Japan’s trading houses shift focus; The recent tumble in the price of iron ore, a vital steelmaking ingredient, has probably been worrying for Japan’s leading trading houses, the sogo shosha

May 22, 2014 8:16 am

Japan’s trading houses shift focus

By Emiko Terazono

Resources will take a smaller piece of the new investment pie

The recent tumble in the price of iron ore, a vital steelmaking ingredient, has probably been worrying for Japan’s leading trading houses, the sogo shosha.

The companies, which trade everything from coal to noodles, have invested heavily in resource assets, including stakes in iron ore projects alongside big miners such as BHP Billiton.

If the price continues to slide – it fell below $100 a tonne this week for the first time since 2012 – it will lead to a further decline in the portion of profits coming from the natural resources businesses.

The five largest shosha – Mitsubishi, Mitsui, Marubeni, Itochu and Sumitomo – reported combined net profit of Y1.6tn in the year to March, up 23 per cent on the year before. But income from resources – energy, mining and minerals – accounted for 38 per cent of overall profits, compared with 43 per cent the previous year. (Agriculture and steel are not included in the natural resource figures.)

Japan’s heavy industries have relied on imported resources and materials supplied by the Japanese trading companies. Imports of crude oil and liquefied natural gas have increased their importance since the Fukushima earthquake.

The fall in resource earnings mainly reflects the price declines in some commodities. But there has been also been a subtle shift away from resource and energy at the leading trading houses’ businesses. The main shosha are trying to move to a more balanced structure, where profits come from a diversified portfolio of sectors, and they are no longer the go-to buyers of natural resource assets.

The weaker yen also means that large projects and investments will become dearer for the Japanese houses.

In its medium-term strategy plan announced last year, Mitsubishi, the largest trader by profits with operations stretching from gasfields in Sakhalin to iron ore mines in Australia, said its natural resource divisions were to “refocus on productivity and cost” for a “more efficient use of our management resources”.

In other words, natural resources will be taking a smaller piece of the new investment pie.

The message was similar from Mitsui, the second largest, which earlier this month laid out seven core businesses on which it will focus on for future growth. Food, for example, is one of the sectors and the company wants to allocate new investments into the supply chain from fertiliser to farming and food distribution.

Diversifying the business portfolio and smoothing out volatility caused by the peaks and troughs of the commodity markets makes sense.

That said, there will continue to be a large contribution from commodities such as oil, copper and LNG for the larger two of the five trading houses.

Mitsui, the trading house with the largest exposure to natural resources, had almost 70 per cent of its net income in the last fiscal year deriving from energy and metals and mining, while at Mitsubishi, it was about 40 per cent.

The two companies are more like tankers rather than speedboats so it will probably be a while before the strategy shift becomes apparent in their profit and loss statements.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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