Mitsubishi Eyes India Revival as Next Driver of Commodity Cycle

If you’re looking to bet on commodities, take a breather. Any revival in prices will be slow and an upswing is unlikely before 2017 or 2018, according to Japan’s biggest trading house.

While Mitsubishi Corp. is in no rush to add commodity assets, it believes the recovery may lie with India, said Chief Financial Officer Shuma Uchino. If premier Narendra Modi’s government delivers on its ambitious investment plans, India’s infrastructure build-out could replace fading Chinese growth as a driver for markets.

“India’s got a bit behind China, but with Modi’s arrival and push to modernize, to cut government inefficiencies, and what with their population size, there’s a lot of potential,” Uchino said in an interview at Tokyo headquarters, adding that he also sees a similar opportunity in Southeast Asia.

Getting ahead of global trends has kept Japan’s trading houses in business for centuries. The traders invested in Australian coal in the 1970s ahead of China’s economic surge, expanded into more defensive utility assets about a decade before commodity profits began to fall in 2012, and more recently shifted focus to food, retail and health care.

This year, Mitsubishi, which co-owns the world’s biggest coking coal exporter in Australia, expects three-quarters of its 360 billion yen ($2.9 billion) in profits to come from non-commodity assets. Five years ago, it was the other way round.

New Proposals

While lower prices have flushed out a number of proposals for Mitsubishi to invest in new commodity projects, none of the offers have come from producers with low enough costs to make it worthwhile, Uchino said. It means the company will limit its ambitions to bolt-on investments that fit with existing assets.

“Chances of new purchases aren’t zero, but commodities are not our main investment focus,” he said. What does pique the trader’s interest is expanding vertically. For its food assets, that could mean adding processing businesses.

Mitsubishi has acquired coffee, grains and salmon fishing companies in the last three years and also owns major stakes in Japanese retailers including its second-biggest convenience store chain Lawson Inc.

“Where we don’t have that final retail element or the middle processing capacity, that’s where we will look at to complete the full value chain,” Uchino said. “I don’t see that as requiring such large investments.”

Asian Growth

If expansion in commodities isn’t on the agenda, the trader remains committed to sweating existing assets to feed Asian growth. Mitsubishi is on track to double its output of copper, coal and liquefied natural gas by about 2020, Uchino said. In fact, its Donggi-Senoro LNG project in Indonesia may start operating before the end of the summer, a few months earlier than planned, he said.

Likewise in North American shale -- an area where rivals Itochu Corp. and Sumitomo Corp. have taken big writedowns on purchases -- Mitsubishi’s gas projects are running on schedule, and even benefiting from a higher-than-expected oil content in its deposits, he said.

As commodity prices have fallen, Mitsubishi has streamlined -- becoming “picky and focused,” according to Uchino. The trading house has cut the number of its operating units, exited businesses that it could not run at a profit or scale up, and merged assets, he said.

Another consideration is the rally in Japanese shares to their highest level in almost 20 years, which has left Mitsubishi more aware of the need to balance spending with payouts to shareholders. The trader has bought back stock for a second consecutive year, and together with dividends expects to return 52 percent of net income to shareholders in the year ending March 2016, from 43 percent and 25 percent in the previous two.

Still, keeping shareholders happy won’t eclipse the need to spend on growth. If the opportunity is there, “we’ll invest in it,” said Uchino.

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