In competitive market economies, the battle for the commanding heights is conducted by corporations as well as countries. Now, Japan's massive trading houses that underpin the
keiretsu system of business groups (Mitsui, Mitsubishi, etc.) have often been criticized as inefficient middlemen by Westerners who deal with them. However, the recent global financial crisis may have provoked a
reassessment of their worth. Given the credit squeeze that resulted when trust became scarce in "arm's-length" financial markets, these trading houses kept the credit flowing given that they were more trust-based institutions. Count it as another demerit for neoliberal orthodoxy.
Another important function they are performing nowadays though is securing raw material availability for the manufacturing arms of their groups (alike Mitsubishi Steel, Motors, and what else have you). What, after all, would Japan Inc. be without such RM inputs to create world famous export-oriented outputs?
Although the heyday of Japanese industrial policy--Ministry of International Trade and Industry (MITI) coordination with
keiretsu and all that--may have passed, there is still a lot of it being formulated. Witness for instance the current
government initiative to capitalize on the mighty yen to secure natural resource supplies worldwide (presumably in the face of the Chinese attempting to do the same). Here we encounter a similar story, and who else is there to get the job than other than these trading houses? Once more onto the
breach...
Japan's top trading house are likely to come head-to-head again while competing for copper mines across the globe, armed with an unprecedented ability to spend on what they see as a long-term bull market. The competition is likely to drive up asset prices for potentially lucrative properties holding the base metal, with the trading houses jostling for the prize of becoming the top supplier for the world's fifth biggest copper market and to tap surging demand in China and other emerging markets.
Japan's six big trading firms, which derive up to 80 percent of their profit from commodities, plan a combined 2.76 trillion yen ($36 billion) investment, a record high, in the year to March 2012 on the back of strong earnings growth in the past few years largely due to gains in oil and other commodity prices. About a half or a third of that amount will be reinvested in natural resources.
This great game between conglomerates' trading houses naturally spans the globe:
In the latest round of the battle for copper, Mitsubishi Corp and Mitsui & Co stood against each other in the high-profile face off between mining giants Anglo American and Codelco in Chile. Anglo shocked Chile's state copper giant last week when it announced it had sold a 24.5 percent stake in its southern Chilean copper properties to Japan's biggest trading house Mitsubishi for $5.4 billion.
The move signalled an aggressive stance in Anglo's negotiations with Codelco on the Chilean firm's option to buy 49 percent of the properties. Codelco has sued Anglo to prevent further sales and says it is still entitled to exercise that option, while Anglo says after the sale Codelco only has an option on 24.5 percent.
Mitsubishi paid a hefty $520 million, or 10 percent, premium to Codelco's valuation of the assets, Jiro Iokibe, analyst at Daiwa Securities Capital Markets Co, said. [OTOH] Codelco has secured a $6.75 billion bridging loan from Mitsubishi's rival Mitsui & Co to buy the assets, in which the Chilean company has given Mitsui an option to take the 24.5 percent stake which Mitsubishi has bought for $4.88 billion.
Certainly the omens are with even higher prices in the future due to good ol' supply and demand:
Japan's trading firms have been chasing copper assets as they see the prospect for rising demand and limited supply leading to higher prices for the industrial metal used in products ranging from cars to electric wiring. They expect demand in China, which accounts for 40 percent of global demand, to continue rising for at least the next five to six years while supplies remain tight due to a falling ore grade, analysts said.
"Demand will be particularly tight in the next two years as new mines will not come onstream until after 2014," Yasuhiro Narita, analyst at Nomura Securities, said. "Copper is one of their preferred assets, which has a large trading volume, meaning less volatility, and there is no concern of new substitutes emerging from technology development..."
While demand is rising, falling ore grade and increasingly difficult development conditions have boosted development costs. "Most mines currently being developed are located in inlands far from ports, causing development cost to balloon," said an official at the Agency for Natural Resources and Energy.
Japanese companies' copper development costs have risen to an average of $5,600 a tonne since 2008, up from the average of $2,500 during 1988 and 2005, according to government data. The official said the copper content of ore has now fallen to about 0.4 percent down from about 1 percent in 2000.
Very interesting stuff, and it's much like the current scramble for oil supplies--less accessible supplies become more economically viable as commodity price rises continue apace.
