Commodity rout cuts ¥970 billion from Japan's major trading houses

Bloomberg

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Mar 25, 2016

The nation’s biggest trading companies, stalwarts of the economy, expect to book combined writedowns of at least ¥970 billion ($8.6 billion) as ill-timed investments in commodities ranging from shale gas to copper mines erode profitability.

The writedowns for the year ending March underscore the predicament the sogo shosha (general trading houses) find themselves in after investing heavily in metals and energy at the height of the commodities boom, only to see prices tumble.

The Bloomberg Commodity Index, a measure of returns from 22 raw materials, has dropped about 40 percent in the last two years, and earlier this year touched the lowest level since 1991. Mitsubishi Corp. and Mitsui & Co. are expecting their first net losses since they were founded in their current form more than 60 years ago.

“These writedowns are significant,” said Tom O’Sullivan, founder of Mathyos, a Tokyo-based energy consultant. “They will review strategy and need to further diversify as margins in the intermediary businesses, which has been their traditional strength, are compressing.”

Mitsubishi, the nation’s biggest trading company by market capitalization, said Thursday it expects its first net loss on a group basis after booking an impairment charge of ¥430 billion on its metals and energy businesses. Mitsui said Wednesday that it expects its first annual net loss after booking ¥260 billion in one-time charges on its commodities businesses, adding to an earlier announcement of a ¥20 billion writedown.

Sumitomo Corp. expects ¥170 billion in writedowns for the year, including an impairment related to a nickel project in Madagascar. In February, Marubeni Corp. announced a ¥72 billion writedown on oil and gas projects in the Gulf of Mexico and North Sea. Itochu Corp. said that it expects ¥18 billion in impairments.

In the fiscal year ended March 2015, Mitsubishi earned about a quarter of its profit from its resources business, such as oil and gas exploration and copper and coal mining. Mitsui derived more than two-thirds.

For every dollar drop in the price of crude, Mitsubishi’s full-year earnings fall by about ¥1.5 billion, while every $100 decline in copper results in ¥1.4 billion in lost earnings, according to a presentation made by the company in February when it was still forecasting net income of ¥300 billion this fiscal year.

Japan’s trading companies tend to reassess the value of assets once annually near the end of the fiscal year, accounting for the recent flurry of revisions.

Itochu Corp. is poised to supplant Mitsui as the nation’s second-biggest trading house after Mitsui’s impairment charge announcement trimmed its market capitalization to ¥2.3 trillion Thursday. That leaves Mitsui just slightly bigger than Itochu, which overtook Sumitomo as the country’s third-biggest trader about three years ago.

“Mitsui’s impairment was greater than the market expected,” said Fumio Matsumoto, a fund manager at Dalton Capital Japan Inc. in Tokyo. “Since Itochu has very little impairment risk and it has a policy of slightly increasing dividends, there is a sense of security with their stock.”

Itochu derived all of its profit from its non-resources business units in the year ending March 2015. The company ended its foray into U.S. shale last year and has since focused on businesses that benefit from low commodity prices. It expects profits of ¥330 billion.

Working for a trading house remains a prestigious career path in Japan, with its prospect of lifetime employment as a shosha man, often characterized as a dashing figure that travels the world negotiating business deals.