China’s Thinning Margins Has Marubeni Betting on U.S. Growth

China’s economic slowdown could be worse than official forecasts and a recovery may not come before 2014, according to the chairman of Marubeni Corp., Japan’s biggest power and agriculture trading company.

Thinning cargo volumes and trading margins suggest China’s gross domestic product may be expanding at less than the announced 7.5 percent in the second quarter, Teruo Asada said in an interview in Tokyo, making the U.S. a better prospect for the trader’s expansion.

“The Chinese economy will come back, but it will take time,” possibly not until spring next year, because domestic firms prioritize employment over efficiency and have created overcapacity, Asada said. As Marubeni looks to expand its agriculture, energy and mining business, “the first great opportunity exists in the U.S. frankly speaking, it’s not China, not India.”

Expansion in China, the largest economy after the U.S., is forecast to drop to the slowest in two decades amid a crackdown on credit. U.S. growth may accelerate next year to the highest since 2006 as consumer confidence firms, boosted by cheap gas from shale rock and a resurgent stock market that closed at a record high this week.

Once seen as a key market, China’s appeal for Japanese trading houses, the nation’s biggest overseas investors, is also complicated by political tensions between the two nations over territorial claims last year. Anti-Japan demonstrations in China in 2012 froze local output at factories of Japanese manufacturers including Toyota Motor Corp. for several months.

Best Course

The best course for China would be to raise its economic growth to 8 percent to 8.5 percent, which should satisfy both Chinese and foreign businesses, as well as the nation’s people, Asada said.

Marubeni rose 1.9 percent to 734 yen today, the most in two weeks, more than the 0.7 percent rise in the benchmark Topix index. The stock has gained 20 percent this year to raise the trader’s value to 1.28 trillion yen ($12.8 billion).

Marubeni relies on overseas sales for more than 80 percent of its turnover, of which a third comes from the U.S., according to Asada. The trader this month completed its biggest purchase, the $2.7 billion acquisition of Gavilon Group LLC, cementing itself as the largest soybean supplier to China.

Aside from Gavilon, the U.S. assets of Marubeni include oil and gas fields in the Gulf of Mexico, as well as factories to make aircraft components and conveyor belts. In China, the trader has auto-leasing, housing development, animal feed and textile businesses.

Soybean Imports

Now Marubeni wants to expand sales of corn, soybeans and wheat to markets in North Africa such as Egypt, and in Saudi Arabia and Southeast Asia. The trader will handle 55 million metric tons of grain a year with the Gavilon acquisition as it seeks to mount a challenge to global market leader Cargill Inc.

“We have to develop new markets as soon as possible after the synergies with Gavilon,” Asada said. “Our advantage is that we will be able to close in the supply side which Gavilon holds in the U.S.”

Gavilon will also help Marubeni improve sourcing of grains from Russia and eastern Europe, and the trader wants new supply channels of wheat from Australia, he said. Marubeni last year supplied about 20 percent of China’s 55 million tons of soybean imports and its market share is growing, he said.

Grain demand is the “exception” to China’s oversupply in resources, and shortages in soybeans will spread to corn in the “very near future,” Asada said.

In terms of energy, Marubeni, which evaluates more than 200 acquisitions and mergers at any one time, seeks to build a full-cycle North American gas production chain from extraction of the fuel from shale rocks to processing, separation, and petrochemical facilities, as well as the transport of liquefied natural gas to South America and other regions, Asada said.

Shale Gas

The trading company, the fifth-largest by profit in Japan, is currently considering investments in shale gas assets on the east coast of the U.S., he said.

Marubeni is planning to boost daily oil output to as much as 70,000 barrels from 40,000 barrels within two years to three years, mostly from U.S. and U.K. assets, Asada said.

The Tokyo-based trader, which traces its roots to the 19th century, announced in May a 1.1 trillion yen ($11 billion) investment plan through March 2016. Non-resource assets will account for about 60 percent of the investments, Marubeni said.

Marubeni, which owns more than 10,000 megawatts of power capacity globally, plans to add more generation assets in Europe and North America to balance its portfolio in the industry, Asada said. About 75 percent of Marubeni’s electricity assets are currently in Southeast Asia and the Middle East, he said.

European Target

“Our target is Europe and a big increase in the U.S. and entry into South America for the IPP business,” Asada said, referring to the independent power producer model. European energy firms are under pressure from lenders to sell part of their assets and have made offers to Marubeni, he said.

Where the trading company is slowing its investments for now is Australian resources and Chile’s copper mines due to the high operating costs in both regions, Asada said.

The exception is Marubeni’s first iron ore mine which it plans together with billionaire Gina Rinehart’s Hancock Prospecting Pty. The 1 trillion yen Roy Hill project has an “unbelievable” break-even point, Asada, who was Marubeni’s chief executive officer for five years until this April, said.

“The operating costs including labor costs in Australia are gradually decreasing,” but they will take another two years to three years to “normalize,” Asada said.

Mitsubishi Corp. is Japan’s biggest trading company by profit and market value.

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