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Business trends

US shale products flood Asia markets as China builds tariff wall

Japan's petrochemical producers feel heat under sudden competition

A DowDuPont ethylene plant in Freeport, Texas. U.S. petrochemical companies have expanded capacity in light of the shale gas boom.

TOKYO -- Chemical products made from U.S. shale gas are flooding Southeast Asia as Chinese tariffs keep them out of what was supposed to be their largest market, with the resulting supply glut dimming earnings prospects at petrochemical companies.

"Additional tariffs imposed in the trade war have made it difficult for U.S. companies to export large quantities of shale gas products to China," Japan Petrochemical Industry Association Chairman Kohei Morikawa told reporters Thursday, referring to the 25% surcharge slapped on American goods.

"The products have been shipped instead to Europe and Central and South Americas, and are coming to Asia as well," said Morikawa, president of Showa Denko. Ethylene prices plunged to over $900 a ton in December from $1,400 in September in Asian markets.

With products diverted from China pushing down prices, high-flying petrochemical companies could now join the list of industries brought down by a drawn-out trade war between the world's two largest economies. The trend is particularly worrisome for Japanese producers, which have managed to improve plant operating rates through painstaking streamlining in light of the U.S. shale boom. 

For now, Morikawa remains upbeat. "The impact on the Japanese market will not be significant," he said. Products not shipped directly to China will eventually be absorbed by the Chinese market anyway by way of Europe, Central and South America, and Asia, he explained.

But Yoshiyuki Fukuda, senior economist at Toray Corporate Business Research, sounds a more cautious note. "Japan will not be immune" to the fallout, he said.

"As in the domino effect, when transportation and other costs are added onto prices of shale-gas-derived products, they lose competitiveness," Fukuda explained. "The glut could lead to a crash in prices."

In 2017 and 2018, big petrochemical companies like DowDuPont and Exxon Mobil opened multiple production facilities to make ethylene from shale gas. Output from these new facilities exceeds 4.5 million tons -- nearly 70% of annual production volume in Japan.

Ahead of this, Japanese companies had streamlined ethylene production facilities as they braced for competition from shale-derived products. Mitsubishi Chemical, Sumitomo Chemical and Asahi Kasei halted domestic facilities between 2014 and 2016, slashing annual capacity by a combined 1.1 million tons.

Ethylene plant utilization rates in Japan remained above 95% from November 2015 through June 2018 as a result. With crude prices stabilizing, Japanese companies have managed to revive earnings. Mitsubishi Chemical Holdings is on track to a second straight record full-year profit as the current term winds down in March.

But the shale revolution and the Sino-American trade war could mean a reversal of fortune. "In the second half of 2018, the shale impact started to emerge, albeit still indirectly," said an official at a major Japanese chemical company.

"We feel" the loosening of the global market, the official said.

Stock investors see competition from cheap products weighing on profits at petrochemical companies, according to an analyst at a Japanese securities brokerage.

Japanese output of ethylene came to 6.53 million tons in 2017, according to the Ministry of Economy, Trade and Industry and the Japan Petrochemical Industry Association. About 13% of this, or 840,000 tons, was shipped to Southeast Asia, India, South Korea and Taiwan as petrochemical products. The volume is larger than the annual output of Japan's biggest ethylene plant.

Ethylene demand in Japan will decline from 2017 estimates to 5.73 million tons in 2022, the ministry projected in October. Production is expected to decline 1.1% while output capacity remains roughly the same, expanding excess capacity.

Exporting to other Asian markets is key to maintaining production levels in Japan. But as cheap shale-gas-derived products weigh down the market, Japanese companies may have to streamline production facilities again.

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