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Japan's top trading houses to compete for more copper assets
November 17, 2011 / 4:13 AM / 6 years ago

Japan's top trading houses to compete for more copper assets

* Japan’s top trading houses seeking more copper

* See copper prices rising as supply dwindles, demand strengthens

* Commodities form major part of traders’ profits

By Yuko Inoue

TOKYO, Nov 17 (Reuters) - Japan’s top trading house are likely to come head-to-head again while competing for copper mines across the globe, armed with an unprecedented ability to spend on what they see as a long-term bull market.

The competition is likely to drive up asset prices for potentially lucrative properties holding the base metal, with the trading houses jostling for the prize of becoming the top supplier for the world’s fifth biggest copper market and to tap surging demand in China and other emerging markets.

Japan’s six big trading firms, which derive up to 80 percent of their profit from commodities, plan a combined 2.76 trillion yen ($36 billion) investment, a record high, in the year to March 2012 on the back of strong earnings growth in the past few years largely due to gains in oil and other commodity prices.

About a half or a third of that amount will be reinvested in natural resources.

In the latest round of the battle for copper, Mitsubishi Corp and Mitsui & Co stood against each other in the high-profile face off between mining giants Anglo American and Codelco in Chile.

Anglo shocked Chile’s state copper giant last week when it announced it had sold a 24.5 percent stake in its southern Chilean copper properties to Japan’s biggest trading house Mitsubishi for $5.4 billion.

The move signalled an aggressive stance in Anglo’s negotiations with Codelco on the Chilean firm’s option to buy 49 percent of the properties. Codelco has sued Anglo to prevent further sales and says it is still entitled to exercise that option, while Anglo says after the sale Codelco only has an option on 24.5 percent.

Mitsubishi paid a hefty $520 million, or 10 percent, premium to Codelco’s valuation of the assets, Jiro Iokibe, analyst at Daiwa Securities Capital Markets Co, said.

Codelco has secured a $6.75 billion bridging loan from Mitsubishi’s rival Mitsui & Co to buy the assets, in which the Chilean company has given Mitsui an option to take the 24.5 percent stake which Mitsubishi has bought for $4.88 billion.

COPPER SHINES

Japan’s trading firms have been chasing copper assets as they see the prospect for rising demand and limited supply leading to higher prices for the industrial metal used in products ranging from cars to electric wiring.

They expect demand in China, which accounts for 40 percent of global demand, to continue rising for at least the next five to six years while supplies remain tight due to a falling ore grade, analysts said.

“Demand will be particularly tight in the next two years as new mines will not come onstream until after 2014,” Yasuhiro Narita, analyst at Nomura Securities, said.

“Copper is one of their preferred assets, which has a large trading volume, meaning less volatility, and there is no concern of new substitutes emerging from technology development.”

Three-month copper prices were quoted at about $7,615 on Thursday on the London Metal Exchange, compared to this year’s high of $10,190, hit in February. The prices hovered at around $4,400 at the end of 2005.

The Anglo purchase will nearly double Mitsubishi’s yearly copper output from 140,000 tonnes currently to 250,000 tonnes in 2012, boosting its net profit by 20-30 billion yen from next year and some 40 billion yen after a planned expansion, analysts said.

“If you have more than 100,000 tonnes of copper output a year from a cost-competitive mine, that will translate into roughly 20 billion yen in net profit a year,” said an analyst at a Japanese brokerage, who asked not to be identified.

Smaller rival Marubeni Corp has a copper output of 125,000 tonnes and Mitsui 63,000 tonnes. Mitsui’s output will rise to 92,000 tonnes in 2014 when the Caserones mine in Chile starts shipments.

While demand is rising, falling ore grade and increasingly difficult development conditions have boosted development costs.

“Most mines currently being developed are located in inlands far from ports, causing development cost to balloon,” said an official at the Agency for Natural Resources and Energy.

Japanese companies’ copper development costs have risen to an average of $5,600 a tonne since 2008, up from the average of $2,500 during 1988 and 2005, according to government data. The official said the copper content of ore has now fallen to about 0.4 percent down from about 1 percent in 2000.

Anglo American’s Los Bronces and El Soldado copper mines in Chile are seen having a cost-competitive edge as infrastructure is already in place, analysts said.

They include a smelter and the recently discovered copper-rich deposits Los Sulfatos and San Enrique Monolito.

Mitsubishi also holds a 7 percent stake in the Escondida copper mine in Chile, the world’s largest mine of the industrial metal, controlled by BHP Billiton.

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