Japanese trading houses to cut investments, step up asset sales

By Reuters

May 14, 2015 07:01 PM EDT

Japan's big trading houses, stung by large asset writedowns in the wake of the global commodities slump, plan to step up asset sales and wind back investment spending by up to $10 billion over the next three years.

The changes will mean reduced spending on energy and minerals projects, and a tighter rein on growth as existing assets are sold to help fund expansion in areas ranging from autos to power infrastructure, medical services and food.

"In the wake of hefty writedowns, the top 5 trading firms have now all shifted their focus on how to generate cash or cash management," said SMBC Nikko Securities' senior analyst Akira Morimoto.

Known as shosha in Japanese, trading houses led by Mitsubishi Corp (8058.T) and Mitsui & Co (8031.T) fulfil a quasi-national role by importing everything from oil to corn to sustain the resource-poor economy.

But a misjudged shopping spree during the now-deflated global commodities boom led to $5.2 billion in resource sector investment losses at the top-five shosha in the year to March 2015.

Releasing earnings this month, the companies said they plan to keep investment budgets within their operating cash flow. They will also push on with plans to recycle assets, ditching poor performers to boost returns or selling non-core assets to improve focus.

"We've lost credibility after booking such heavy losses," Sumitomo's Chief Financial Officer Hiroyuki Inohara said, after a 310 billion yen impairment, mainly from U.S. shale and iron ore, led to the first annual loss in 16 years.

The firm plans to cut its investment in natural resources to around 10 percent of proposed total spending of 1.2 trillion yen over the next three years, down from a 40 percent share over the past two years.

Marubeni Corp (8002.T), which posted a 50 percent profit fall, is pulling back on investments to keep cashflow positive, said President Fumiya Kokubu.

"We were willing to sacrifice cash flow for the sake of growth, but given the hefty writedowns, we now aim to retain tighter investment discipline and a positive cash flow," he said.

Analysts said the pullback meant overall investment by the top-five trading firms will be trimmed, even after a $5 billion tie-up by Itochu Corp (8001.T) with Chinese conglomerate CITIC CITIC, which it hopes will boost its investment clout.

"Total investment by the five for the next three years, excluding Itochu's CITIC deal ... will be cut by about 20 percent from their spending in the past three years," said Daiwa Securities' senior analyst Jiro Iokibe.

This would be equivalent to nearly $10 billion, based on Thomson Reuters data.


Many firms plan to accelerate asset sales.

"Sumitomo, Marubeni and Itochu need to sell off some of their assets to earn cash to fund fresh investments or offset losses," said Nomura Securities senior analyst Yasuhiro Narita.

Mitsubishi and Mitsui, which both expect lower commodity prices to weigh on profits this year, plan to recycle assets worth 500 billion yen and 300 billion yen a year respectively.

But analysts cautioned the practice of working to a short-term group investment horizon could lead the firms to sell off some businesses at the wrong time in the investment cycle.

"Instead of setting an overall investment budget every two-three years, they should decide where and how much they invest or divest based on their own long-term analysis of the industry cycle of each business segment," said Daiwa's Iokibe.

Some assets, such as resource projects, could be hard to sell at present.

Sumitomo said it was still looking to sell off part of a U.S. oil project, while Sumitomo and Itochu have had coal assets in Australia on the block since July last year.

Marubeni has power, real estate and financial assets as candidates for disposal, but no resource assets.

"We don't know if it makes sense to sell resource assets under the current circumstances," Marubeni President Kokubu said.

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