Japan Trader Profit Boosted by Autos, Yen as Resources Slump

Strong demand for autos in southeast Asia and a weaker-than-forecast yen helped boost third-quarter profit at Japan’s biggest trading houses as the companies led by Mitsubishi Corp. seek to weather falling commodity prices.

Mitsubishi and Itochu Corp., the top and third-largest traders, raised their net income forecast for the fiscal year ending March 31. Mitsui & Co. and Sumitomo Corp., the second-and fourth-largest, beat analyst estimates for third-quarter profit, while retaining full-year goals set in May.

The gains for companies that until two years ago made more than half their profit from oil, gas, coal and other commodities reflects their growing shift to retail, food, and media assets. That’s as China’s slowing growth has reduced raw material demand in Asia’s biggest economy. A 15 percent drop in the yen against the U.S. dollar since the beginning of 2013 also helped inflate overseas profits.

“Asian auto-related assets look good, the non-resource businesses generally are moving in the right direction in terms of results,” Mitsubishi Chief Financial Officer Shuma Uchino said at a briefing in Tokyo on Feb. 4. “With the U.S. economy steadily improving, we see the dollar stronger to the yen.”

Mitsubishi raised its full-year profit target to 420 billion yen ($4.15 billion) from 400 billion yen, basing the increase in part on a revised forecast for the yen to average 99.5 against the dollar, compared with the company’s May 8 forecast of 95 yen.

Profit Target

Itochu raised its net income forecast for the fiscal year ending March 31 by 7 percent to 310 billion yen after reporting a record nine-month profit. The co-owner of apparel maker Paul Smith Group Holdings Ltd. reported a 15 percent jump in net income in the nine months to Dec. 31 to 240.3 billion yen.

The ratio of profits coming from non-resource businesses rose to about 72 percent, Chief Financial Officer Tadayuki Seki said at a briefing in Tokyo on Feb. 4. “Non-resource profits are what helped us reach record profits,” he said.

A slowdown in Chinese economic growth and turmoil in developing markets has eased global demand for coal, iron ore and other metals and minerals.

“Commodity prices could trend negatively for the general traders, particularly crude oil and iron ore, where supply-demand is set to ease,” UBS AG analyst Katsuya Takeuchi said in a Jan. 28 report. Prices for coal used in steelmaking also lack “recovery momentum,” the report said.

Commodity Profits

Mitsui, the most reliant among Japan’s six major trading houses on commodity profits, reported a third-quarter profit of 104.7 billion yen, beating a mean estimate of 92 billion yen from two analysts, according to data compiled by Bloomberg.

The Tokyo-based company, the nation’s biggest importer of iron ore, said the depreciation of the yen and higher trading volumes were the two biggest factors for a 19 percent jump in profit to 301.9 billion yen in the first nine months.

Mitsui, which also announced plans to spend as much as 50 billion yen in a share buyback, increased its average forecast for the yen against the dollar to 100 for the twelve months to March 31, from a forecast of 96.83 made in November.

The buyback reflects a lull in Mitsui’s investments in iron ore and creates expectation of more such actions by the company in the future, UBS’s Takeuchi said in a Feb. 6 report.

“Over the long term, share buybacks could change the trend in shareholder returns within the sector,” Takeuchi said. The current strategies and debt loads of Mitsui’s rivals mean that other trading houses are unlikely to offer buybacks in the near term, he said.

Mitsui gained 2.6 percent to 1,445 yen in Tokyo after a 7.2 percent rise yesterday, the biggest since March 23, 2009. Mitsubishi rose 4.6 percent to 1,918 yen today, the biggest jump in almost two years.

Sumitomo Corp. posted a 4 percent drop in nine-month net income to 180.5 billion yen. Profit was “slightly above our assumptions even including one-offs,” Takeuchi said.

While Sumitomo may need to write down the value of some assets next quarter, the company should meet its annual net income target of 240 billion yen, Takeuchi said.

Marubeni Corp., Japan’s biggest grain trader, and Sojitz Corp., one of the country’s main importers of rare earth metals, will report their third-quarter earnings tomorrow.

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