Pressure on profitability to remain limited
After a decrease across all subsectors in Q2 of 2022, Japanese chemicals production has rebounded again in Q3. The short-term outlook remains positive, with modest but steady growth rates. Domestic household chemicals consumption continues to recover, due to pent-up demand for soaps and detergents (up 3.7% in 2022). At the same time, demand from automotive as a key customer sector is increasing, in line with an easing of the global chip shortage.
Overseas markets account for about 50% of chemicals sales, and external demand has increased again in Q3. However, weaker economic growth in advanced economies and in China could dampen exports in the coming months.
Higher energy prices remain a concern, although the industry does not overly depend on oil and gas supplies from Russia. While the weakness of the yen supports exports, it leads to higher costs for energy and commodity imports. Fully passing on higher input prices for energy and raw materials to end-customers remains difficult. Therefore, we expect margins of chemicals businesses to shrink in the Financial Year (FY) 2022 (April 1, 2022 to March 31, 2023). However, most companies recorded growing profitability in the FY 2021 due to favourable market conditions.
Payments in the Japanese chemicals sector take 30-120 days on average, and payment behavior has been good during the past two years. The number of payment delays and insolvencies in the industry has been low during the past couple of years, and we expect no significant deterioration in 2023. We assess the credit risk situation of the Japanese chemicals sector as “Good” across all segments, because pressure on profitability will remain limited, banks are willing to provide loans, and the majority of businesses are not highly geared.
In the long-term, high domestic production costs and cheaper competition from China and the US is likely to have a negative effect on output capacities, particularly in the basic chemicals subsector. We expect that businesses in this segment will try to climb up the value chain towards low-carbon and specialized products made for key buyer sectors like automotive.