JX Keeps an Eye on China

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JX Nippon remains committed to its investment in China, despite the protracted political rift between the governments in Beijing and Tokyo over the disputed Senkaku/Diaoyu Islands.

When contacted by Lube Report in February, company spokesman Hayashi Suzuki indicated that business in China is still important to JX and to its foreign investment strategy. JX has shown no indication that it is working to reduce its footprint in China.

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Currently, JX sales to China amount to more than 40 percent of the companys overseas sales. Last year JX reported more than $7 billion in sales to China, compared to $10.5 billion elsewhere outside Japan.

JX Nippon set up a venture in 2005 with Sinopec to form the Nippon Oil (Guangzhou) Lubricants Corp. In its most recent annual report, JX noted that against a background of progress in motorization in emerging countries, substantial growth is expected in worldwide lubricants markets, especially in Asia. The company has taken steps to steadily expand its operations.

Despite this, JX, which just announced a shakeup of its lubricants division last month, remains cautious about future investment in China. In the companys risk profile it lists risks related to business operations in China and other East Asian countries as its second biggest risk after access to raw materials abroad.

The Senkaku/Diaoyu crisis in the East China Sea has been steadily escalating in recent months. Three of the five islands, which are administered by Japan but also claimed by both China and Taiwan, were purchased by the previous Japanese government last year from a private owner. This purchase was seen by the Chinese government as proof that Japan intended to nationalize the islands and devalue Chinas claim.

Since then, there have been a series of tit-for-tat diplomatic exchanges as well as considerable protests and violence against Japanese companies and nationals in China. Several large Japanese companies, including Toyota, Mazda and Honda, have reduced their footprint in China due to security concerns and reduced demand.

However, while the dispute remains heated, the Chinese market remains a prime target for JX and other foreign petroleum companies such as ExxonMobil, Shell, Idemitsu Kosan and BP. Despite this, there remains a concern that Chinas demand for lubricant products may subside as a result of economic pressures, including an overheated real estate market.

On March 4 the Chinese State council announced a new measure to control the rapidly rising price of real estate in the country. The new policy levies a 20 percent capital gains tax on homeowners selling a property to prevent flipping properties.

China seems intent on reining its dramatic economic growth, built upon its exports, in order to enhance domestic demand. Outgoing Chinese Premier Wen Jiabao told the Chinese National Peoples Congress on March 5, We (China) should unswervingly take expanding domestic demand as our long-term strategy for domestic development. This could be a good sign for foreign lube companies looking at harnessing domestic Chinese demand.