Japanese Traders Follow Sumitomo Lower as Writedowns Loom

  • Sumitomo warns of further impairments; stock dives 8.7%
  • Nickel prices hit 12-year lows due to slowing growth in China

Japan’s trading companies fell after Sumitomo Corp. withdrew its full-year earnings forecasts because of a 77 billion yen ($654 million) charge on its Ambatovy nickel project in Madagascar, following a collapse in the price of the metal.

The Tokyo-based trading house, one of Japan’s big five, warned of further impairments on other projects as it assesses the impact of slumping raw material prices, according to a statement Wednesday. Sumitomo had expected net income of 230 billion yen in the year to March and said it will issue new earnings guidance at its third-quarter earnings on Feb. 5.

Sumitomo fell 5.8 percent to close at 1,123.5 yen in Tokyo trading, the lowest since October 2014, after sliding as much as 8.7 percent. The company announced the writedown Wednesday after stock trading finished. Top trader Mitsubishi Corp. slid as much 5 percent and ended down 2.9 percent, while the second biggest, Mitsui & Co., dropped as much as 4.4 percent.

“I expect another round of writedowns from trading companies exposed to resources,” Jiro Iokibe, an analyst at Daiwa Securities Co., said by phone, citing their large investments in the sector over the past five years when commodity prices were high.

While Sumitomo has revised its forecast to “undetermined” as it reviews the impact of the charge, Chief Financial Officer Hiroyuki Inohara told a briefing in Tokyo Wednesday that the company wants to secure net income of at least 100 billion yen for the financial year. Sumitomo also said it would maintain its dividend forecast of 25 yen a share.

Investments Vulnerable

Inohara said the writedown had “struck me with a thud” and that its investments in oil, coal, iron ore and copper could be vulnerable to impairments as China’s economy slows more swiftly than anticipated.

The price of nickel, used to make stainless steel, plunged to a 12-year low in 2015, another casualty of China’s weakest growth in a quarter century. While that slump has continued this month, some analysts are betting that prices could recover this year as consumers draw down inventories and mine output shrinks in the face of mounting losses.

Sumitomo said in October that tough conditions in commodity markets would continue in the second half and could force further writedowns on some projects. The Bloomberg Commodity Index, a measure of returns from 22 raw materials, fell to its lowest level since 1991 on Tuesday.

Commodity Prices

Goldman Sachs Group Inc. expected Sumitomo to book 129.6 billion yen in writedowns related to Ambatovy, according to a report published last month. The bank forecast that the four Japanese trading companies most keyed to the decline in commodity prices would post a total of 903.6 billion yen in impairments in 2016.

Ambatovy was launched in 2005 as a project that would integrate mining to refining. Sumitomo is joint operator, holding 32.5 percent, with Canada’s Sherritt International Corp. owning 40 percent and Korea Resources Corp. the rest, according to Sumitomo’s statement. Sherritt said Wednesday it expected to book an impairment of about $2.4 billion on Ambatovy.

Sumitomo reported a 73.2 billion yen loss last financial year, its worst result since 1997, on asset writedowns, including U.S. oil and Brazilian iron ore projects. In the wake of the loss, it embarked on a three-year plan that included boosting investment and paying greater attention to risk management.

The company had swung to profit in the first half and along with other Japanese traders has sought to bolster earnings by shifting focus to non-resources business, such as transportation and media.

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