Mitsui Chemicals. Annual Report Brought to you by Global Reports. Year Ended March 31, 1998

Transcription

1 Mitsui Chemicals Annual Report 1998 Year Ended March 31, 1998

2 Profile Mitsui Chemicals, Inc. ( Mitsui Chemicals ) was born as a result of a merger on equal terms between Mitsui Petrochemical Industries, Ltd. and Mitsui Toatsu Chemicals, Inc. on October 1, As it pursues chemistry s boundless potential, Mitsui Chemicals is contributing broadly to society through innovations and the creation of materials and products, while keeping in harmony with the global environment. Mitsui Chemicals aspires to become a diversified chemical company with a strong competitive position in the global market. Financial Highlights Reported Basis (Millions of yen) Change Net sales 681, , % Operating income 38,384 24, % Net income 11,702 11, % Stockholders equity 318, , % Total assets 1,298, , % Restated Basis (Millions of yen) Change Net sales 927, , % Operating income 49,330 46, % Net income 13,010 14,185 (8.3%) Stockholders equity 318, ,565 (0.3%) Total assets 1,298,236 1,257, % Mitsui Chemicals Fiscal 1998 consolidated results include the financial results for the second half of Fiscal 1998, the period from October 1, 1997 through March 31, 1998, of the businesses that the company succeeded to from the former Mitsui Toatsu Chemicals, Inc. owing to the merger on October 1, Please refer to page 23. Contents Message From the Management 1 Products at a Glance 4 Medium-Term Corporate Plans 5 Research & Development 12 Responsible Care 14 Topics 16 Management s Discussion and Analysis 23 Consolidated Financial Statements 28 Major Subsidiaries and Affiliates 44 Board of Directors 46 Corporate Data 47

3 Message From the Management Shigenori Koda, Chairman Akio Sato, President The Year in Review Fiscal 1998 Results The Japanese economy in Fiscal 1998, the year ended March 31, 1998, took on a strong recessionary tone. With the consumption tax hike from 3% to 5% and the abolition of a special income tax reduction measure in the background, consumer spending as well as housing investment slumped. In the year s second half, the public s loss of confidence in the financial system, coupled with the Asian currency crisis, added further to the economic woes. In the chemical industry, while production and shipments made solid progress by and large in the first half of the year, a decline set in during the second half. The business climate continued on its difficult path, with high feedstock costs and low product prices remaining unmitigated. In such a challenging climate, Mitsui Chemicals and its Group companies endeavored to boost profitability through an all-out sales effort and a thorough cost-cutting drive. As a result, consolidated net sales on a reported basis achieved a 70.5% increase over Fiscal 1997, at billion (US$5,157 million), while consolidated operating income recorded 38.4 billion (US$291 million). However, the adverse impact of securities revaluation losses attributable to the slumping stock market caused consolidated net income to stay flat from the previous period, at 11.7 billion (US$89 million). 1

4 Mitsui Chemicals Corporate Domain Industry Scope: Diversified chemical industry with a broad competitive scope Market Scope: Packaging and containers Automotive and transportation Adhesives and sealants Paint and ink Electric appliances Electronics and information Fibers Pulp and paper Healthcare Housing and construction Agriculture Who We Are Mitsui Chemicals is a company that made a fresh start on October 1, 1997 as a result of a merger between Mitsui Petrochemical Industries, Ltd. and Mitsui Toatsu Chemicals, Inc. We are one of Japan s representative diversified chemical companies, having a network of 41 production sites spanning 14 countries and a total headcount of 14,000 on a consolidated basis. The company is 16thranked by chemical sales among the global chemicals manufacturers. Having secured superior market positions in a number of business areas through the merger, we are now well equipped to meet the challenges of stringent global competition. Geographical Scope: Basic Chemicals & Petrochemicals Mainly Asia/Pacific Performance Materials Worldwide Mainly the U.S., Europe and Japan Technological Scope: Chemistry and related technologies Goals for Fiscal 2008 (Nonconsolidated ) 1. Net Sales Basic Chemicals & Petrochemicals billion Performance Materials billion Total ,200 billion 2. Current Profit billion (Return on Net Sales of 5%) The Mitsui Chemicals Strategic Direction Mitsui Chemicals aims to become a diversified chemical company with a strong competitive position in the global market. We will pursue business development with a focus on core businesses in two sectors: Basic Chemicals & Petrochemicals, and Performance Materials. Mitsui Chemicals aspires to achieve nonconsolidated net sales of 1,200 billion 10 years after the merger, in Fiscal The specific goals are shown in the table to the left. 2

5 Goals for Fiscal 2001 (Nonconsolidated) The Mitsui Chemicals Medium-Term Corporate Plans Mitsui Chemicals formulated and implemented toward attaining the goals set by strategic direction 3-year Medium-Term Corporate Plans, with Fiscal 1999 as the first year. The mission of the plans is to achieve an early realization of effective merger results. The following goals have been posted. 1. Net Sales billion 2. Current Profit billion (Return on Net Sales of 6.2%) The key words of the Medium-Term Corporate Plans are as follows: Focus Pursue business activities by identifying and focusing on core businesses in highperformance products, high-growth markets and high-profit areas in order to take maximum advantage of resources. Globalization Target U.S., European and Asian markets to develop core businesses by leveraging proprietary technologies and thereby establish a strong, globally competitive position. Streamlined Group Align Group business strategies and consolidate Group R&D to fortify competitiveness and ensure growth. Early Effective Merger Results Personnel reductions More efficient and effective utilization of R&D functions and sites Optimization of production sites, and thorough reduction of production costs Restructuring and consolidation of subsidiaries and affiliates Pursuit of market, product and technological synergies Caring for the Environment Improve environmental conservation in accordance with Responsible Care activities. Strengthening of Corporate Vitality Cultivate a corporate culture that pursues innovation and strengthen management resources. Mitsui Chemicals has been able to take a successful first step forward following its birth, owing much to the kind understanding of our stockholders. We are convinced that achieving the goals of the Medium- Term Corporate Plans as outlined above, and realizing the strategic direction will lead to a bigger contribution to the prosperity of our stockholders and customers. September 1998 Shigenori Koda Chairman Akio Sato President 3

6 Products at a Glance Basic Chemicals Major Businesses Major Products Market Share Japan Asia Petrochemical feedstocks Fiber intermediates Phenols Industrial chemicals Chemical fertilizers Ethylene No. 2 No. 2 Purified terephthalic acid No. 1 No. 3 Phenol No. 1 No. 1 Bisphenol A No. 1 No. 1 Ethylene oxide & glycol No. 3 No. 6 Ethanolamine No. 2 No. 2 Acrylamide No. 2 No. 1 Major Businesses Major Products Market Share Japan Asia Polymers Polyethylene PET resin Elastomers Styrenics Vinyl chloride Polypropylene HDPE No. 3 No. 6 LDPE + LLDPE No. 2 No. 2 PET resin No. 1 No. 3 Alpha-olefin copolymer No. 1 No. 1 Polypropylene No. 2 No. 2 Performance Materials Major Businesses Major Products Market Share Japan Asia Worldwide Specialty resins Urethane chemicals Building materials Performance polymers Fabricated polymer products Electronics and information materials Crop protection Fine chemicals Pharmaceuticals and healthcare Dyestuffs TDI No. 1 No. 1 No. 5 MDI No. 3 No. 2 No. 6 Spunbonded polypropylene No. 1 No. 1 No. 3 Silicon wafer protective tape No. 1 No. 1 No. 1 Pellicles No. 1 No. 1 No. 1 Functional dyes No. 1 No. 1 No. 1 (phthalocyanine dye for CD-Rs) Chemicals for plastic lens No. 1 No. 1 No. 1 with high refractive index Major Businesses Others Engineering, warehousing and freight transportation, finance and others 4

7 Mitsui Chemicals Medium-Term Corporate Plans Medium-Term Corporate Plans The Mitsui Chemicals Strategic Direction Mitsui Chemicals has set a strategic direction and goals for Fiscal 2008, the year ending March 31, 2008, envisioning the form its corporate existence should take 10 years hence. The strategic direction centers on Mitsui Chemicals becoming a diversified chemical company with a strong competitive position in the global market. The goals include enlarging Basic Chemicals & Petrochemicals sales by 20% and Performance Materials sales by 170% over the next decade. The Mitsui Chemicals Medium-Term Corporate Plans Mitsui Chemicals has formulated a 3-year Medium-Term Corporate Plan for the period spanning Fiscal 1999 through Fiscal 2001 toward achieving its strategic direction and goals. The foremost objective of the Fiscal 1999 Medium-Term Corporate Plan lies in achieving an early realization of effective merger results. Strengthening and expanding clearly defined core businesses and acceleration of actions to nurture next-generation businesses are also embodied in this plan. At the same time, restructuring of businesses that are weak or not aligned with the strategic focus will be promoted. 5

8 Mitsui Chemicals Medium-Term Corporate Plans Focus Mitsui Chemicals is focusing its activities on high-performance products, high-growth markets and high-profit businesses in order to take maximum advantage of its resources. The company has identified 17 core businesses from among its 48 strategic planning units: 10 from Basic Chemicals & Petrochemicals, and 7 from Performance Materials. 1. Identification, Strengthening and Expansion of Core Businesses [A] Basic Chemicals & Petrochemicals Sector Identify core businesses and concentrate efforts on strengthening and expanding them as well as on increasing profit [B] Performance Materials Sector Identify core businesses and build selectively on strengths [C] 2. Prospective Core Businesses [D] 3. Businesses to be Restructured [E] 6

9 73% [A] Core businesses are projected to account for as much as 57% and 73% of consolidated net sales and pretax earnings, respectively, in Fiscal In each core business, Mitsui Chemicals ranks among the top three in Japan and the top six in Asia in terms of market share. (refer to page 4) [B] Core Businesses of Basic Chemicals & Petrochemicals Evolue, Mitsui Chemicals new LLDPE, has high impact strength and excellent lowtemperature heat sealability. Petrochemical feedstocks Terephthalic acid Phenol/ Bisphenol Ethylene oxide, Ethylene glycol and derivatives AN (Acrylonitrile), AAM (Acrylamide) and derivatives Polyethylene (HDPE/LLDPE) Elastomers PET resin [C] Core Businesses of Performance Materials Urethane chemicals (TDI/ MDI/ POLYOL) Nonwoven fabrics Semiconductor materials Fine chemicals Healthcare [D] Prospective Core Businesses Hydroquinone, Resorcinol, Aniline and Meta/paracresol Papermaking materials Additives (Wax, CHEMIPEARL and LUCANT ) Toner resins Agricultural chemicals Mitsui Chemicals semiconductor materials such as pellicles and silicon wafer protective tape have strong competitiveness worldwide. [E] The styrene business and chlor-alkali/vinyl chloride businesses are earmarked for restructuring. Mitsui Chemicals is moving quickly to formulate and execute restructuring plans. Mitsui Chemicals has identified five prospective core businesses. In contrast to existing core businesses, all are specialties. 7

10 Mitsui Chemicals Medium-Term Corporate Plans Globalization Mitsui Chemicals will target U.S., European and Asian markets to develop core businesses, leveraging its proprietary technologies and thereby establish a strong, globally competitive position. 1. Basic Chemicals & Petrochemicals [A] Expand core businesses by focusing on the growing Asian market 2. Performance Materials [B] Promote proprietary technology-leveraged product and high-performancecapability product businesses through optimal site selection worldwide 3. Alliances [C] Leverage alliances and collaboration with influential partners [A] Mitsui Chemicals has classified its subsidiaries and affiliated companies in order to clarify their positions as a basis for Group strategy formulation. The classification process, which covered 134 domestic subsidiaries and affiliates, yielded 19 core companies that need to be strengthened through developing a fit with Mitsui Chemicals strategy, 17 independent companies having independent identities and offering prospects of high dividend payments, 19 requiring early application of profitability improvement measures, and others. On the basis of these classifications, Mitsui Chemicals will draw up specific plans to rationalize and integrate affiliated companies. [B] In a climate of global competition, Mitsui Chemicals is accelerating the formation of strategic alliances and expanding collaboration. 8

11 Mitsui Chemicals Major Overseas Sites Basic Chemicals & Petrochemicals Performance Materials Office [A] In Singapore, Mitsui Chemicals is building a Bisphenol A plant using proprietary technology. And in order to secure competitive feedstocks and to meet increased Southeast Asian demand, Mitsui Chemicals is actively studying construction of a phenol plant in Singapore. [B] Mitsui Chemicals has been successfully producing toner resins and CD-Rs in Japan, the U.S. and Europe in a global tripolar setup. Premix businesses for polyurethane are also deployed at four countries in Asia. At the same time, the company is studying local production of breathable film in Europe. Toner resin plant in the U.S. [C] In its purified terephthalic acid business, Mitsui Chemicals has formed alliances with Amoco Corporation in Indonesia and the Siam Cement Group in Thailand. In toner resins, the company has teamed up with the Zeneca Group to develop this business area in the U.S. and Europe. Moreover, Mitsui Chemicals is making advances in Europe in polypropylene compound operations in association with Petrofina, S.A. Streamlined Group Mitsui Chemicals is aligning its Group business strategies and consolidating R&D. At the same time, it is promoting business alliances and collaboration with domestic and overseas companies to fortify competitiveness and ensure growth. 1. Alignment of Group Strategies by Business and Function Mitsui Chemicals is clarifying the mission and business domains of its subsidiaries and affiliates. [A] 2. Alliances and Collaboration With Domestic and Overseas Companies [B] 9

12 Mitsui Chemicals Medium-Term Corporate Plans Early Effective Merger Results Mitsui Chemicals is formulating and executing strategic initiatives to achieve maximum effective merger results as soon as possible. Personnel reductions by 20% More efficient and effective utilization of R&D functions and sites [A] Optimization of production sites, and thorough reduction of production costs Restructuring and consolidation of subsidiaries and affiliates Pursuit of market, product and technological synergies [B] [A] Mitsui Chemicals has formulated an internal code called Basic Policy Concerning the Environment, Safety and Quality based on its strategic direction. Moreover, company-wide awareness is being promoted for Responsible Care Rules and Environment and Safety Management Rules, which Mitsui Chemicals has compiled. [B] Mitsui Chemicals is endeavoring to develop reduced environmental loading-type processes and products by giving consideration to the environment and securing safety throughout the entire life cycle of chemical substances, starting with the R&D stage. At the same time, Mitsui Chemicals is also concentrating its efforts on material recycling. Reduced Environmental Loading-Type Processes: Polymer production plant using metallocene catalyst Reduced Environmental Loading-Type Products: MILASTOMER (recyclable thermoplastic olefinic elastomer for automotive parts) Paper-strengthening resins to promote recycling of paper LACEA (biodegradable plastics) Strengthening of Corporate Vitality Establish a strong platform to ensure the deployment of Mitsui Chemicals basic strategy. Generate a corporate culture that always pursues innovation Aggressively strengthen the management resources needed to execute strategic initiatives 10

13 ESPOIR (breathable films) [A] Mitsui Chemicals has decided to consolidate as much as possible the activities of its ten R&D sites throughout Japan at a single location. A specific plan is now close to completion for achieving this consolidation by Fiscal SYNTEX (nonwoven fabrics) [B] Much synergy is expected. For example, in the personal hygiene market between nonwoven fabrics and ESPOIR breathable films. Another market synergy is in the semiconductor field between pellicles and ICROS TAPE. In terms of product synergy, significant merger benefits are forthcoming from phenol and polypropylene. The mutually complementing effect is large in the fields of materials processing and catalysts/synthesis process technologies. Caring for the Environment Actively address comprehensive management of chemical substances and industrial waste issues in line with the Responsible Care principles [A] Be on an active lookout for business opportunities while dealing with environmental issues [B] Activated sludge wastewater treatment plant at the Ichihara Works With regard to financial health, Mitsui Chemicals has set minimum numerical targets that must be met by Fiscal 2001 in order to fulfill the company s strategic direction. Return on equity (ROE) Target: at least 5% in Fiscal 2001 Break-even point (BEP) Target: BEP 83% in Fiscal 2001 Fixed expenses 195 billion Total assets turnover Target: 0.8 times or better in Fiscal

14 Research & Development R&D Strategies Develop and maximize core competencies Contribute to boosting profitability by strengthening and expanding core businesses. Create new products in the Performance Materials sector Mitsui Chemicals is aiming to develop new products in each of these fields: Environmentally friendly materials Healthcare materials New energy-related materials Information and communications-related materials Strengthen and nurture important core technologies Strengthen technologies for innovation in core businesses Acquire technologies with the aim of developing next-generation products Actively address global environmental issues Work on actively developing technologies required for maintaining existing businesses and technologies needed for generating new business opportunities in environment-related fields. Polymer market development center Pursue efficient and effective R&D management for early achievement of effective merger results Rationalize and consolidate R&D functions and sites, and review the R&D management setup in order to more efficiently and effectively manage R&D resources at hand, including those of affiliated companies. Consolidate as much as possible the activities of the company s ten Japanese R&D sites to a single location by Fiscal Cultivate an R&D organizational culture that allows researchers to fully demonstrate their strategic sense and creativity Investment in R&D (Nonconsolidated) 1,450 people in R&D as of April 1998 Total R&D expenditure (5% of net sales) Corporate Research % Divisional Research % Basic Chemicals & Petrochemicals: 30% Performance Materials: 70% 12

15 R&D Activities Mitsui Chemicals brings its industry-leading technology to bear on a wide range of fields from Basic Chemicals & Petrochemicals to Performance Materials. Accumulated technology for polymer design, computational chemistry, applied catalyst design and synthesis. Production process technology of organic intermediates and polymers. Molecular design technology integrated with computational chemistry using accumulated structure/function correlation data. Precision organic synthesis technology comprised of catalysis technology and a variety of sophisticated reaction and refining technologies. Performance polymer production technology integrating monomer production, polymerization, refining, characterization and morphology control. Precision processing technology: alloy formation, material processing, thin layer formation and fine tolerance processing. Biotechnology: gene recombination, enzyme application and cell fusion. Basic Chemicals & Petrochemicals Mitsui Chemicals is conducting ongoing research into catalysts, material properties and alloys. Through the development of new polyolefins and polymer alloys, Mitsui Chemicals continues to meet the intricate challenges of polymer chemistry. Mitsui Chemicals has also already brought on stream the world s most advanced polyethylene production technology, featuring a metallocene catalyst. Petrochemicals laboratory Performance Materials In response to ever-broadening needs in the marketplace, Mitsui Chemicals is developing new materials to support advances in electronics and information technology. Mitsui Chemicals is facilitating advances in the life sciences through research into pharmaceuticals and biotechnologybased agrochemicals. Electronics and information materials laboratory 13

16 Responsible Care Mitsui Chemicals recognizes that environmental conservation and securing safety are the fundamentals of corporate management as well as customers, and improves environmental conservation, safety and quality. Mitsui Chemicals strictly observes relevant regulations and ordinances, and is committed to voluntary management in connection with Responsible Care activities. Environment Contribute to environmental protection by developing new products and technologies Evaluate and reduce the environmental impact of products through their entire life cycle from product research and development to disposal Reducing air and wastewater pollutants [A] Energy conservation (responding to global warming) [B] Reducing industrial waste [C] Voluntary management of harmful air pollutants [D] Safety Give priority to securing safety and aim for accident- and injury-free operations [E] Secure safety for handling chemical substances in order to prevent injury or harm to people connected with Mitsui Chemicals activities such as employees and others related to plants and distribution Quality Supply high-quality products and services that earn the trust and satisfaction of customers and guarantee that they are fit for their intended purpose [F] 14

17 [A] SOx Emissions (FY1974=100) 100 [A] COD Emissions (FY1974=100) (FY) (FY) [B] The Specific Consumption of Energy (FY1991=100) 100 [C] Industrial Waste Recycling Rate (%) (FY) (FY) [D] Emissions of Harmful Air Pollutants (Tons/year) (FY) (Emissions of 10 harmful air pollutants that must be voluntarily managed in accordance with the Air Pollution Control Law, which was revised in May 1996.) [E] Employee Accident Frequency Rate ( Mitsui Chemicals) ( Japan Chemical Industry) (FY) Note: Frequency Rate = Number of disabling injuries 1,000,000 / [Total working hours] Disabling injuries = Injuries causing employees to leave their workplace for at least one day. [F] For pharmaceuticals and food products, Mitsui Chemicals carries out risk assessments based on the relevant regulations and ordinances, and as a matter of course implements strategies to ensure that quality is not compromised. Furthermore, Mitsui Chemicals revises Material Safety Data Sheets (MSDSs) periodically and provides them to customers. 15

18 Topics Basic Chemicals Merger Creates a Balanced Ethylene Capability in Japan One outcome of the recent merger is that Mitsui Chemicals now has four ethylene plants located in eastern and western Japan. In the Tokyo area, affiliate Ukishima Petrochemicals Co., Ltd. operates two facilities, one in Kawasaki and the other in Ichihara, while another affiliate, Keiyo Ethylene Co., Ltd., has a plant in Chiba. Osaka Petrochemical Industries, Ltd., a subsidiary, operates a plant in western Japan. This gives Mitsui Chemicals not only a fully integrated supply capability that extends from feedstocks through the production of ethylene, propylene and their derivatives, but also a logistical advantage. The company intends to leverage these advantages to boost its international competitiveness in the field of petrochemicals. Purified Terephthalic Acid in Southeast Asia In September 1997, P.T. Amoco Mitsui PTA Indonesia commenced operations at a purified terephthalic acid (PTA) plant. With an annual capacity of 350,000 tons, the new Indonesian plant will respond to brisk demand in that country and other countries in Asia. PTA has attracted considerable attention as a raw material for polyester fibers and as resin going into PET bottles, among other applications. Furthermore, Siam Mitsui PTA Co., Ltd. is presently constructing a PTA plant in Thailand with an annual capacity of 350,000 tons. The new facility is slated to come on stream in February Siam Mitsui PTA was founded in 1996 jointly with Cementhai Chemicals Co., Ltd., a comprehensive chemical company belonging to Thailand s Siam Cement Group. 16

19 Construction Proceeds at a Bisphenol A Plant in Singapore In June 1997, Mitsui Bisphenol Singapore Pte Ltd was established as a wholly owned subsidiary to build a Bisphenol A (BPA) plant with an annual capacity of 70,000 tons on Sakra Island. Slated for completion in the spring of 1999, this new plant will boost Mitsui Chemicals annual BPA production capacity in Asia, including Japan, to 210,000 tons. The new plant will meet rapidly rising BPA demand in ASEAN countries. This substance is used primarily as a raw material for polycarbonate resins used in electronics and electrical products, automobiles and machinery. Mitsui Chemicals is the first company to have established a local BPA production and supply system in the ASEAN region. Indonesia s First Acrylamide Plant Completed P.T. Mitsui Eterindo Chemicals, established together with Indonesia s Eterindo Group and Hong Kong s Cook Group, completed construction of an acrylamide monomer plant in August Operations began soon thereafter. Over the last several years, demand for acrylamide in the ASEAN region, including Indonesia, has increased steadily. There has been steady growth in demand, particularly for use as a bonding agent for adhesive tape. Looking ahead, high hopes are also held for orders driven by new applications such as paper-strengthening agents for recycled paper and water treatment agents. Acrylamide will thus play a significant role in efforts to conserve natural resources and protect the environment in the region. 17

20 Polymers Evolue Business Starts In 1996, Evolue Japan Co., Ltd. was established jointly with Sumitomo Chemical Co., Ltd. to produce Evolue, a metallocene catalyst-based linear low-density polyethylene (LLDPE) developed by Mitsui Chemicals. A gasphase process plant to produce Evolue was completed late in This facility is the first of its type in the world to employ metallocene catalyst. Efforts are continuing to bring the plant up to its full capacity of 200,000 tons per year. Evolue is superior to existing polyethylene polymers in terms of impact resistance and low-temperature heat sealability. These qualities are expected to open up applications in new areas and spark demand as a substitute for polymers presently being used. Evolue is also attracting a considerable number of inquiries from overseas. New TAFMER Plant Completed In August this year, Mitsui Chemicals commenced production at its newly completed No. 3 TAFMER plant, which is located inside the company s Ichihara Works. TAFMER, an alpha-olefin copolymer based on metallocene catalyst technology, is added to thermoplastics such as polyethylene and polypropylene to strengthen resistance against impact and tearing. Mitsui Chemicals already had TAFMER plants with an aggregate annual production capacity of 40,000 tons. The new facility was built to meet rising demand for resin modifiers from makers of automotive parts. 18

21 Consolidating Polypropylene Operations In 1995, the former Mitsui Petrochemical Industries, Ltd. and Ube Industries, Ltd. jointly established Grand Polymer Co., Ltd. to consolidate their polypropylene production, supply and research activities. To buttress international competitiveness in this area, the former Mitsui Toatsu Chemicals polypropylene operations were merged into Grand Polymer in July Grand Polymer s production capacity of polypropylene, GRAND POLYPRO, is now 659,000 tons per year. Completion of New PET Resin Plant Completion of a 60,000-ton-per-year liquid phase polymerization unit in October 1997 has given Mitsui Chemicals affiliate P.T. PETNESIA RESINDO a comprehensive PET resin production capability. P.T. PETNESIA RESINDO was established as a joint venture in Indonesia with Toray Industries, Inc. of Japan in 1994 in order to respond to surging demand in East and Southeast Asia for polyethylene-terephthalate (PET) resin for plastic bottles. 19

22 Performance Materials New Polyurethane Resin Premixture Plant in China Tianjin Cosmo Polyurethane Co., Ltd., which produces and sells urethane premixture in China, is building a new polyurethane premixture plant with an annual capacity of 5,000 tons in Suzhou. Positioned as a second production base alongside the existing Tianjin facility, the new plant is slated to commence production in November Demand for urethane is rising in China as a result of rapid progress in the country s automotive and household appliances industries. NBDA and NBDI Mitsui Chemicals has decided to become the first in the world to commercialize alicyclic diamine (norbornanediamine: NBDA) and alicyclic isocyanate (norbornanediisocyanate: NBDI). Plant construction is progressing on schedule at the Omuta Works. The new facility is scheduled to come on stream in NBDA is an epoxy resin hardening agent that boasts excellent water resistance and a high curing speed. There is much potential for NBDA in fields such as civil engineering, building construction and paints. NBDI, a urethane feedstock, also has distinctive features: excellent reactivity and weatherability. These properties are expected to lead to increased orders for use in paints and adhesives. 20

23 Development of Formaldehyde-Free Adhesives Mitsui Chemicals has developed formaldehyde-free adhesives for use in houses and furniture. One example is a polyisocyanate-based adhesive for wooden boards. Another is an acrylic emulsion adhesive for wooden decorative panels such as floor panels. With this product line, Mitsui Chemicals is focusing on making further inroads into the markets for adhesives used in wood-based products. Enlarging Production Capacity for Nonwoven Fabrics Mitsui Chemicals is a leading manufacturer of spunbonded polypropylene nonwovens. This product is in increasing demand in a broad range of applications such as diapers and other household products, industrial materials, and agricultural and civil engineering materials. In response, the company raised its annual production capacity to 27,500 tons in October Presently, Mitsui Chemicals is studying further expansion of production capacity. 21

24 Toner Resin Plant Comes on Stream in England Image Polymers Europe UK Partnership, a joint-venture company established with the Zeneca Group of the U.K., completed construction of a toner resin production plant in October Capable of producing 4,000 tons of this product per year, the new plant joins the existing U.S.-based Image Polymers Company s annual 5,000-ton toner resin facility and another plant belonging to Mitsui Chemicals in Japan. Development of New Super Absorbent, Biodegradable Materials Mitsui Chemicals has developed an amino acid-based absorbent polymer that demonstrates both outstanding absorbency and biodegradability. This polymer also has an excellent water-retention capability. These qualities and the ability of degraded amino acids to provide nourishment for plants make the polymer ideal for horticulture or desert greenery programs. Furthermore, combinations of this polymer and other biodegradable materials are expected to lead to an even broader range of applications contributing, among others, to the creation of a huge diaper industry. 22

25 Management s Discussion and Analysis Mitsui Chemicals came into being on October 1, 1997 from a merger of Mitsui Petrochemical Industries, Ltd. and Mitsui Toatsu Chemicals, Inc. in which the latter firm was dissolved. For the year under review, therefore, figures on a reported basis are those of Mitsui Petrochemical Industries for the first half combined with those of Mitsui Chemicals for the second half. Business results for the year ended March 31, 1997 are those of Mitsui Petrochemical Industries only. Because this method does not permit meaningful year-to-year comparisons, this section also presents figures on a restated basis as a matter of reference. On this basis, the previous fiscal year s results are the combined figures for the two companies, while those of Fiscal 1998, the year ended March 31, 1998, represent the reported basis figures plus those for Mitsui Toatsu Chemicals in the first half of the same year. In the restated basis figures, intercompany transactions between the premerger companies are eliminated from net sales. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (Millions of yen except per share amounts) Reported Basis Restated Basis Net sales , , , , , , ,456 Cost of sales , , , , , , ,768 SG&A ,436 70,474 71,776 72,903 72, , ,501 Operating income ,384 24,296 33,313 27,517 14,070 49,330 46,187 Other income (expenses) (17,197) (7,242) (13,308) (12,913) (9,839) (22,128) (17,103) Income before income taxes, minority interests and equity in earnings of nonconsolidated subsidiaries and affiliates 21,187 17,054 20,005 14,604 4,230 27,202 29,084 Income taxes ,290 7,534 12,241 10,176 2,761 14,963 14,879 Income before minority interests and equity in earnings of nonconsolidated subsidiaries and affiliates ,897 9,520 7,763 4,428 1,468 12,240 14,205 Equity in earnings of nonconsolidated subsidiaries and affiliates ,802 2, , Net income ,702 11,569 8,123 4,834 1,806 13,010 14,185 Total current assets , , , , , , ,660 Total investment securities and long-term receivables ,164 62,487 55,780 48,460 49, , ,829 Total assets ,298, , , , ,906 1,298,236 1,257,822 Total current liabilities , , , , , , ,726 Long-term liabilities ,972 89, , , , , ,223 Stockholders equity , , , , , , ,565 Depreciation and amortization ,422 23,936 23,162 23,952 21,856 52,802 52,695 Capital expenditures ,428 17,853 18,831 13,975 20,984 60,060 45,117 R&D expenses ,036 15,181 19,259 20,841 22,167 40,451 40,011 Return on sales % 2.90% 2.07% 1.34% 0.54% 1.40% 1.59% Return on equity % 6.99% 5.05% 3.08% 1.17% 4.08% 4.47% Return on assets % 2.34% 1.67% 1.01% 0.38% 1.02% 1.12% Net income per share (basic) Net income per share (diluted) Cash dividends per share

26 OPERATING RESULTS Fiscal 1998, the year ended March 31, 1998, was characterized by cooling personal consumption owing to the consumption tax hike and discontinuance of special tax cuts. Financial system instability in the second half, Asian economic turmoil and other factors also conspired against the Japanese economy to send it to the brink of recession. In the chemical industry, production and shipments in the first half of the fiscal year were generally favorable. They began to contract in the second half, however, as raw material prices were still rising and product prices declining. This created a persistently difficult business environment. Against this backdrop, consolidated net sales on a reported basis came in at 681,234 million (US$5,157 million), while the gross profit was 148,820 million and selling, general and administrative expenses were 110,436 million. The result was 38,384 million (US$291 million) in operating income, for a ratio to sales of 5.6%. On a restated basis, consolidated net sales rose by 3.9% to 927,688 million (US$7,023 million). This was due to the higher volumes of products sold. Gross profit was 206,279 million, almost unchanged from the prior year s 209,688 million. Selling, general and administrative expenses declined from 163,501 million to 156,950 million, leading to a gain in operating income from 46,187 million to 49,330 million (US$373 million). The operating income margin was 5.3%, largely unchanged from the 5.2% recorded a year earlier. In the discussion that follows, the term the companies refers to the aggregate of Mitsui Chemicals, its 43 consolidated subsidiaries and 160 other affiliates accounted for by the equity method. SEGMENT INFORMATION BUSINESS SEGMENTS The operations of Mitsui Chemicals ( the Company ) and its subsidiaries and affiliates ( the companies ) are divided into four business segments. Basic Chemicals principally comprises basic raw materials, fiber intermediates, phenols, industrial chemicals and chemical fertilizers. The Polymers segment produces mainly polyethylenes, elastomers, PET resins, styrene and polypropylenes, while the Performance Materials segment is responsible chiefly for industrial resins, construction materials, performance polymers, fabricated polymer products, electronics and information materials and agricultural chemicals. The Others segment includes mainly plant construction and maintenance, warehousing and transport, and loans and asset management. A more detailed discussion of each segment follows. Basic Chemicals Overview: This segment manufactures and markets basic raw materials and basic chemical products. Osaka Petrochemical Industries, a subsidiary, manufactures and sells petrochemical feedstocks, selling some to the Company and the remainder directly to other users. Mitsui Toatsu Fertilizers makes and markets chemical fertilizers and other products from materials supplied by the Company. This segment s feedstocks are also used by a number of affiliates, including Toyo Phosphoric Acid, Chiba Phenol, Keiyo Ethylene, Nippon Epoxy Polymers, Ukishima Petrochemicals and GE Plastics Japan, to manufacture a variety of products; some are sold to the Company, the remainder are sold through other channels. Mitsui Bisphenol Singapore is currently constructing bisphenol production facilities in that country, while Siam Mitsui PTA is doing the same for synthetic textile raw materials in Thailand. A total of 22 other firms are involved in this segment. 24

27 Results: Sales of ethylene, propylene and other petrochemical feedstocks saw some loss of momentum in the year s second half, but generally maintained a favorable tone. Raw materials for synthetic fibers trended well in the first half, but in the second were impacted by the Asian economic crisis and in particular by more sluggish overseas markets. Phenol-related products, in contrast, saw good demand both domestically and abroad. The result was net sales of 253,634 million (US$1,920 million) and operating income of 18,561 million (US$141 million), both on a reported basis. Polymers Overview: This segment manufactures and sells synthetic resins. Grand Polymer, a subsidiary, and Taiyo Vinyl, an affiliate, use the Company s products as feedstocks to fabricate and market their own products. Vinychlon produces and markets PVC compounds, while Evolue Japan is constructing manufacturing facilities for synthetic resins. Du Pont-Mitsui Polychemicals performs production on behalf of the Company and produces plastics for sale to its own customers. Ukishima Polypropylene manufactures polypropylenes as a subcontractor for the Company. In addition to these, 20 companies are included in this segment. Results: Polypropylene was impacted when domestic and overseas demand fell in the fiscal year s second half, limiting domestic sales growth slightly and shrinking exports. Demand for polyethylene terephthalate was sluggish as orders contracted in the second half and sales declined in overseas markets. Although polypropylene moved favorably in the first half, demand shrank in the second. Special olefin copolymers trended well, both at home and abroad. In consequence, reported-basis net sales for the segment came in at 162,948 million (US$1,234 million) and operating income was 6,872 million (US$52 million). Performance Materials Overview: This segment is involved in the manufacture and sales of functional and fine chemical products. Mitsui Pharmaceuticals uses the Company s products as raw materials in its main line of manufacturing and marketing drugs and others. A number of other domestic subsidiaries make the same use of the Company bulk products, and resell some of the finished products back to the parent. Six other significant contributors to manufacturing and sales activities in this segment are Sun Technochemicals, Sakushin Kogyo, Adler Construction Material, Hokkaido Adler Construction Material, Miike Dyes Works and Mitsui Toatsu Seibu Building Material. Mitsui Toatsu Fine Chemicals markets fine chemicals and others made by the Company. In Korea, Kumho Mitsui Chemicals makes and sells urethane resin feedstocks. A total of 65 other companies are part of this business segment. Results: Sluggish construction, auto and other markets hurt demand for urethane resin feedstocks in the second half, but exports to China were brisk. Papermaking materials and additives such as wax did relatively well. Demand rose for nonwoven fabrics, principally for sanitary materials, while semiconductor materials saw increased demand in U.S., European and Asian markets. Gains in toner binder were supported by strong exports by the domestic toner makers. Agricultural chemicals and functional pigments were all hurt by sluggish demand in their respective markets, but pharmaceutical intermediates and other products for the healthcare business, as well as dyestuffs, trended favorably. The result for this segment was net sales of 233,212 million (US$1,765 million) and operating income of 11,773 million (US$89 million), both on a reported basis. 25

28 Others Overview: Mitsui Sekka Engineering and Mitsui Toatsu Plant Services perform construction and maintenance services for manufacturing facilities for the Mitsui Chemicals Group. MTB is the subsidiary charged with arranging loans to the Group companies, while San Analysis & Consulting Service performs testing, analysis and inspection of chemical substances. Mitsui Chemicals America and Mitsui Chemicals Asia coordinate business activities in their respective regions, while Mitsui Chemicals Europe handles sales of the parent company s products. Sun Medical and Sanshin Kako carry out manufacture and marketing of dentistry materials and assorted synthetic resin products, respectively. In Korea, Daiichi Chemical Industry is investing in that country s petrochemical business and undertaking related operations. There are 50 other companies participating in this segment. Results: Japan s stagnant economy impacted adversely on engineering, warehousing and transport, and other operations, resulting in reported-basis net sales of 31,440 million (US$238 million) and operating income of 3,232 million (US$24 million). GEOGRAPHIC SEGMENTATION Fiscal 1998 s overseas net sales on a reported basis were 116,318 million (US$881 million), accounting for 17.1% of total net sales. By region, sales in Asia were 77,543 million (US$587 million), equivalent to 11.4% of the total, while the Americas turned in 16,123 million (US$122 million), Europe 17,437 million (US$132 million) and other areas 5,215 million (US$39 million). OTHER INCOME (EXPENSES) For the year under review, interest and dividend income was 1,903 million (US$14 million), while interest expenses totaled 10,179 million (US$77 million), bringing net financial expenses to 8,276 million. In addition, a loss of 1,586 million was posted on disposal of property, plant and equipment and other net was an expense of 7,335 million, mainly due to a revaluation loss on stocks. The result was that Other Expense came to 17,197 million (US$130 million). All figures are on a reported basis. On a restated basis, interest and dividend income declined to 2,533 million (US$19 million) from the previous term s 2,840 million. In line with low domestic interest rates, interest expenses were down to 15,992 million (US$121 million). The result was net financial expenses of 13,459 million. In Fiscal 1997, 1,292 million was posted as a loss on disposal of property, plant and equipment; in the year under review this figure was 2,232 million (US$17 million). These changes and a large revaluation loss on stocks resulted in a 29.4% increase in Other Expenses to 22,128 million (US$168 million). NET INCOME On a reported basis, income taxes were 11,290 million (US$85 million), equivalent to an effective tax rate of 53.3%. Income before minority interests and equity in earnings of nonconsolidated subsidiaries and affiliates came in at 9,897 million (US$75 million). Although minority interests in earnings of consolidated subsidiaries were a negative 997 million (US$8 million), equity in earnings of nonconsolidated subsidiaries and affiliates posted 2,802 million (US$21 million) because of favorable business results at related companies. 26

29 The same items calculated on a restated basis show 14,963 million (US$113 million) in income taxes for the term, for an effective tax rate of 55.0%. The result was a 13.8% decline, to 12,240 million (US$93 million), in income before minority interests and equity in earnings of nonconsolidated subsidiaries and affiliates. Minority interests in earnings of consolidated subsidiaries increased by 54.4% from 799 million to 1,234 million (US$9 million), while equity in earnings of nonconsolidated subsidiaries and affiliates jumped 157.3% to 2,004 million (US$15 million) from Fiscal 1997 s 779 million. The foregoing factors led to reportedbasis net income of 11,702 million (US$89 million) and fully diluted net income per share of (US$0.159). Fiscal 1998 ROE, based on average stockholders equity, was 4.81%. On a restated basis, net income was 13,010 million (US$98 million) and ROE came to 4.08%. FINANCIAL POSITION On a reported basis, current assets at the end of Fiscal 1998 were 616,871 million (US$4,670 million), while current liabilities were 612,583 million (US$4,637 million), for a current ratio of 100.7%. On a restated basis, current assets rose 3.0% year-to-year to 616,871 million (US$4,670 million) and current liabilities declined 0.7% to 612,583 million (US$4,637 million); this led to a 3.6 point improvement in the current ratio to 100.7%. In current assets, receivables decreased 1.8% on account of lower sales, while cash and time deposits increased 86.5% due to the retention of surplus funds. In current liabilities, the total of short-term bank loans and the current portion of long-term debt fell 2.4% and payables decreased by 11.8% due to lower purchases. The total of investment securities and long-term receivables on a reported basis was 142,164 million (US$1,076 million). On a restated basis, this figure was down 17.3%. Investment securities decreased 10.1% due to the transfer of listed securities to marketable securities in current assets. Reported-basis long-term liabilities were 349,972 million (US$2,649 million), yielding a debt/equity ratio of 130.4%. On a restated basis, this ratio increased 10.4% year-to-year. This was the result of the issue of corporate bonds during the year under review. CAPITAL EXPENDITURES Consolidated capital expenditures in Fiscal 1998 were 46,428 million (US$351 million) on a reported basis, centering mainly on upgrading existing facilities, energy conservation and rationalization. On a restated basis, the figure was 60,060 million (US$455 million), representing a 33.1% increase over the year-prior level. This reflects efforts to bolster the production facilities of companies involved in polymer production. CASH FLOWS In Fiscal 1998, net cash provided by operating activities was 43,110 million (US$326 million), with roughly 90% of this amount accounted for by depreciation and amortization. Net cash used in investing activities was 53,860 million (US$408 million). Net cash provided by financing activities of 16,297 million (US$123 million) resulted in cash at March 31, 1998 of 32,641 million (US$247 million). 27

30 Consolidated Balance Sheets MITSUI CHEMICALS, INC. AND CONSOLIDATED SUBSIDIARIES March 31, 1998 and 1997 Thousands of U.S. dollars Millions of yen (Note 3) ASSETS Current assets: Cash ,641 10,229 $ 247,093 Time deposits ,604 6,291 Marketable securities (Notes 5 and 6) ,756 19, ,185 Receivables: Trade notes and accounts: Nonconsolidated subsidiaries and affiliates ,751 30, ,036 Other , ,773 1,958,350 Other ,171 16, ,965 Inventories (Note 4) ,183 54,003 1,136,889 Deferred income taxes ,390 10,522 Other current assets ,676 10,058 73,247 Allowance for doubtful accounts (2,226) (869) (16,851) Total current assets , ,791 4,669,727 Investment securities (Notes 5 and 6): Nonconsolidated subsidiaries and affiliates ,134 33, ,636 Other ,144 12, ,491 Long-term receivables: Loans to nonconsolidated subsidiaries and affiliates ,510 9, ,111 Other ,911 1,433 22,036 Deferred income taxes ,278 62,665 Other non-current assets ,939 7, ,939 Allowance for doubtful accounts (752) (1,045) (5,693) 142,164 62,487 1,076,185 Property, plant and equipment (Note 7): Land ,346 45,400 1,334,943 Buildings and structures , ,129 1,809,296 Machinery and equipment , ,237 6,275,640 Construction in progress ,324 6, ,133 1,268, ,559 9,604,012 Accumulated depreciation (737,830) (342,739) (5,585,390) Property, plant and equipment, net , ,820 4,018,622 Intangibles ,341 1,862 63,142 Total assets ,298, ,960 $ 9,827,676 The accompanying notes are an integral part of these financial statements. 28