Japan’s trading houses move into the big league

Why Mitsubishi has ideas above its station

When Mitsubishi Corp made the final decision to invest in Donggi Senoro, a liquefied natural gas project in Indonesia, early last year, it was a moment to savour for the Japanese trading house.

The $2.9bn development, which by 2014 should be shipping 2m tonnes a year of LNG to Japan and Korea, is the first energy project to be controlled by Mitsubishi, the biggest by market capitalisation of the Japanese sogo shosha, or general trading houses. The investment marks an important step in the group’s evolution from a passive investor in assets, to an active operator of them.

But within six months of the announcement came a penalty from the Indonesian business watchdog, which found the project consortium guilty of collusion. Mitsubishi denies wrongdoing but, as operator, the Japanese company was hit with the biggest fine: 15bn rupiah ($1.6m).

Welcome to the major league. For years the shosha, which trade everything from ramen noodles to missiles, have been content to take minority stakes in assets overseas.

Energy majors such as ExxonMobil and BHP Billiton saw companies such as Itochu and Marubeni as useful support acts: inexperienced at running projects, but flush with cash and brimming with contacts. Backing from a shosha, which have long-term supply contracts with utilities all over the world, was a good way of reassuring lenders to a project that the end-product could be sold.

But now that global resources companies can borrow very cheaply and have plenty of cash of their own, the competitive advantage of the shosha has dimmed. Meanwhile, Japan’s utilities – led by Tokyo Electric Power and Tokyo Gas – have taken direct stakes in projects overseas, bypassing the trading houses, which usually act as intermediaries. “We were literally skipped,” says Junichi Iseda, chief operating officer of Mitsubishi’s natural gas division B, which focuses on new projects.

Finally, the Fukushima nuclear crisis has underlined the importance of control over the supply of energy to the world’s third-largest consumer of oil, and largest importer of LNG. Tuesday’s LNG supply deals involving Mitsubishi, Mitsui & Co and Sempra Energy of San Diego – the first direct export arrangements between the two nations – provided further illustration.

For all these reasons, Japan’s largest shosha is looking to move up the value chain.

“Running projects is the right thing to do: high risk, but high pay-off,” says Michael Yoshino, Tokyo-based professor emeritus of Harvard Business School, and author of a history of the trading companies. “The shosha know their bargaining power has been diminishing over time. And the risk of doing nothing has gone up since the earthquake.”

Peers are watching closely. A senior executive at Mitsui, the next biggest trading company by market capitalisation, says the group was made aware of the risks of majority ownership after the 2010 blowout of BP’s Macondo well in the Gulf of Mexico, in which Mitsui owned a 10 per cent stake. But he recognises that Donggi Senoro could point the way. Since Mitsubishi Corp accelerated its direct investments last year its shares have outperformed the other shosha, and now trade at a 20 per cent valuation premium to the rest of the big five.

Mitsubishi executives accept that the company is a long way from supermajor status. Its 45 per cent stake in the Donggi Senoro venture means that staff from Mitsubishi are taking the lead in planning, purchasing and budgeting. But the top job – chief executive – is an appointee from Pertamina, the Indonesian state-owned energy company, which is a junior partner in the venture with 29 per cent.

Donggi is a relatively small LNG project, but it could be a good way for Mitsubishi to cut its teeth, say analysts. “Operating is a long way from [Mitsubishi’s] core competence, which is investing,” says Penn Bowers, analyst at CLSA in Tokyo.

Mitsubishi’s Mr Iseda agrees, explaining that the aim is to create a well-balanced portfolio. “We’re not looking at take the initiative in all projects. But we want to use our experience in Donggi Senoro as leverage to gain access to more projects,” he says.

That strategy could be bearing fruit already. When Mitsubishi bought stakes in nine petroleum-prospecting licenses in Papua New Guinea in February, for example, an executive at the independent Canadian explorer paid tribute to Mitsubishi’s “extensive experience in LNG development,” as well as its marketing clout.

“We’re just a humble Japanese sogo shosha,” says Mr Iseda, with a smile. “We know we cannot compete with the majors on resources and capability. But we want to grow.”

If Donggi goes well, expect more trading companies to follow suit.

“One of our tasks is to create new business models,” says the Mitsui executive. “Otherwise we cannot survive.”

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