TOKYO Aug 8 After going on a spending spree
during the global commodities boom, many Japanese trading houses
have stretched their balance sheets and are now looking to sell
off some of the assets to fund future investment plans.
Japan's five biggest trading houses all booked lower profits
in their metal resources businesses for the April-June quarter,
making coal and other minerals prime candidates as they look to
offload unprofitable assets and find others with more promise.
"They're not getting any more capital to allocate to
resources investments, so if they want to take advantage of
asset-buying opportunities, they need to sell some assets before
they can buy assets," said Mike Elliott, global metals and
mining leader at advisory firm Ernst & Young.
"Recycling is a portfolio upgrade opportunity for them. They
may mix between commodities. They may see some advantage in
selling coal assets and buying copper, for example. They're not
wedded to staying within any particular commodity," he added.
Lower prices of coal and iron ore caused metal resource
profits to fall at Mitsubishi Corp, Mitsui & Co
, Itochu Corp, Marubeni Corp and
Marubeni still made a record net profit overall and Itochu
posted higher net income, but Mitsubishi, Mitsui and Sumitomo
all booked lower net profit for the quarter.
The trading houses, which have business portfolios like
investment funds, invested aggressively in commodities during
the resource boom of the 2000s, but a fall in prices has hurt
profitability in the sector and the outlook remains gloomy.
The price of iron ore is forecast to continue falling into
next year, as is that of coking coal, with global economic
growth still fragile, including in top resource buyer China.
Itochu spent $1.5 billion in 2011 for a 20 percent stake in
the Colombian business of coal mining firm Drummond Co, but the
stake contributed only 500 million yen ($4.9 million) to net
profit for the business year that ended in March.
To improve performance, some trading houses such as Sumitomo
may be prepared to take on the role of operator in some of the
ventures in which they have a stake, analysts say, noting that
Sumitomo operates a silver, lead and zinc mine in Bolivia.
They may have to innovate in other ways, too.
For example, industry observers say it is often hard for the
trading houses to sell their minority stakes in ventures. But
sources said last month that Sumitomo and Itochu were looking to
jointly sell their stakes in the Collinsville and Newlands mines
in Queensland, which make up the sixth-largest coal-producing
complex in Australia.
Elliott at Ernst & Young said he envisaged more such sales.
High debt is compounding the problem of poor profitability
and Moody's Investors Services recently revised its ratings
outlook for Sumitomo and Mitsubishi.
"The rise in leverage has occurred due to a build-up in debt
associated in turn with substantial investments, eroding all
headroom within the company's ratings to absorb any unexpected
volatility in its operating environment," Moody's said of
Mitsubishi in June.
To develop more stable profit streams, trading houses have
lifted the pace of investment in non-resource assets, but very
few projects are expected to boost profits significantly in the
short term, so getting rid of non-performing assets is vital.
"Trading houses have become more and more focused on asset
divestitures since their balance sheets have ballooned to a size
that is difficult for them to manage," said Thanh Ha Pham, an
analyst at Jefferies who covers Japanese trading houses.
Mitsui plans to sell off 700-900 billion yen of assets by
the business year that ends in March 2017, according to its
medium-term plan released in May.
Sumitomo said last year it would divest or reduce assets by
770 billion yen, while Mitsubishi wants to have 35-40 business
divisions in 2020, down from 47 in the year to March 2013.
Mitsubishi says it is not looking to sell metal resources
since it has taken steps to limit losses and does not see prices
falling further. But it does not rule out the idea completely.
"If prices were to fall further, there could come a time
when our thinking might change, but that is not the case at this
point in time," CFO Shuma Uchino said on Thursday.
Still, with miners like BHP Billiton, Rio Tinto
and Anglo American shedding assets to focus on
their most profitable businesses, there are bargains to be had
by the Japanese trading houses and a chance to upgrade.
"They're looking to sell some of the other assets they hold,
where they may have extracted most of the value from them,"
Elliott said. "For them it's a value upgrade if they're looking
to invest into other assets."
(1 US dollar = 102.0700 Japanese yen)
(Additional reporting by Manolo Serapio Jr in Singapore and
Sonali Paul in Melbourne; Editing by Alan Raybould)