TOKYO -- Four out of six major Japanese chemical manufacturers managed to shorten their cash conversion cycles in the six months through September due to enhanced inventory management and improving market conditions, freeing up funds to invest for their future growth.
Shin-Etsu Chemical, Sumitomo Chemical, Tosoh and Mitsubishi Chemical Holdings improved the business metric during the fiscal first half compared with the entire previous financial year. The cycle measures the time needed to retrieve production outlays. The cycle for Mitsui Chemicals remained flat, while Asahi Kasei recorded a slight increase.
All six companies saw their conversion cycles lengthen beginning around fiscal 2014. They were directing resources toward operations with high added value, and some of those businesses came with longer cash conversion cycles. Sumitomo Chemical's offshore agrichemical segment, for instance, tends to take longer to recover receivables due to the business customs involving farmers.
But fortunes have changed, as the Japanese companies have benefited from higher petrochemical prices linked to tighter supplies -- this year's Gulf Coast hurricanes disrupted U.S. petrochemical production while China strengthened environmental oversight.
While chemical producers are enjoying higher sale prices, raw material costs have remained comparatively stable -- improving cash positions as a result. Mitsubishi Chemical, which holds the world's top share for acrylic resin material, enjoyed price increases averaging 40% on the year for the material during the April-September half. The petrochemicals segment is driving the company toward larger revenue and profit, leading to better cash flow.
Inventory controls also are helping the companies shorten their cash recovery cycles. Mitsui Chemicals previously let workers on the ground estimate appropriate stock levels, but last fiscal year began using market trends and other data to determine appropriate inventory volumes. The company began using similar systems groupwide this fiscal year.
Mitsui Chemicals had to boost inventories temporarily for some products to make up for an output halt during the summer for regularly scheduled maintenance. Despite this, the new inventory control systems enabled the company to maintain its first-half cash conversion cycle at 122 days, mostly unchanged from the fiscal 2016 figure.
Shin-Etsu, which cut its cycle by more than 10 days, shrank inventory levels of silicon wafers. Orders for them have been increasing so much amid healthy demand for semiconductors that the company has been unable to keep up even when running at full capacity.
A shorter cash conversion cycle also indicates a reduced need for working capital, allowing more funds to go toward research and development as well as growth investments in high-value-added segments.