Japan’s trading houses look to new markets

February 10, 2014 3:04 am

Japan’s trading houses look to new markets

By Ben McLannahan in Tokyo

In the coastal town of Kushimoto, on the southern-most tip of Japan’s main island of Honshu, Mitsubishi Corp is rearing tuna.

The Tokyo-based company used to buy every bluefin it sold, fished out of the Atlantic or Mediterranean or closer to home. But last August it started selling its own, raised from juveniles artificially hatched three or four years earlier.

Trying to persuade price-conscious wholesalers that it is worth paying about 20 per cent extra for fully sustainable produce has not been easy, sighs Yukio Shinano, former head of the business. “We need to change their mentality.”

That effort to create new markets at Mitsubishi, the biggest of Japan’s trading companies by assets, sales and market capitalisation, is being mirrored elsewhere.

For years, the traders have been best known for supplying the resource-poor nation with the energy and the minerals it lacks. But that image no longer fits.

Third-quarter figures last week from the big five traders – Mitsubishi, Mitsui & Co, Itochu, Sumitomo andMarubeni

– showed that non-resources businessesaccounted for 57 per cent of net profits over the first nine months of the fiscal year to April. That was the highest share since the financial crisis, and probably many years before that, says Thanh Ha Pham, a Tokyo-based analyst at Jefferies.

The new mix reflects years of rising investment in areas such as food, retail, transport and healthcare, often at the expense of mainstay coal, gas and metals businesses.

Even at Mitsui, the most exposed to resources, net income from minerals and energy came to about two-thirds of the total in the first nine months – down from more than three-quarters a year earlier.

“The prevailing perception that Japanese trading companies are commodity plays is wrong,” says Mr Pham. “Businesses encompassing different parts of the value chain have become the pillars of earnings.”

The shift is partly by choice. After two pretty violent commodities cycles in the past decade – and steadily sinking prices since mid-2011 – executives say they are keen to stabilise earnings.

At Sumitomo, for example, solid third-quarter profits from car finance, ship leasing and its US pipes business made up for volatility in Bolivian, Australian and Madagascan mining projects. At Mitsubishi, net income from energy and metals was up almost 3 per cent over the first nine months thanks mainly to an absence of labour strikes in its coal business. But profits in non-resources were up 59 per cent, led by machinery and infrastructure.

The shift is also driven by necessity. In recent years, the traders’ traditional customers – domestic utilities – have been stepping on their toes, transforming themselves from buyers of fuels and raw materials into integrated energy companies that produce and sell liquefied natural gas.

In deals in 2012 with Freeport LNG of Texas, for example, Chubu Electric and Osaka Gas bypassed the traders completely, agreeing 20-year contracts to take LNG and sell it where they see fit.

Resources will remain vital, especially given the shutdown of Japan’s nuclear power capacity in the wake of the 2011 Fukushima disaster. All five of the big traders have bought stakes in shale gas fields in the US, for example, spending more than Y1.5tn in total.

Even so, the balance of new investment is likely to stay tilted in favour of non-resources.

Mitsubishi’s investment in non-resources sectors, for example – in aircraft leasing, shipping, electricity transmission and grains in Brazil – came to Y348bn over the first nine months, one-third more than in resources.

“If trading companies can find weak points in any value chain, from the raw material to final demand, they will try to enter,” says Akira Kimura, a senior executive at the Japan Foreign Trade Council, a lobby group.

Investors really ought to start calling these companies something else, he adds.

Ken Kobayashi, Mitsubishi president, is known to bridle at the “resources” tag, seeing it as the main reason why the price/earnings ratio of Mitsubishi – along with the other trading companies – is among the lowest on the Nikkei 225.

“We’re like amoebas,” says Mr Kimura. “The best description these days is ‘ubiquitous business enabler’.”