochemical firms to buy Japanese made naphtha. which is more expensive than world prices. Thus in the structural Improvement plan under the new Structurally Recessed Industry Law, MITI is seeking to have 36% of the production capacity of the ethylene industry scrapped, as well as 22% in the polyolefin industry. Sumitomo Chemical was the first firm to move to meet its requirements under the plan with respect to both ethylene and polyolefin. Soon thereafter however, MITI and the industry came to loggerheads on quarterly production. Together with stronger domestic demand in line with an improving Japanese economy, imports are starting to fall off as they flow to meet the increasing demand in the US market. The industry is seeking to increase production by 10% in September-December 1983, over the same period a year earlier. Since the production cartel in the ethylene industry came to an end in June 1983, the industry has basically been following the demand forecasts made by MITI. Nevertheless, it has been producing over the demand forecasts made by MITI. Another factor favorably influencing the industry was that besides the decrease n imports from the US and Canada, as their respective economies improved, the Japanese had revoked special tariff measures giving lower tariffs for imports from Korea and Taiwan. Thus imports from those countries fell dramatically. Moreover, the fall in exports by the US and Canadian makers was not only to Japan but also to Southeast Asia and the Japanese are rushing to gain back their traditional markets. Nevertheless, MITI wants the industry to restrain themselves and not overextend themselves as before, which it believes was greatly responsible for the decrepit condition of the Industry. In fact, by late December, 1984 MITI issued a strong warning to the industry to control themselves as they were producing more than 10% above guidelines set for the quarter in late September, 1983. This later accelerated. In November, 1983 production was up 30% over the previous year. Production for October-December, 1983 looked certain to exceed 1 million tons, compared to MITI's plan of 940,000 tons. This was the highest level since 1979. Production for the January-March 1984 quarter is expected to be held down to 950,000 tons. Ethylene production hit a peak in 1979, fell by 13% in 1980, 12% In 1981 and another 2% in 1982, which was the lowest level in 10 years. In the first 6 months of 1983, production was down by 6% over the first half of 1982. Now things are beginning to pick up.

The Industry has been making significant improvements in energy conservation. The industry is now moving to bring to under 6000 kilocalories the amount of energy required to produce one kilo of ethylene. Only a few years ago it took 7-8,000 kilocalories. Following the formation of joint sales firms the summer of 1983 by the polyethylene firms, the move has gone upstream as the polyethylene film makers are starting to move to joint sales firms as well. With respect to polyolefin the industry, in line with their industry structural improvement plan, is moving to divide up production. They are also dropping a long practiced rebate custom with their customers. Under the custom, when they raised prices their customers were expected to raise their prices by whatever their costs increased. If they could not raise their prices, then rebates would be paid. This helped speed up negotiations on pricing for supplying polyolefin and also helped prevent price discounting among the polyolefin makers. This is expected to hit the polyolefin film processing industry particularly hard. That industry. made up of several hundred small firms, then applied for an extension of their antirecession cartel due to deteriorating business conditions. This cartel is based on the Small & Medium Enterprises Organization Law (Chusho kigyo dantai ho) It started in July 1983 and is set to run for 6 months, reducing production by 26.7%. The industry is also expected to start under its new structural Improvement plan under the new law in April, 1984. Concerning imports of petrochemicals a group of 10 importers of liquefied petroleum gas have formed a body to stabilize prices under the administrative guidance of MITI. The aim is also to improve bargaining power, particularly against Saudi Arabia and as they plan to cut imports from the Saudis by 20-40%. Japan imports 10,666,000 tons of its annual demand of 14,555.000 tons of LPG, half of this from the Saudis. The Saudis raised prices 5 times from November, 1982 to May, 1983 while other energy prices were going down. They raised the prices to uncompetitive levels and where possible users changed energy sources greatly cutting demand. Although the Saudis have since cut prices twice, the Japanese now plan to cut contract volumes. They regard this as the first time in a long time where users have set prices. . Naphtha imports in the first 9 months of this year topped the total imports for all of 1982. Moreover imports of natural gas from Canada and Saudi Arabia apparently have permanently retired two group owned methanol centers in East and West Japan, which had been "temporarily" closed earlier in the year. Imports under long ten contracts now meet 80% of Japan's demand.

THE JAPAN LAWLETTER, January, 1984 . Roderick Seeman