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As a global wave of consolidation sweeps through the chemicals industry, Sumitomo Chemical Co., Japan’s second-largest chemicals maker, is trying to get a jump on its domestic rivals by merging with industry No. 3 Mitsui Chemicals Inc.

“The merger with Mitsui is the only way for us to accelerate the build-up of our presence in the global market . . . in the face of increasing megacompetition,” Sumitomo Chemical President Hiromasa Yonekura said in a recent interview with The Japan Times.

The Sumitomo-Mitsui merger, announced in November 2000, is expected to create the largest chemicals maker in Japan and become one of top 10 chemical companies in the world. The current leader in Japan is Mitsubishi Chemical Corp.

“We may conclude the merger earlier than planned if our preparations progress smoothly,” said Yonekura, 64, who became president of Sumitomo Chemical in June 2000.

Sumitomo and Mitsui are in the process of integrating their core petrochemical businesses into a joint venture to be named Mitsui Sumitomo Polyolefin Co. The equally owned venture will begin operations on April 1, focusing on plastic resins such as polyethylene and polypropylene. The resins will be used in various products, including plastic bags and containers and plastic parts for automobiles and home appliances.

The next step in the merger will be to set up a holding company, with Sumitomo and Mitsui as subsidiaries, in October 2003. Then all of the firms — the holding company, Sumitomo, Mitsui, and the polyolefin venture — will be reunited into a single corporation at the end of March 2004 to complete the consolidation.

“We initially decided to take these steps to smoothly integrate our information systems and other operations, but the general atmosphere at the moment is that we may not need to stick to the original plan to set up a holding company,” Yonekura said.

The synergies from the merger will save the two firms 26 billion yen in costs over the next three years in the polyolefin business, and 50 billion yen to 100 billion yen over four to five years in the rest of their operations, including basic, fine, agricultural and IT-related chemicals, Yonekura said.

At a time when European and U.S. chemical manufactures are accelerating consolidation of the industry and advancing into the fast-growing Asian market, it’s no wonder Yonekura is in a hurry.

For instance, U.S.-based major energy and petrochemical producers Exxon and Mobil, which merged in 1999 to become ExxonMobil, began operating an ethylene plant in Singapore last year with an annual production rate of 800,000 metric tons — its largest facility in the Asia-Pacific region.

Drawing on his background in corporate planning for Sumitomo both at home and abroad, Yonekura said recent changes in the industrial landscape make him increasingly concerned about the future of the Japanese chemicals industry.

“In this business environment, Japanese chemical makers will not survive without forming tieups with domestic or foreign companies and downsizing their production in this country,” Yonekura said.

Japanese chemical companies did brisk business from the ’60s through the ’80s, meeting strong domestic and overseas demand for petrochemicals by supplying a wide range of clients from automakers to appliance manufacturers.

With more and more Japanese manufacturers shifting their production bases from Japan to China and Southeast Asia, however, domestic demand for plastics is waning.

According to the Ministry of Economy, Trade and Industry, domestic annual production of ethylene, a basic material for petrochemicals, is projected to fall 10.9 percent from 2001 to 6.56 million tons in 2006.

In addition, a plan to reduce tariffs on imported petrochemical products will cause an influx of cheap foreign products into Japan and intensify price competition.

Starting in January 2004, Japan, Europe and the United States are scheduled to further reduce import tariffs on a number of of petrochemical products, including polyethylene and polypropylene, to 6.5 percent or less. In Japan, import tariffs are currently 11.12 yen per kg of polyethylene and 13.28 yen per kg of polypropylene.

Inspired by the Sumitomo-Mitsui merger plan, other Japanese chemical makers are also moving toward consolidating their domestic operations. In the meantime, Sumitomo is planning to expand in Asia.

Sumitomo plans to build a large plant that will produce 1 million tons of ethylene per year in Singapore, in cooperation with Anglo-Dutch oil giant Shell, Yonekura said.

It will be the third ethylene cracker plant for Petrochemical Corporation of Singapore (Pte) Ltd., a joint venture equally owned by a Sumitomo-led Japanese consortium and Shell, and will be completed in 2006, he said.

An ethylene cracker breaks down naphtha, a raw material, into various kinds of petrochemicals to make downstream products.

Although U.S. and European rivals are planning to invest heavily in the petrochemical business in China, the new manufacturing center of the world, Yonekura said his company needs more time to study the market.

“China is a very challenging market for us to do business in,” he said, citing the relatively shaky legal environment, lack of interest in intellectual property rights, and changing economic policies. “We will think about forming alliances with European or American firms to enter the Chinese market.”

For the time being, Sumitomo will continue exporting petrochemicals to China from Singapore, he said.

The new Singapore plant signals that petrochemicals will continue to be a core area for the Sumitomo-Mitsui entity. But some industry analysts say Japanese chemical makers should be trying to reinforce specialty petrochemical products by using advanced technologies if they want to stay alive in the global market. Manufacturing general purpose products is becoming less profitable.

In response, Yonekura said that Sumitomo will bring new technologies to the new Singapore plant to manufacture profitable products.

“Japanese makers have developed technologies to produce high-quality petrochemical products for industrial use that foreign companies cannot make,” he said. “We can still differentiate our products from those of foreign competitors and strengthen our position in the world market.”

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