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ESG pressure to promote petrochemical consolidation in Japan

Social and financial pressures on Japanese companies to achieve carbon neutrality, a hot ESG topic, have started to transform Japan’s petrochemical industry, according to industry sources and experts interviewed by Mergermarket.

The pressures could lead to the large-scale consolidation of basic petrochemical facilities in waterfront industrial complex areas, in particular ethylene production plants, they said.

Ethylene is a fundamental material in plastic, polyethylene, synthetic rubber, synthetic fiber and detergent production. Ten Japanese companies including Mitsubishi Chemical Group [TYO:4188] now operate 15 ethylene plants in waterfront industrial areas, according to the Japan Petrochemical Industry Association.

In December 2021, Mitsubishi Chemical Group, Japan’s largest chemical company by sales, sent shock waves throughout the industry as it announced its decision to carve out its petrochemical and carbon business units in its financial year ending March 2024.

Jean-Marc Gilson, president and CEO of Mitsubishi Chemical Group, said "consolidation” of the country’s petrochemical industry is “inevitable” as the world’s focus on carbon neutrality will keep pushing the cost of “commodity businesses” in the petrochemical industry.

“As a leader, it is our duty to recognize the situation and to drive these consolidations,” he said at a press conference in December 2021. 

Consolidation led by state-backed fund possible

Two of the industry sources said that some major petrochemical companies, including Mitsubishi Chemical,could separate their major ethylene plants and form a new entity together with Japan Investment Corporation (JIC), a state-backed fund.

A source familiar with JIC said the fund would be willing to consider such a consolidation proposal at the request of the Ministry of Economy, Trade and Industry (METI).

“Such an idea is being talked about by some operators of petrochemical facilities,” the source said.

“Generally speaking, the chemical industry has an excessive number of plants, so such an option is possible,” the source said.

The source emphasized that neither METI nor any petrochemical company has made such a request to JIC yet.

Petrochemical companies would first need to agree to such an idea before JIC would take any action, the source added.

Basic petrochemical plant consolidation would fit into the government-set criteria for investments by JIC, the source also noted.

The JIC aims to supply more risk capital to Japan’s private sector to “promote business consolidation across industries and organizations,” according to its website.

A JIC spokesperson declined to comment.

Meanwhile, another source familiar with Mitsubishi Chemical Group agreed with the possibility of a JIC-led realignment.

Mitsubishi Chemical had also long engaged in negotiations with petroleum major ENEOS Holdings [TYO:5020] to have it acquire Mitsubishi’s ethylene plants, the second source said.

However, the talks did not go anywhere because the ethylene plants “are not very profitable” and ENEOS was more interested in focusing on clean energy like hydrogen, solar power generation and fuel cells, the second source added.

The second source said a JIC-led consolidation is “more realistic” than divesting these facilities to petroleum companies like ENEOS.

“Talks among private-sector companies alone will not work anymore,” the source said.

The second source also noted that maintaining domestic ethylene plants is a matter of economic security for Japan, so some Japanese players could form an alliance to maintain ethylene production for that purpose.

ENEOS declined to comment on previous discussions with Mitsubishi Chemical. Mitsubishi Chemical Group separately declined to comment.

Takeo Kikkawa, former outside board member of Mitsubishi Chemical Group, pointed out that the profitability of ethylene production business is relatively low.

This is one of the reasons many medium-sized chemical companies focused on more value-added specialty chemicals, such as Shin-Etsu Chemical [TYO:4063], boast higher profitability than major Japanese petrochemical companies like Mitsubishi Chemical, he said.

In addition to this low profitability, ESG-sensitive investors are now applying strong pressure on Japanese companies to reduce CO2 emissions. These two factors are now prompting Mitsubishi Chemical Group to get rid of its petrochemical business including its ethylene plants, he said.

Meanwhile, Mikiya Yamada, a senior analyst at Mizuho Securities covering the chemical and material sectors, noted it would not be politically easy for the government-backed JIC to use its public funds to consolidate the private-sector companies’ petrochemical plants.

“It would be difficult for the government to convince taxpayers to spend their money to save bulk chemical businesses such as ethylene plants,” he said, noting that losses of some ethylene plants in Japan would not evoke any critical risks for the economic security of Japan.

Yamada also noted that Mitsubishi Chemical Group and any other companies would have to accept a loss if they ever divest their bulk petrochemical business.

On 2 August, Nikkei reported that Mitsubishi Chemical Group has decided not to divest its petrochemical business. Instead, it is considering turning its petrochemical unit into a 100%-owned subsidiary first, and then integrating it with the corresponding business units of peers to set up a new joint venture, according to Nikkei.

Later, Mitsubishi Chemical Group issued a press statement saying the report is not based on what the company has announced, and “no concrete decisions have been made” yet.

Generally, chemical vendors can sell their “dirty” businesses and promote their pro-ESG stance, but buyers – no matter what industry – would have to create a narrative that justifies why they are acquiring such businesses, a sector expert suggested. Buyers would have to disclose tangible data (e.g., on how much emission rates will be cut etc) or be able to explain to shareholders the rationale for acquiring a high-emission asset.

An ENEOS spokesperson noted that under its long-term vision, the energy company is considering gearing up on chemical refineries to produce more chemical products. While this may or may not be in the form of M&A, this is one of the ESG-related initiatives it is considering for its petrochemical business, she said.

According to its midterm business plan FY20-FY22, it looks to enter the high-value-added derivatives business through the pursuit of chemical refineries.

Besides hydrogen and fuel cells, ENEOS still wants to strengthen its chemical business through bolt-on opportunities, a source familiar with ENEOS’ strategy said. Compared to its core business like refineries, the chemical business is still cleaner, he added.

ENEOS completed its acquisition of Tokyo-based JSR’s [TYO:4185] elastomers business, including the manufacture and sale of synthetic rubber, for an undisclosed sum, in April.

Ethylene or other basic chemicals are less likely to be of interest, as it seeks higher-value-added products – which generally require less CO2 emission to produce than the former – to meet its own ESG goals, the source familiar added.