Ja­pan trad­ing houses fac­ing $13b hit on com­mod­ity mis­fire

The Pak Banker - - MARKETS/SPORTS -

A hand­ful of com­pa­nies that have dom­i­nated al­most ev­ery kind of raw­ma­te­rial busi­ness in Ja­pan for decades may take as much as $13 bil­lion in charges dur­ing the cur­rent fis­cal year.

The global com­mod­ity slump is squeez­ing the "sogo shosha," or gen­eral trad­ing houses like Mit­subishi Corp. that sup­ply ev­ery­thing from gaso­line and steel to seafood and noo­dles in re­source-poor Ja­pan. They in­vested in me­tals and en­ergy only to see prices fall. Al­ready, Su­mit­omo Corp. has taken a $650 mil­lion write­down at a nickel pro­ject in Mada­gas­car. Its ri­vals will prob­a­bly re­port im­pair­ments as soon as this week, says Gold­man Sachs Group Inc.

Sogo shosha com­pa­nies -- in­clud­ing Mit­sui & Co. and Marubeni Corp. -- have in­ter­ests through­out the econ­omy. They are min­ers, sales­men, con­sul­tants, bro­kers, ship­pers and bankers, and their cor­po­rate cul­tures are revered. A trad­ing-house job is con­sid­ered a pres­ti­gious ca­reer path, with the prospect of life­time em­ploy­ment as a "shosha man," some­one of­ten char­ac­ter­ized as a jet-set­ting busi­ness ne­go­tia­tor.

Mit­subishi, Mit­sui, Su­mit­omo and Marubeni "are fac­ing quite large re­vi­sions," said Hiroyuki Sakaida, a Gold­man an­a­lyst in Tokyo. The bank es­ti­mates com­bined write­downs for four of the five largest sogo shosha could to­tal be­tween 811 bil­lion yen ($6.7 bil­lion) and 1.6 tril­lion yen in the fis­cal year end­ing March 31. "In­vestors can­not in­vest in trad­ing com­pa­nies un­der the cur­rent en­vi­ron­ment," Sakaida said.

This could mark the se­cond straight fis­cal year of sig­nif­i­cant im­pair­ment charges for the trad­ing houses. And it may only get worse. Crude-oil prices have tum­bled al­most 70 per­cent in the past two years to less than $30 a bar­rel, and that's prob­a­bly go­ing to con­tinue to weigh on earn­ings, Sakaida said.

Al­most ev­ery ma­jor raw ma­te­rial is worth less now than two years ago, from iron ore to oil to crops and base me­tals. The Bloomberg Com­mod­ity In­dex, a mea­sure of re­turns from 22 items, has tum­bled 40 per­cent over that pe­riod, touch­ing the low­est level since Jan­uary 1991. "An­other leg down in com­mod­ity prices means that new im­pair­ment charges are un­avoid­able, par­tic­u­larly with the as­sets that have been bought since 2010," said Polina Diy­achk­ina, an an­a­lyst at Mac­quarie Group Ltd.

One po­ten­tial write­down tar­get is the Browse LNG ex­port ter­mi­nal partly owned by Mit­subishi and Mit­sui, Diy­achk­ina said. Other can­di­dates in­clud­ing Marubeni's stake in the Roy Hill ironore mine and Su­mit­omo's hold­ing in the Sierra Gorda cop­per pro­ject, the Mac­quarie an­a­lyst said.

The trad­ing houses are sched­uled to re­port re­sults for the fis­cal third quar­ter this week. Su­mit­omo, which last month with­drew an ear­lier profit fore­cast for the fis­cal year and warned of ad­di­tional im­pair­ment charges, said it will is­sue new guid­ance on Feb. 5. Of­fi­cials from Mit­subishi, Mit­sui, Marubeni and Su­mit­omo de­clined to com­ment for this story. Itochu Corp., which ex­pects to be the most-prof­itable of the Ja­panese trad­ing houses this year, said it hasn't changed its net-in­come fore­cast for the year.

"First, oil and gas projects will book im­pair­ment charges, then base me­tals," said Kazuhisa Mori, an an­a­lyst at JPMor­gan Chase & Co. in Tokyo.

To sur­vive the com­mod­ity mar­ket rout, the trad­ing houses -- some of which have roots dat­ing back to the 17th cen­tury -- are shift­ing their fo­cus away from busi­nesses ex­posed to the slump­ing en­ergy mar­ket. Some are get­ting into retail, me­dia and health.

Mit­sui, which Gold­man says may in­cur as much as 304 bil­lion yen in write­downs, is look­ing to ex­pand its North Amer­i­can chem­i­cal ven­tures that are big buy­ers of fuel. Mit­subishi, which faces as much as 660 bil­lion yen of write­downs, ac­cord­ing to Gold­man, said it plans to add more non-re­source busi­ness af­ter cut­ting its profit fore­cast for the year.

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