Trading houses pay for missing commodity bus
They are facing massive impairment losses after embarking on shopping spree just before resource prices tanked
Japanese government debt twice the size of the economy will make exiting stimulus a nightmare for central bank Governor Haruhiko Kuroda, according to the nation’s former top currency official.
Makoto Utsumi, who oversaw foreign-exchange policy at the Ministry of Finance from 198991, said the Bank of Japan’s expansion of its balance sheet into debt with an average remaining maturity of up to 10 years makes it impossible for Kuroda to pare stimulus “for the foreseeable future” without causing bond yields to surge. Speculation that the BOJ will accelerate its note purchases helped cut 10-year yields to a three-week low of 0.3 per cent on April 17.
“The thought of exit itself is a nightmare for Japan, not whether it’s premature to talk about it,” Utsumi said “There is no choice but to keep issuing bonds for financing, and with buying of longer dated JGBs [bonds], a With their extensive intelligence networks and broad global footprint, Japan’s trading houses historically have been reliable sounding boards on topics ranging from energy supply and diplomacy to the world economy.
It is no coincidence that Prime Minister Shinzo Abe meets regularly with their chief executives, just this month spending two evenings with the heads of Mitsubishi and Marubeni.
Yet the instincts of Japan’s sogo shosha (trading houses) failed them when it came to reading the commodity cycle, with many embarking on a shopping spree for resources assets just as commodity prices were reaching their peaks.
The country’s top five trading houses — Mitsubishi Corp, Mitsui & Co, Sumitomo Corp, Itochu Corp and Marubeni — have warned of combined impairment losses exceeding $5 billion (Dh18.36 billion), mainly on oil and gas assets, for the fiscal year that ended in March. As of the end of December their combined net interest-bearing debt totalled $177 billion — roughly double the level of five years ago.
At the crossroads
Analysts say the trading houses now stand at a crossroads. Japanese traders expect them to step up their shift towards non-resource sectors and efforts to repair stretched balance-sheets. But such businesses take time to grow and returns are not always as enticing as were energy assets during the commodities boom.
Marubeni, for example, is struggling to justify the $2.7 billion it paid to buy US-based grains merchant Gavilon in 2013. The global packaged foods and Asian fresh produce businesses Itochu bought from Dole Food for $1.7 billion in 2013 also have been disappointing.
The companies are now exploring ways to revamp their business models, says Naoto Saito, a senior research analyst at CLSA. “It won’t be surprising if an industry shake-up occurs.”
The hardest hit so far has been Sumitomo, which last month warned of its first dip into the red in 16 years. It expects a fiscal-year net loss of 85 billion yen, estimating impairment losses of 325 billion yen (Dh10 billion) because of hits from US shale oil projects and a Brazilian iron ore mine.
The company was among the most aggressive in Japan in acquiring resources in the wake of the March 2011 Fukushima nuclear accident, which sparked a surge in imports of oil, coal and liquefied natural gas. Sumitomo has since admitted that it did not “sufficiently understand” the risks involved with resources assets.
Analysts expect the write downs in the sector to continue this year, and say Mitsui — which generates about two-thirds of its profits from energy and metals — is the most vulnerable.
Nomura estimates sliding oil and iron ore prices will knock 103 billion yen off of Mitsui’s full-year net profits. In comparison, it projects a combined impact of 87 billion yen on the four other trading houses.