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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 GlencorePLC 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.
Itochu Corp., Japan’s third-largest commodity trader, in June sold its 25% stake in U.S.-based oil and gas developer Samson Resources Corp. back to Samson for $1 after racking up roughly ¥95 billion ($799 million) in impairment losses on it earlier this year.
Mitsui& Co., which derives about half its profit from energy investments, making it the most resources-dependent of its peers, has also been shedding assets. A spokesman said this week that it had decided to close its precious-metals businesses in London, New York and Hong Kong.
Mitsui’s net profit for the April-June period fell 24% from a year earlier due to lower prices for energy, minerals and metals.
Japan’s largest trading house, Mitsubishi Corp., booked losses of ¥95 billion on resources-related business, including natural-gas exploration and development in Papua New Guinea, in the year ended March 2015.
Yasuhiro Narita, an analyst at Nomura Securities, said the major trading houses have likely finished with write-downs on oil-related projects but face further pain as a result of iron ore and nickel prices. He cited Sumitomo’s Madagascar project as a likely example.
Sumitomo became involved in the project, in which it currently owns a 32.5% stake, in October 2005. Under the leadership of President Kuniharu Nakamura, who took the helm in 2012, the company has sought to ramp up investment in resources, especially in U.S. shale gas. The company didn’t have the same track record in resources investment as rivals such as Mitsubishi or Mitsui.
Subsidiaries of Canada-based Sherritt International Corp.own 40% of the Madagascar project, and Korea Resources has a 27.5% stake. Sherritt didn’t respond to a request for comment.
“The project recently achieved financial completion and our September production numbers included confirmation of LME registration for the nickel produced from Ambatovy,” a spokesperson at Sherritt said, declining to comment further until it reports earnings on Oct. 28.
In September 2014, Sumitomo booked roughly ¥270 billion in write-downs for the fiscal year ended March 2015 on operations that included a shale-gas development in North America. The loss was the biggest for Sumitomo since 1996, when it announced that its chief copper trader had lost about $2.6 billion in unauthorized trades in one of the biggest commodity-trading scandals in history.
Sumitomo has since reevaluated its investment strategy, shedding assets and reallocating portfolios. It said in its medium-term plan starting this fiscal year that it would strengthen nonresources businesses, including automotive and infrastructure operations.
In July, Sumitomo and Vale S.A.sold the Isaac Plains coking coal mine in Australia to Stanmore Coal. In August, it sold leasing rights to some of its U.S. shale projects to Gunn Oil.