How shortlived is the revival of Japan's petrochemical industry?

Robust demand from China for petrochemical products is fueling a revival of Japanese petrochem manufacturers, with 8 of the nation's 9 oil wholesalers and petrochemical producers showing record sales and profits for the six months through September. This boom definitely spells out a revival of the Japanese petrochem industry, which had been ailing since it underwent a slump during the 1980s and 1990s. In the Middle East, Saudi Arabia, Iran and Qatar all plan to start operating large petrochemical complexes from 2008, having an edge because the feedstock used to produce ethylene will be natural gas. Natural gas is less than 20% the cost of naphtha, which is used in Japan and many other countries. When these plants go on stream, we will witness a glut in petrochem supply--a situation the industry calls "the 2008 problem." However, is this recovery shortlived, and will it last after the several production facilities in China and the Middle East, benefiting from economies of scale and cheaper production costs, go onstream in 2008? The petrochem plants in China have been constructed on expansive lots, leaving plenty of space to expand. They make a striking contrast to Japan's petrochemical complexes, where small plants are crammed tightly into small plot, making them less efficient and more costly. With more land and strong government-backed efforts to attract investors, China is expected to gain competitiveness. As per Japan's estimates, global demand for petrochemical products is expected to reach 132.8 million tons in 2009 for ethylene--up 36% from 2003. During the same period, China's production capacity is projected to grow by 70% to 26.3 million tons. That is about five times what Japan can produce and almost as much as the United States, the world's largest petrochemical producer. Declining demand from China will affect Japan's exports and push down capacity utilization rates at domestic complexes. The facilities that lack competitiveness could be forced to close or weigh the option of alliances. Oil wholesalers and petrochemical producers are increasingly allying within the complexes where they operate. In November, Mitsubishi Chemical Corp. announced plans to invest 70 billion yen with Japan Energy Corp. to set up production facilities for naphtha and other materials at the Kashima petrochemical complex in Kamisu. Idemitsu Kosan Co. and Mitsui Chemicals Inc. have entered a tie-up at a complex in Ichihara, Chiba Prefecture, ranging from procurement of naphtha and other materials to production of polyethylene and polypropylene through a joint venture. Nippon Oil Corp. will take over administrative functions of its wholly owned subsidiary Nippon Petrochemicals Co. in April as part of its efforts to cut costs. Sumitomo Chemical Co. plans to join Saudi Aramco, a major overseas rival, in building a 950 billion yen petrochemical complex on the Saudi Red Sea coast- the largest investment in the Middle East by a Japanese company.