Sumitomo Faces Possible Loss on Nickel Project – by Atsuko Fukase (Wall Street Journal – October 16, 2015)

Commodities slump has hammered profits and stock prices at many global traders and producers

TOKYO– Sumitomo Corp. faces a potential loss on its multibillion-dollar stake in a Madagascar nickel project, as the global commodities slump takes a heavy toll on Japanese trading houses.

Japanese firms that invested in oil, iron ore and other commodities have booked billions of dollars in losses over the past year and likely face more to come as a result of the long slide in global energy and commodities prices, analysts say.

Sumitomo, Japan’s fourth-largest trading house by revenue, will likely be forced to take a loss on the Madagascar project because nickel prices have dropped below the cost of production, said Akira Morimoto of SMBC Nikko Securities. Nickel prices are near a six-year low.

A Sumitomo spokesman said Friday that the company’s risk exposure to the project is about $2.4 billion, and it would consider whether to book a write-down based on mid- to long-range price projections and production plans. The project was on track to begin full production after construction was completed last month, he said.

Sumitomo is scheduled to report its quarterly earnings results Oct. 30.

An official at Korea Resources Corp., a partner in the Madagascar project, said Friday that the company expected another loss on it this year after taking one of 113.2 billion won ($100.2 million) on it last year. He declined to offer an estimate.

With China’s economy slowing further, prices of energy and industrial commodities such as copper and iron ore have hit multiyear lows in recent months. The slump has hammered profits and stock prices at many global commodity traders and producers, such as Glencore PLC and Noble Group Ltd.

While sensitive to big price moves in commodities, Japan’s five major trading companies are generally more diversified than their global rivals and haven’t invested as much in production and infrastructure assets such as mines and ports. This has left them less exposed to price declines but they are still selling or writing off assets.

“Given a drop in commodity prices–oil, liquefied natural gas and nickel–I wouldn’t rule out a possibility of further write-downs by [Japanese] trading firms,” Mr. Morimoto said.

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