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Bloated inventories squeezing capital investment

Mitsubishi Chemical's Kashima plant in Kamisu, Ibaraki Prefecture, produces ethylene.

TOKYO -- Mounting inventories have Japanese manufacturers losing their willingness to spend on new facilities and equipment. And an increasingly uncertain future is only making them more cautious.

     Japanese steelmakers have been turning out less than they were before spring, largely due to a huge global oversupply and slower car sales at home.

     Yet, until recently they remained largely optimistic about the future. Koji Kakigi, chairman of the Japan Iron and Steel Federation, and president and chief executive of JFE Steel, not long ago said he expects crude steel production to begin recovering, at least to a certain extent, in October.

     Kakigi's scenario, however, has not fell into place.

     At the end of July, Japan's total inventory of hot-rolled, cold-rolled and surface-engineered sheet iron held by makers and distributors stood at 4.06 million tons. This is above the 4 million ton mark regarded as appropriate for inventory levels. Sheet iron is used for automobiles as well as for machine and construction materials.

     A month later, the level was 4.25 million tons, due to increased imports, especially from South Korea. That country's steelmakers have been intensifying their marketing in Japan, where they can reap bigger profits.

     Their Japanese rivals are not happy with the situation. Inventories in Japan are not likely to remarkably decrease anytime soon. Sales were slow in September due to days of heavy rain as well as a long string of national holidays.

     China's slowing economy and shaky stock markets around the world are also weighing on Japanese steelmakers. According to the latest Indices of Industrial Production, published by Japan's Ministry of Economy, Trade and Industry, production has weakened while inventories have slightly grown.

     The chemical industry's prospects look grim, too.

     Japan's ethylene factories had been maintaining utilization rates of 90% or higher for 21 months in a row through August, with much of the credit going to the weakened yen.

     In September, a representative of a leading Japanese chemical company visited China and became alarmed by what he witnessed -- a sharp fall in demand for his company's product. "We need to brace for possible adverse effects of China's slowing economy," the representative said.

     Ethylene is one of the most essential materials used in manufacturing; it goes into a wide array of goods, from cling wrap to automotive parts.

     Companies in other sectors appear to be remaining buoyant. According to the Bank of Japan's Tankan quarterly business survey for September, released on Oct. 1, the capital investment plans of large enterprises and all industries for this fiscal year was revised upward to an increase of 10.9%, an improvement from 9.3% in the June survey.

     In fact, more businesses are pumping more money into their specialty technologies.

     Alps Electric in October launched a 10 billion-yen ($83.3 million) investment plan in a bid to expand production of smartphone camera components.

     Murata Manufacturing is planning to put another 12 billion yen or so into increasing its capacity to make smartphone telecommunication components.

     Japan's Asahi Kasei and Mitsui Chemicals are hoping to spend more money to increase domestic production of highly functional unwoven cloth. The cloth is used for facial masks and diapers -- items that are being snapped up by foreign tourists to Japan.

     However, it is not sure how long this kind of aggressive investment activity can last.

     According to statistics prepared by the Japan Machine Tool Builders' Association, August machine tool orders were lower than year-earlier levels for the first time in 23 months. This was largely due to Chinese smartphone makers reducing their orders for manufacturing equipment.

     Preliminary figures for September also show domestic demand was weaker than a year earlier for the first time in 27 months. 

     The strong domestic demand on which Japanese chemical makers had been counting on as a growth driver now appears to have been a temporary upturn -- one that reflected a government program which subsidized up to 150 million yen of highly energy efficient machinery.

     Small to medium enterprises, which had been cautious about updating their facilities, jumped at the offer in March, when the government began taking applications for the subsidy. When the 80 billion yen earmarked for the program quickly dried up, these companies stopped pumping money into their plants and equipment.

     An employee at a machine tool maker in Osaka Prefecture said that the company rarely receives orders. "Customers," he said, "have been putting off making decisions." 


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