TEXT-S&P report: Japan general traders 1H FY2012 performance

Mon Nov 12, 2012 4:42am EST

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(The following statement was released by the rating agency)

Nov 12 - Although most of Japan's rated general trading companies (GTCs) saw their profits fall in the first half of fiscal 2012 (April 1 to Sept. 30, 2012) from the previous year, the impact on their credit quality is limited, Standard & Poor's Ratings Services said in a Japanese-language report published today. The consolidated net profits of the rated GTCs, except for Marubeni Corp. (BBB/Negative/--), fell year on year, mainly due to lower resource prices and impairment losses on marketable securities. Mitsubishi Corp. (A+/Stable/A-1) and Mitsui & Co. Ltd. (A+/Stable/A-1) suffered substantial earnings declines in their coal and iron ore businesses, while Sojitz Corp. (BBB-/Stable/--) posted material losses on marketable securities. The three companies cut their earnings forecasts for fiscal 2012 (ending March 31, 2013). Although lower resource prices are likely to continue to weigh on the six rated GTCs' earnings, we expect them to be able to absorb the impact of the resource price declines to some extent. They have a variety of earnings sources while the current resource prices still provide reasonable profit margins in general. As such, the impact of the profit declines on their credit quality is limited, in our view. Other than the four aforementioned companies, the other two rated GTCs are Sumitomo Corp. (A/Stable/A-1) and ITOCHU Corp. (A-/Stable/A-2).

Prices of hard coking coal and iron ore plunged year on year after the demand for steel products in China weakened. Profits from coal and iron ore-related businesses declined materially at all rated GTCs, except for Marubeni, which has low dependence on both commodities. On the other hand, Marubeni and ITOCHU each earned profits of about JPY45 billion from their resource and energy businesses; Mitsui and Mitsubishi each generated profits of over JPY100 billion from the same businesses, since the prices of resources such as oil and copper remain relatively high and the break-even points of resource prices are still generally low. In the nonresource segment, profits also fell after China's economic slowdown hurt the chemical, steel products, and shipping businesses; a drought in the U.S. hurt the grain business; and the paper and pulp market weakened. Nevertheless, except for Sojitz, all the rated GTCs secured nonresource related profits ranging from JPY20 billion to JPY100 billion.

Standard & Poor's expects the earnings of the six rated GTCs to remain under downward pressure in the second half of fiscal 2012. The contract prices of coal and iron ore for Oct. to Dec. 2012 have fallen below their first-half levels, and the contract prices of hard coking coal and iron ore are reportedly set at $170 per ton and $117 per ton, respectively. Except for Mitsubishi--which is likely to receive dividend payments in its nonferrous metals business--the GTCs have forecast that the profits from their metal resources businesses will largely decrease in the second half of fiscal 2012. Some of them have lowered their forecasts for consolidated net profits for fiscal 2012, reflecting severe operating conditions. Sojitz and Mitsubishi cut their forecasts by over 30%, and Mitsui reduced its guidance by 23%. Sumitomo said that its profits may fall below its target. In contrast, Marubeni, which has relatively low dependence on coal and iron ore among the six GTCs, has said that it aims to achieve record consolidated net profit for fiscal 2012.

In addition to earnings declines, lower stock prices and a higher yen have slowed the GTCs' capital accumulation. In our view, controlling and maintaining risk assets and debt at adequate levels by restraining capital spending are a key factor for the GTCs to maintain their credit quality amid severe operating conditions. In the first half of fiscal 2012, the six companies, particularly Mitsui and Marubeni, continued to make aggressive investments and loans. Active investments caused their free cash flow, except for Sumitomo and Sojitz, to turn negative.

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