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Chemical maker AGC sees profit uptick on Southeast Asian sales

Plastic sales buoy Japanese company while glass business rebounds

A factory owned by AGC's PVC subsidiary in Thailand. The Japanese company has become Southeast Asia's largest producer of the chemical.

TOKYO -- AGC, formerly called Asahi Glass, is likely to book a slight increase in group operating profit to around 125 billion yen ($1.15 billion) in 2019 as polyvinyl chloride demand grows in Southeast Asia and material costs fall.

The main source of revenue for AGC has shifted from glass to chemical products, a trend reflected by its name change in July. The Japanese company has become the largest producer of PVC in Southeast Asia after buying Thailand's Vinythai in 2017, and operating profit for the chemical products business overtook the gains from glass and electronics materials in fiscal 2015.

AGC controls half of Southeast Asia's PVC market by production, and its chemical products segment generates more than half its group operating profit. 

Demand for PVC, used to make products like water piping, is predicted to remain firm this year as the region proceeds with infrastructure development. The cost of ethylene, a raw material, is also falling as the U.S. produces more shale gas.

The cost of caustic soda, used to make synthetic fibers and paper, is also anticipated to recover. Quality controls introduced by India last year have redirected the material to Southeast Asia, a main market for AGC, reducing prices there. But producers are moving to comply with India's new regulations to increase supply there again, which could boost caustic soda prices in neighboring countries down the road.

The company's glass segment is also expected to book its first operating profit increase in three years as the rise in fuel costs plateaus. AGC's operating profit jumps 300 million yen annually for every $1 drop in a barrel of Dubai crude. The benchmark crude was projected to trade at $72.60 per barrel last year, but the spot price has recently hovered around $55.

Last year, the Japanese chemical company's consolidated profit is estimated to have edged up to 120 billion yen, and sales by 4% to 1.52 trillion yen. Revenue from Vinythai and a biopharmaceutical subsidiary contributed to the yearly increase.

Group sales probably will continue to grow as the company launches more factories overseas. Architectural glass shipments are increasing in Brazil with the opening of a new facility there, and insulated glass sales for building renovations in Europe are brisk. A new Moroccan plant will begin production of automobile glass as soon as this month.

In the electronics materials business, however, depreciation costs are running up for a liquid crystal display glass factory in China that will open this year. Falling prices for such glass are also a concern. Although inventory disposal costs from last year for specialty glass will not be booked in 2019, this factor will be unable to compensate for the depreciation costs.

Glass shipments in AGC's home market of Japan have sunk 40% from their peak in 1990, according to the Ministry of Economy, Trade and Industry. A slump in domestic home construction has hurt architectural glass sales, in particular, along with cheaper Chinese imports used in buildings.

Demand for automobile glass, for which AGC controls about 20% of the global market, is also easily swayed by the global economy. China's economic slowdown could also have an impact in the future.

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