Commodity Rout Cuts $8.6 Billion From Japan's Trading Houses (1)

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 businesses. 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 as much as much as 3.7 percent to 1991.5 yen on Friday, the biggest increase in intraday trading since March 3. Mitsui also rose as much as 3.7 percent to 1,347.5 yen.

Asset Revaluation

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.

U.S. Shale Foray

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 Japan’s second-biggest trading house after Mitsui’s impairment charge announcement trimmed its market capitalization to 2.3 trillion yen 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 a profits of 330 billion yen.

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

(Updates to add share prices in fifth paragraph.)

To contact the reporters on this story: Stephen Stapczynski in Tokyo at sstapczynsk1@bloomberg.net, Ichiro Suzuki in Tokyo at isuzuki@bloomberg.net. To contact the editors responsible for this story: Ramsey Al-Rikabi at ralrikabi@bloomberg.net, Iain Wilson, Aaron Clark

By: Stephen Stapczynski and Ichiro Suzuki

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