TOKYO/BEIJING May 12 A year after spending $3.6
billion to buy grain trader Gavilon to expand in China, Japan's
Marubeni Corp has been shaken by defaults on soybean
sales and faces an investigation into alleged tax evasion in the
world's top food consumer.
Its aggressive expansion, fuelled by offering flexible terms
on soybean contracts and a willingness to deal with
less-established customers, has been blamed for making it more
vulnerable to buyers walking away from deals in a shaky market.
The problems in China come as the Japanese trading house
also faces more competition. Chinese state trader COFCO Corp has
gone on its own spending spree and may soon rival Marubeni, the
top grain exporter to China, as it builds its own trading house.
"The rapid expansion that Marubeni is pursuing has caused
them to take risks that other grains companies would not in
their pursuit of business," said Nobuyuki Chino, president of
Tokyo-based Continental Rice Corp, who has spent more than 35
years trading grains, including as a broker for Gavilon.
Asked about its business operations in China and any
problems it faced, a Marubeni spokeswoman said China was one of
its most important markets and it would ensure stable supply.
Chinese buyers have recently defaulted on at least 500,000
tonnes of soybean shipments and threatened to default on more
than 20 physical soybean cargoes, which have not yet been
Marubeni President Fumiya Kokubu said on Friday the firm,
which supplies a quarter of China's soybean imports, had
suffered defaults on as many of three of its cargo shipments by
Chinese buyers in late March and early April.
Another Marubeni official, who requested anonymity, said all
companies operating in the Chinese grain market had faced a
"perfect storm", with tightening credit, sliding crushing
margins and the first fall in feed demand in recent memory.
Typically, commodities sellers only start shipping after
buyers provide a letter of credit (LC) to guarantee payment.
However, some trading firms relax the requirement and are
willing to accept deposits, particular from established clients.
The Marubeni official said difficult market conditions had
forced it to divert some ships initially earmarked for China and
suspend loading of others docked in Brazil because of delays in
receiving LCs, in order to give the trading firm time to find
alternative buyers and minimize losses.
The official said the company, which trades under the names
of Gavilon and Columbia Grain Trading in China, had not taken
excessive risks. Marubeni's president said the firm's exposure
to soybean cargoes without LCs was falling.
"We have about 20 late May, early June cargoes we're aiming
to sell to China that have already been loaded and now are
gradually having LCs opened on them," said Kokubu.
An executive at one of Marubeni's main customers in Shandong
province said as the Japanese firm sought to expand in China its
local units had supplied cargoes where customers had provided a
deposit. This was a practice followed by rivals, though the
executive and traders said its deposits were smaller.
Marubeni's Chinese business, which competes with global
trading firms such as Bunge and Cargill supplying soybeans, had
required a deposit as low as 3 million yuan ($482,000) for a
cargo of 55,000 tonnes to 60,000 tonnes worth around $40 million
at current Chinese prices, said the executive, who declined to
be named due to his business relationship.
According to traders, other suppliers required about 10
million yuan per cargo.
A Marubeni spokeswoman said the firm was unable to comment
on the details of individual business transactions and payment
terms would depend on the creditworthiness of each client.
"Among suppliers, Marubeni offered the lowest deposit
payment," said Gao Yanbin, an investment manager at Shanghai
Shenkai Investment Co. Ltd, which trades agricultural products.
Gao said Chinese buyers seeking to get out of deal with
Marubeni saw losing a deposit as a relatively cheaper option.
It is rare for international traders to revert to legal
action or arbitration under such circumstances, given the
importance of the Chinese market and difficulty of enforcement.
Traders and industry sources said Marubeni's difficulties in
China were compounded by it focusing too much on small- and
medium- sized buyers, which have had a tougher time coping with
stricter lending conditions introduced by Chinese authorities.
"This is because they deal with second- and third-tier
players in the market which are more likely to default when the
prices rise," said a Singapore-based trading manager with a
rival global firm that sells soybeans to China.
The Marubeni official said it had a broad range of
counterparties from the biggest to smaller crushers and traders.
Marubeni's acquisition last year of U.S. grain merchant
Gavilon made it China's top grains supplier.
The concept was simple: take Gavilon's vast storage network
in the Americas, combine it with Marubeni's export capabilities
to Asia, and sell corn, soybeans and wheat, to China.
The purchase made Tokyo-based Marubeni the biggest soybean
exporter to China, shipping 15-16 million tonnes, or about a
quarter of the nation's annual imports of 60 million tonnes.
But just as the firm has been expanding in China, it has
faced a potentially more difficult trading environment.
Adding to complications, Chinese regulators only approved
the Gavilon deal on condition the two firms maintain separate,
independent trading units when selling soybeans to China.
At the same time, relations between China and Japan have
become more strained, amid escalating tensions over a chain of
uninhabited islands both countries claim, raising worries about
the dispute spilling over to harm business ties.
China recently seized a bulk carrier owned by Japan's Mitsui
O.S.K. Lines Ltd in a case related to a wartime claim.
Mitsui had to pay almost $30 million to Chinese claimants and
the ship was released.
Beijing said it was a simple business dispute, but it has
set off alarm bells in Japan and increased scrutiny over the
probe involving Marubeni's operations in China.
Three employees at Marubeni's Chinese unit of Columbia Grain
Trading were detained last month for what Chinese customs said
was suspicion of smuggling, which is often used by authorities
when referring to tax evasion. Marubeni says it does not know
why the staff were detained.
CHINA IS CHINA
The health of China's soybean sector has deteriorated.
Crushing margins in China, which takes 60 percent of the
soybeans traded in the world, indicate processors are losing
500-600 yuan a tonne of soybeans, compared with a 600 yuan
profit in the fourth quarter of 2013 during peak consumption.
But even with these obstacles it is impossible for trading
houses like Marubeni to ignore China, the world's top buyer of
everything from soybeans to copper.
"They've put a huge amount of money into their grains
business and when you look at it, almost only China has the
means and the mouths for all the supplies that will come out of
the U.S. and South America," said Masayuki Nagano, a senior
analyst at Mitsubishi UFJ Morgan Stanley Securities Co.
Other analysts said given the importance of Marubeni's
strategy in China meant there could be a hit on earnings if
there was any threat to its operations.
But a source familiar with Marubeni's strategic thinking,
who did not want to be named, said the firm would stick to the
thrust of its plans. "China is China. There isn't any choice but
to make deals with the Chinese."
(Additional reporting by Aaron Sheldrick in TOKYO, Fayen Wong
in BEIJING and Naveen Thukral in SINGAPORE; Editing by Ed