Best Ever Financial Performance and Overseas Strategy

 

Hiromasa Yonekura, President, Sumitomo Chemical

Japanese Page

President Yonekura said that the financial performance for the March term was better than it might have been, and that there were many lucky factors behind this result. However, it is clear that Sumitomo Chemical’s high (38%) ratio of overseas sales and active investment in Korea are also major elements in this term’s dramatic profit increase. The company’s next major project is the Saudi Rabigh Plan. This involves taking on the challenge of constructing a complex that will be among the world’s largest that combines an oil refinery and petrochemicals. “Any concerns like those about Iran? Not at all!” laughs Yonekura cheerfully. With his inherent strong leadership and individuality, Yonekura is sure to continue to lead Sumitomo Chemical steadily forward.

Q: In your March account settlement, you achieved your best performance ever, with consolidated net sales of 1.3 trillion yen and net profits of 64.5 billion yen. How do you feel about this?

I think we had a lucky break. In petrochemicals, although the prices of crude oil and naphtha increased dramatically, the positive showing of the economy in China and the US partly made up for this. This meant that the product market conditions improved, especially in Asia, and, although this was insufficient in itself, it still helped to absorb the higher costs to some extent.

For IT-related business as well, last summer the market entered an inventory adjustment period. Although I’d been told “if the price of panels drops by half, the demand will increase tenfold,” in fact that was not the case, and the demand actually slowed. However, materials such as the company’s polarizing film, color filters, and so on have a considerably smaller excess capacity than that of panel-makers. Moreover, in a move with good timing, last year for the first time, we constructed two film plants in Korea. These have achieved a positive showing right from the start. As a result, this good performance compensated for the tough market conditions to some extent.

Q: We’ve heard various opinions about prospects for this year. What is your own view?

In petrochemicals, it depends on how you see the demand and market conditions in Asia turning out, but I think it will be down slightly from last year. In China BASF and several other complexes have been built. Some people believe that this might herald some kind of shift in demand. However, the strong demand of China as a whole will no doubt continue. Growth of around 11% or 12% in petrochemical products is predicted. Probably the Japanese petrochemical companies will want to maintain about the same results as last year.

Q: So it seems to strongly depend on trends in the price of crude oil.

Yes. However, if you compare things today with the way they were during the second oil shock, it’s not so bad. At that time the price of naphtha suddenly shot up, and the demand in Japan and Asia for petrochemical products dropped dramatically. It was so bad that we delayed the start of our company’s factory in Singapore by a year, after the first phase was completed. Compared to those days, recently, although the price of crude oil has exceeded $50, we have not experienced negative growth, so the impact on the Japanese and global economies is not all that severe. Also, although it is true that we are partly supported by the economy of China, the industry itself has developed elasticity.

Your predicted performance for the March 2006 term is net sales of 1.5 trillion yen, operating income of 100 billion yen, and net profits of 65 billion yen. These figures look a little low to us.

Under our current mid-term plan, we set our goals for 2006, the final year, as net sales of 1.33 trillion yen and net income of 65 billion yen, but we have already achieved close to this in FY 2004. However, it does not follow that we can therefore be optimistic about the future, so we cannot have too high expectations. Nevertheless, this time we estimated a high yen exchange rate of 100 yen to the dollar, and the price of naphtha as 38,000 yen. Those were the factors behind our estimates.

Q: One of the special features of Sumitomo Chemical is the high ratio of overseas sales (38%). Is that a reflection of your progress in global strategy?

Recently the greater part of our investment is overseas, so the overseas ratio of our sales is naturally going to go up. This year too, looking overseas, we have the second polarizing film plants in both Taiwan and Korea, and new plants such as the one producing MMA monomers in Singapore are starting up. As for domestic investment, there is really only methionine, and most of that’s for export, so it’s highly likely that our ratio of overseas sales will continue to increase.

Domestically, there’s also the reorganization of our facilities for propylene production facilities in Chiba. We will concentrate the lines into two main facilities, from the present three. Although the capacity will be unchanged, the fixed costs will decrease. Also, the PP for automobile use will be transformed to the gas phase method, and the propylene oxide will be augmented from 150,000 tons to 200,000 tons. We have various other plans such as further EPDM installation, but if we look at it as a whole, the vast majority of our investment will be overseas. Our investment budget for this year is roughly from 80 billion to 100 billion yen over the year. We don’t have any particularly large projects.

Q: We’ve heard that you have purchased the light-emitting polymer business from Dow Chemical.

That came about as a result of a direct approach from Dow’s president. Even before that Sumitomo Chemical and Dow had been competing intensely in technological development. Now we are able to make use of Dow’s technology, so that makes future development easier. Even though I’ve been talking about international strategy, that doesn’t mean that we’ll actively tackle just anything. We’ll only do something after proper consideration of how it fits in with our existing operations. We don’t intend to take on operations outside our core competencies.

Q: Another of your international projects is the Rabigh Plan with Saudi Arabia’s ARAMCO. How far have you got with your FS?

We’ve already entered the final phase. We’re now conducting work to finalize the investment amount, within a margin of error of plus or minus 10%. The plant scale is the same as we announced previously: 900,000 tons of PE and 700,000 tons of PP per year, as well as EG, PO, etc. We are working to see just how much we can keep the investment amount down in each of those areas, while still maintaining the scale, quality and function. We should have the final plan pretty much completed some time in July, and then we will officially sign a joint venture agreement.

Q: We hear that your start of operation is planned for 2008; aren’t the investment risks high?

No, not really. Our initial plan involved a total investment amount of 4.3 billion dollars. Our basic concept includes getting financing using Rabigh’s assets as collateral. So, for example, if the project finance is 70%, that means the capital is 30%, and since it will be an equal-share company, that means Sumitomo Chemical’s burden would be 15%. Our plan to start operations at the factory in 2008 is proceeding on schedule.

Q: It appears to be a very attractive location.

Yes, the location is ideal. It’s close to the markets of Asia and China, and because it’s on the Red Sea coast, Europe is just on the other side of the Suez Canal. In terms of transportation costs, if you compare transporting from Singapore to Shanghai, and from Rabigh to Shanghai, there’s only a difference of about one yen per kilogram. We can obtain competitive raw materials, and there’s a great benefit in that it will be a complex of the world’s largest class, amalgamated with petroleum refining.

Q: Aren’t you concerned about the political situation or security in the area?

No, not at all. It’s true that there was some concern about terrorism at one point, but later those responsible turned themselves in and the issue was resolved. Basically Saudi Arabia is quite secure politically, with everything revolving around the royal family. They put a lot of effort into security measures. And lately they’re having local elections and moving towards greater democracy.

Q: So it won’t turn out like the Iran Petroleum Project did?

(smiling): No, that’s impossible. In those days Iran had hardly any factories built with foreign capital, and those weren’t yet completed. Nowadays in Saudi Arabia there are lots of top-class companies from all over the world. If anything happened, it would be an international problem. We’re not worried about that at all.