Sojitz Corporation

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Indonesia Methanol Project

A trading company with manufacturing functions. Made in Indonesia, sold in Asia.

September 2011

*Affiliations and titles are current as of the time of the posting of this article.

Sojitz currently owns an 85% share of Kaltim Methanol Industri (KMI) in Indonesia and exports methanol manufactured by KMI to other countries in Asia, promoting sales for use as a chemical raw material and for energy applications. It is unusual for trading companies to have manufacturing functions including production operations and become directly involved in manufacturing in addition to their trading and marketing functions. We examine the methanol business in Indonesia to investigate how a trading company entered a new and largely unknown business field.

High Hopes for the Future of the Methanol Business

Indonesia has abundant resources including oil, natural gas, and coal and is a leading resource producer in Asia. KMI, a manufacturer that uses natural gas to produce methanol, was established in 1991. Sojitz did not initially invest in KMI, but as the relationship between the two companies deepened on the basis of trading and the provision of financing, Sojitz increased its stake in phases with the intention of strengthening the relationship, eventually acquiring 85% of KMI’s equity. Today, Sojitz is involved in all aspects of operations including production.

Methanol is positioned as a fundamental chemical raw material. There are numerous applications for methanol and it is used in secondary and tertiary processing. In recent years, use in energy-related fields has also increased. In this sense, methanol production plays a key role in upstream segments of a wide range of value chains.

Sojitz projected that methanol demand would increase in both the chemical and energy fields in conjunction with economic growth in emerging markets and other countries. For this reason, Sojitz-which had almost no experience in methanol sales-acquired KMI shares using local capital and increased its stake to 85% over the course of several years.

Development Despite the Economic Downturn

Full-scale production began in 1998. Technical knowledge and experience was necessary, so Sojitz sought support from a former employee of a Japanese business partner in the chemical industry with advanced manufacturing technologies and plant operating experience. Initial annual production target was 660,000 tons. However, it took three years to reach this point because of numerous complications that had to be overcome.

When production started, Asia was in the midst of a monetary crisis. Demand was sluggish, and methanol prices fell to minimum levels. It was under these circumstances that we had to develop methanol sales routes starting from the ground up.

Many industries require methanol including chemical makers and energy supply makers, so we made a list of prospective customers and made the rounds.

The plant tank could hold only 60,000 tons, and if we were not able to sell any, production at the plant would have to be suspended. This would in close numerous burdens concerning quality control and efficiency right at the start of production. As a result, we did not want to suspend operations, so we single-mindedly and desperately conducted sales. We flew to Taiwan, shifted to Indonesia, traveled to South Korea, and visited customers in Japan.

This period of intense effort continued for some time.

Conditions Improve

In 2003, economic conditions changed drastically. Asia entered a growth phase and economies turned upward. Demand for methanol grew steadily in the chemical products field for use in adhesives, synthetic fiber, and high-performance plastics and in the energy field.

Methanol produced in Indonesia is in competition with methanol from Middle Eastern countries such as Saudi Arabia, but it enjoys considerable geographic advantages for sales in Asia. The lead time before delivery for methanol from the Middle East is three weeks, but just one week is adequate for methanol from Indonesia. As a result, KMI was able to adequately meet customer needs and establish confidence in the market concerning its operations, and business grew steadily.

Collapse of Lehman Brothers

The collapse of Lehman Brothers in 2008 had repercussions around the world and was the first major setback since the Asian monetary crisis. Sales stagnated and product remained in the plant’s tanks. At this time, there was a risk that methanol would exceed the capacity of the tanks, so the day that production would have to be suspended was rapidly approaching.

As we worked to make sales, a customer in Taiwan with which we did business even before beginning methanol sales and build a solid relationship of trust over many years offered to help us out of our predicament. We received a major order for a buyer in China.

With this transaction, we began to develop the Chinese market, a market where we had done almost no business in the past. Following the collapse of Lehman Brothers, China acted as the engine of the global economy, and it was quite opportune that we established this sales route at that time. As a result, Sojitz was able to make it through the crisis and even established a sales route to a new and massive market.

Anti-Dumping

The Chinese market was extremely promising. Consumption of methanol as a chemical material was rising in proportion to the standard of living and GDP. There was also considerable demand for energy applications.

KMI, however, faced yet another crisis.

In June 2009, the Chinese government imposed anti-dumping measures (protective measures that a government can order under WTO standards to protect a domestic industry) against Indonesian methanol.

Following the collapse of Lehman Brothers, large volumes of Indonesian methanol were sold to China, and the Chinese government took measures to protect Chinese producers. This was a crucial moment for the methanol business-if the measures stood, it would lost its price competitiveness and could even be pushed out of the Chinese market altogether.

Sojitz adopted a policy of tacking the situation head on by explaining and seeking to gain the understanding of the Chinese government. Sojitz submitted past trade data, statements, securities reports, contracts and other documents to the Chinese government and explained its position in good faith.

KMI and Sojitz personnel worked together and made strenuous efforts, and in December 2010, the Chinese government decided to cut tariff rates even lower than they had been prior to the initial announcement.

Further Advances

Sojitz now sells 1 million tons of methanol annually (of which KMI accounts for 500,000 tons). This is equal to about 2% of the global market. Since sales are so strong, Sojitz buys methanol from producers other than KMI in the Middle East and other regions for sale.

The next goal is to establish a second KMI. We are now investigating and examining fields where we can apply the assets established over 12 years of operations including experience, operational expertise, and trusting relationships with customers.

The key to our next business development will be procuring competitive raw materials, but conditions concerning natural gas are changing rapidly including advances in shale gas extraction technology and increased use of LNG for electric power generation. To maintain sustainable growth in the methanol business over the long term, it will be necessary to overcome various risks including economic fluctuations, intense competition for resources, and changes in economic development and political conditions.

Sojitz’s methanol business will continue to overcome all obstacles by making use of the human power centered on fusing trading company function with manufacturer functions that has seen it through numerous problems in the past.

Column : KMI Wins Zero Accident Award Every Year Since 2005

KMI has received the Zero Accident Award presented by the Indonesian Department of Manpower and Transmigration every year since the award was created in 2005.

KMI places the highest priority on safe operations and conducts extensive preventive maintenance, periodic training, and safety guidance. These activities are evidence of the solidarity at KMI. The company will continue its safety measures with the aim of receiving the Zero Accident Award in the years to come.

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