Japan’s five largest trading houses could face as much as $13 billion in writedowns on recently acquired shale, coal and iron ore assets, according to Daiwa Securities Group Inc. analyst Jiro Iokibe.
The companies — the biggest is Mitsubishi Corp. — have long specialized in acquiring raw materials around the globe to feed Japan’s factories. Now, some of those investments have been caught out by a slide in prices that started in 2011.
Businesses from Brazilian iron ore to Australian coal mines are struggling to break even, Iokibe said by phone in Tokyo. Writedowns will depend on managers at each company, but if they happen dividends may be cut along with share buybacks, said Iokibe, who’s covered the industry for six years.
“That’s the maximum risk of writedown for the assets,” Iokibe said, referring to the 1.43 trillion yen ($13.2 billion) figure, which represents his estimated book value of 20 shale, coal and iron ore assets held by the five companies. Mitsui & Co., Itochu Corp., Sumitomo Corp. and Marubeni Corp. round out the group. “These are expensive assets,” which are now worth less than their book value, he said.
Sumitomo last month gave an indication of what may be brewing when it announced 240 billion yen of expected losses on resource assets and slashed its profit forecast by 96 percent. The company’s shares fell the most in almost two decades on Sept. 30, the day after the announcement.
Photographer: Dado Galdieri/Bloomberg
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Shares in four of the five companies declined today. Mitsubishi fell the most with a 2 percent loss at 12:33 p.m. in Tokyo, compared with a 1.4 percent drop in the benchmark Topix index. Itochu was up 0.9 percent.
The two largest traders, Mitsubishi and Mitsui, have both gained so far this year against a 2 percent decline in the benchmark Topix index. Mitsui added 12 percent, Mitsubishi 5 percent. Sumitomo has lost 13 percent, Marubeni 6 percent and Itochu 2 percent.
While Japan’s traders steadily wrote down some assets over the last two years, the scale of Sumitomo’s and that it was largely due to a shale oil field in the U.S. that few had considered a risk caught investors by surprise, according to Daiwa, Nomura Holdings Inc. and JPMorgan Chase & Co.
“It’s brought out voices of anxiety over writedowns at other trading companies,” Nomura analyst Yasuhiro Narita said in an Oct. 3 report.
Narita’s report came out 48 hours after Marubeni said it agreed to sell its 40 percent in Canada’s Grande Cache Coal Corp., which it valued at about $1 billion in 2011, to Up Energy Development Group. The price? $1.