Japan’s biggest trading companies, stalwarts of the nation’s economy, expect to book combined write-downs of at least ¥970bn ($8.6bn) as ill-timed investments in commodities ranging from shale gas to copper mines erode profitability.
The write-downs 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% 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 write-downs 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 capitalisation, said on Thursday it expects its first net loss on a group basis after booking an impairment charge of ¥430bn on its metals and energy businesses. Mitsui said on Wednesday that it expects its first annual net loss after booking 260bn yen in one-time charges on its commodities businesses, adding to an earlier announcement of a ¥20bn write-down.
Mitsubishi rose 3.2% to 1,981 yen yesterday, the biggest increase since March 3. Mitsui also advanced, gaining 3.4% to ¥1,344.
Sumitomo Corp expects ¥170bn in writedowns for the year, including an impairment related to a nickel project in Madagascar. In February, Marubeni Corp announced a ¥72bn write-down on oil and gas projects in the Gulf of Mexico and North Sea. Itochu Corp said that it expects ¥18bn 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 ¥1.5bn, while every $100 decline in copper results in ¥1.4bn in lost earnings, according to a presentation made by the company in February when it was still forecasting net income of ¥300bn 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.
Itochu Corp is poised to supplant Mitsui as Japan’s second-biggest trading house after Mitsui’s impairment charge announcement trimmed its market capitalisation to ¥2.3tn on 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 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 US shale last year and has since focused on businesses that benefit from low commodity prices. It expects a profits of ¥330bn.
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 characterised as a dashing figure that travels the world negotiating business deals.