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

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.