Com­mod­ity rout cuts $8.6 bil­lion from Ja­pan's trad­ing houses

The Pak Banker - - 6BUSINESS -

Ja­pan's big­gest trad­ing com­pa­nies, stal­warts of the na­tion's econ­omy, ex­pect to book com­bined write­downs of at least 970 bil­lion yen ($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 Ja­pan's "sogo shosha," or 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 the last two years, and ear­lier this year touched the lowest level since 1991. Mit­subishi Corp. and Mit­sui & Co. ex­pect their first net loss since they were founded in their cur­rent form more than 60 years ago. "These write­downs are sig­nif­i­cant," 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 yen on its met­als and en­ergy busi­ness- es. Mit­sui said on Wed­nes­day that it ex­pects its first an­nual net loss af­ter book­ing 260 bil­lion yen in one-time charges on its com­modi­ties busi­nesses, adding to an ear­lier an­nounce­ment of a 20 bil­lion yen write­down.

Mit­subishi rose 3.2 per­cent to 1,981 yen on Fri­day, the big­gest in­crease since March 3. Mit­sui also ad­vanced, gain­ing 3.4 per­cent to 1,344 yen. Su­mit­omo Corp. ex­pects 170 bil­lion yen in write­downs for the year, in­clud­ing an im­pair­ment re­lated to a nickel project in Mada­gas­car. In Fe­bru­ary, Marubeni Corp. an­nounced a 72 bil­lion yen write­down on oil and gas projects in the Gulf of Mex­ico and North Sea. Itochu Corp. said that it ex­pects 18 bil­lion yen 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 falls by about 1.5 bil­lion yen, while ev­ery $100 de­cline in cop­per re­sults in 1.4 bil­lion yen in lost earn­ings, ac­cord­ing to a pre­sen­ta­tion made by the com­pany in Fe­bru­ary when it was still fore­cast­ing net in­come of 300 bil­lion yen 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.

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