TOKYO -- After losing tons of money through massive bets on overseas resource assets, Japan's trading behemoths are now working to overhaul their natural resource businesses as a whole.
Collapsing prices for oil, metals and other commodities have forced Mitsubishi corporation, Mitsui & co., Sumitomo corporation and their peers to report hefty asset impairment losses.
In addition to expanding and enhancing other revenue sources, the big traders are also racing to reinvent their strategies for investing in overseas mining assets.
Mitsui's Robe River iron ore joint venture with Rio Tinto, a British-Australian mining giant, in Western Australia, offers anecdotal evidence of the company's efforts to improve the profitability of its resources businesses.
A visit to one of the two open-pit mines operated by the Robe River joint venture shows the potential for a more cost-efficient future for mining.
There are a surprisingly small number of workers at the site despite the large scale of the operation. Dump trucks carrying iron operate without drivers. Even ultra-class haulers with a payload capacity of over 300 tons move autonomously.
Employees monitor the operation offsite, in an office in Perth.
Rio Tinto, Mitsui's partner in the project, has been leading the efforts to automate mining.
With today's depressed resource prices, cost savings can make or break a mining project, especially in high-wage Australia.
During the resource boom of previous years, some dump truck drivers in Australia earned 30 million yen ($270,000) annually, according to a Mitsui executive.
Japan trading houses revamping resource strategies
The presence of powerful labor unions, which look askance at overtime and midnight work hours, makes automation indispensable for cutting labor costs. The project operator is also working on automated trains to transport the mines' output to port.
To further improve cost efficiency, Rio Tinto operates a big data analysis center in India together with an Indian information-technology company. Data from mining machinery is used to optimize the frequency of maintenance and support other cost-reduction efforts.
Mitsui has decided to tighten the criteria for investment in resource assets but has no intention to pull out of the business altogether.
It also plans to make exhaustive efforts to squeeze costs and boost the productivity of existing projects. In the year through March 2016, it saved about 51 billion yen in costs related to metal and energy projects.
Other trading houses are under no less pressure to cut costs. Mitsubishi has adopted a policy of keeping the total value of its resource assets unchanged. If it makes a new investment, it will sell assets it owns to raise the necessary funds.
Mitsubishi intends to gradually replace assets like coking coal mines, iron ore and natural gas fields with potentially more profitable ones.
To trim costs at existing projects, Mitsubishi is reducing the frequency of regular maintenance of heavy mining machines like trucks and power shovels and switching to larger machinery. It will also hold auctions to select afresh subcontractors because some contracts granted during the boom years are too costly under current conditions.
Itochu announced last year the merger of Nacional Minerios, a Brazilian producer of iron ore known as Namisa, and the mining division of the major Brazilian steel producer Companhia Siderurgica Nacional. The merger has integrated the operations of Namisa, partly owned by Itochu, and the neighboring Casa de Pedra Mine, owned by CSN, resulting in a 30% reduction in production costs.
With prices of commodities expected to remain low for the time being, trading companies are also facing the need to concentrate their management resources on carefully selected targets.
Sumitomo booked impairment losses totaling 77 billion yen on its investment in the Ambatovy nickel production project in Madagascar. Sumitomo's partner in the project, Canada's Sherritt International, which has a 40% stake, is in serious financial trouble.
If Sherritt decides to withdraw from the project, Sumitomo is likely to seek a new partner. Sumitomo President Kuniharu Nakamura has ruled out the possibility of acquiring the stake from the Canadian company.
As it is assessing potential new investments, Sumitomo needs to quickly get some existing plans underway while accelerating cost cuts.
Its copper mine project in Chile, Sierra Gorda SCM, for instance, is falling behind schedule for full production.
The company has sold off most of its stake in a shale gas development project in Texas that caused it to report impairment losses in 2015.
Only 10% of Marubeni Corporation's 1 trillion-yen budget for new investments for fiscal 2016 through fiscal 2018 will be allocated to resource-related assets, down from about 40% during the past three years.
"Prices simply rise and fall," said Marubeni President Fumiya Kokubu in explaining the company's decision to slash its resource investments.
The prospects for trading companies' resource investments, however, aren't all bleak. Some analysts predict the prices of copper, iron ore and other commodities will gradually recover in the years to 2020.
(Nikkei)
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