Further...

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http://www.ft.com/intl/cms/s/0/4ec2b6c6-1038-11e1-8211-00144feabdc0.html#axzz1f96zvrJ4

November 16, 2011 10:19 am

Japan’s trading houses look to resource investments

By Emiko Terazono in London

The battle between UK-listed Anglo American and Codelco, the Chilean state-owned mining group, is pitting two of Japan’s leading trading houses against each other.
Mitsui and Mitsubishi, the general trading houses, or sogo shosha, are the supporting actors, and are more than bit part players in the unfolding drama surrounding Anglo American Sur, a company that holds some of the most prized copper mining assets in Chile.

The sogo shosha are known to trade everything from ramen noodles to missiles, but their involvement in commodities spans decades. The top five trading houses – Mitsui, Mitsubishi, Sumitomo, Itochu and Marubeni – are significantly exposed both as producers and traders to the natural resources sector, including copper, iron ore, crude oil, coal, aluminium, soyabeans, corn and liquefied natural gas.

The top two houses, Mitsui and Mitsubishi’s part in the Chilean drama comes as Japan’s trading houses are looking to ramp up their commodities-related investments overseas.

One senior executive at a leading international miner noted a new sparkle in the eyes of trading houses officials during a recent trip to Tokyo. Although the previous governments were largely uninterested in their overseas resource investment efforts, he was told that the new prime minister was fully behind the sogo shosha’s activities in the energy and metals arena, specifically after the Fukushima nuclear accident.

The sogo shosha were first established in the late-19th century, and played an important role after Japan tried to catch up with the industrialised world. After the second world war, they mainly focused on procuring raw materials and helping Japan’s export effort.

After investing in energy projects in the 1970s, they turned to direct investments in the decade after as they looked beyond their traditional business of moving things from one place to another on thin margins especially as Japan’s manufacturers went directly to their overseas customers and material sources.

There were ill-fated investments into IT and real estate, but the trading houses have also been astute investors in natural resources, using their relationships and access to cheap financing. Mitsui, for instance, owns 5 per cent of Vale, the world’s largest iron ore miner, while Mitsubishi has an Australian coal venture with BHP Billiton, which is the top supplier of coking coal.

Both trading houses are active in the liquefied natural gas business, in the Middle East, and are involved in the Sakhalin oil and gas development off Russia’s Sakhalin Island, alongside Gazprom and Royal Dutch Shell. Itochu, meanwhile, invested in a Columbian coal miner this year, and Marubeni bought a Canadian coking coal group alongside China’s Winsway.

While the mantra for trading houses is balanced investments in non-resource and resource-related businesses, the reliance on commodities among the trading houses is now huge. Over 80 per cent of net profits in the first half at Mitsui, for example, came from energy and metals divisions, while for Mitsubishi, the figure was more than 70 per cent. In fact, Glencore, the world’s largest commodities trader, probably is now the closest example in the west for the sogo shosha.

While the Japanese have traditionally bought small stakes and have left operations up to their partners, some are said to be keen to take on controlling stakes and bigger operational roles in resource projects.

The state-owned Japan Bank for International Cooperation is also there to offer cheap financing for commodities investments deemed in the national interest. Thus, expect further bold moves from the sogo shosha in the natural resources arena, especially at a time when financing from European banks shrinks in the commodities markets. Backed by the high yen and with the government blessing, the commodities world will probably be hearing more about them in the very near future.