Photographer: Dado Galdieri/Bloomberg

Japan Trading Houses Facing $13 Billion Hit on Commodity Misfire

  • Companies esteemed for creating `shosha man' plan writedowns
  • As raw-material prices fall, focus shifts to other businesses

A handful of companies that have dominated almost every kind of raw-material business in Japan for decades may take as much as $13 billion in charges during the current fiscal year.

The global commodity slump is squeezing the “sogo shosha,” or general trading houses like Mitsubishi Corp. that supply everything from gasoline and steel to seafood and noodles in resource-poor Japan. They invested in metals and energy only to see prices fall. Already, Sumitomo Corp. has taken a $650 million writedown at a nickel project in Madagascar. Its rivals will probably report impairments as soon as this week, says Goldman Sachs Group Inc.

Sogo shosha companies -- including Mitsui & Co. and Marubeni Corp. -- have interests throughout the economy. They are miners, salesmen, consultants, brokers, shippers and bankers, and their corporate cultures are revered. A trading-house job is considered a prestigious career path, with the prospect of lifetime employment as a “shosha man,” someone often characterized as a jet-setting business negotiator.

Mitsubishi, Mitsui, Sumitomo and Marubeni “are facing quite large revisions,” said Hiroyuki Sakaida, a Goldman analyst in Tokyo. The bank estimates combined writedowns for four of the five largest sogo shosha could total between 811 billion yen ($6.7 billion) and 1.6 trillion yen in the fiscal year ending March 31. “Investors cannot invest in trading companies under the current environment,” Sakaida said.

This could mark the second straight fiscal year of significant impairment charges for the trading houses. And it may only get worse. Crude-oil prices have tumbled almost 70 percent in the past two years to near $30 a barrel, and that’s probably going to continue to weigh on earnings, Sakaida said.

Commodity Collapse

Almost every major raw material is worth less now than two years ago, from iron ore to oil to crops and base metals. The Bloomberg Commodity Index, a measure of returns from 22 items, has tumbled 40 percent over that period, touching the lowest level since at least January 1991.

“Another leg down in commodity prices means that new impairment charges are unavoidable, particularly with the assets that have been bought since 2010,” said Polina Diyachkina, an analyst at Macquarie Group Ltd.

One potential writedown target is the Browse LNG export terminal partly owned by Mitsubishi and Mitsui, Diyachkina said. Other candidates including Marubeni’s stake in the Roy Hill iron-ore mine and Sumitomo’s holding in the Sierra Gorda copper project, the Macquarie analyst said.

New Outlooks

The trading houses are scheduled to report results for the fiscal third quarter this week. Sumitomo, which last month withdrew an earlier profit forecast for the fiscal year and warned of additional impairment charges, said it will issue new guidance on Feb. 5. Officials from Mitsubishi, Mitsui, Marubeni and Sumitomo declined to comment for this story. Itochu Corp., which expects to be the most-profitable of the Japanese trading houses this year, said it hasn’t changed its net-income forecast for the year.

Mitsubishi will review the value of its commodity assets by the end of the fiscal year, as low prices and a slowing China force the company to reduce its medium and long-term price outlooks, Chief Financial Officer Shuma Uchino said at the company’s earnings briefing on Tuesday. Mitsubishi maintained its full-year net income forecast.

“First, oil and gas projects will book impairment charges, then base metals,” said Kazuhisa Mori, an analyst at JPMorgan Chase & Co. in Tokyo.

To survive the commodity market rout, the trading houses -- some of which have roots dating back to the 17th century -- are shifting their focus away from businesses exposed to the slumping energy market. Some are getting into retail, media and health.

Mitsui, which Goldman says may incur as much as 304 billion yen in writedowns, is looking to expand its North American chemical ventures that are big buyers of fuel. Mitsubishi, which faces as much as 660 billion yen of writedowns, according to Goldman, said it plans to add more non-resource business after cutting its profit forecast for the year.

Itochu, Japan’s third-largest trading house, is among the most likely to avoid large writedowns, according to Goldman’s Sakaida. The company has limited exposure to resources and exited its only shale investment in June. For the first time, Itochu is expected to have the highest profit among the trading houses, based on analysts forecasts for the current fiscal year.

The sogo shosha also have the capital to help weather the commodity slump. The five biggest are sitting on a combined 40 trillion yen ($338 billion), according to company data compiled by Bloomberg.

Three of the five biggest trading houses have maintained or raised dividends in an effort to entice investors as profit slumped and the value of resource assets fell. But the companies may be forced to cut back on the payouts if the writedowns are big enough, according to Jiro Iokibe, an analyst at Daiwa Securities Co.