TOKYO (Reuters) - Sumitomo Corp (T:8053) shares slumped the most in 18 years after Japan's fifth-biggest trading house by sales slashed its annual profit forecast by 96 percent due to massive losses on a U.S. shale project and sharp declines in iron ore and coal prices.
Japanese trading houses have invested heavily in North American shale oil and gas fields as the world's third-largest economy looks to diversify its energy sources after the Fukushima nuclear disaster in 2011. But revised reserve estimates and unproductive wells have led to write-downs.
Sumitomo said on Monday that it will review its minerals investment strategy and risk management system, after booking impairment losses of 270 billion yen (1.52 billion pounds) before tax benefits. The losses included the latest and biggest of a series of writedowns on U.S. shale assets by Japanese trading houses.
Its shares plunged 12.1 percent on Tuesday, the largest one-day loss since June 1996 when Sumitomo said its head of copper trading Yasuo Hamanaka had racked up $2.6 billion of losses in illicit trades.
Shares in other trading houses including Mitsubishi Corp (T:8058), Mitsui & Co Ltd (T:8031) and Marubeni Corp (T:8002) also fell and underperformed the general market. Investors fretted that the falls in commodities will take their toll across the sector.
"The size of this revision is so big that it is possible that investors will be concerned about risks to other trading companies," Polina Diyachkina, an analyst who covers trading houses in Tokyo for Macquarie Research, said in a research note after the revision.
Sumitomo now expects net income for the year through March to be 10 billion yen, compared with an earlier forecast of 250 billion yen, following the write-downs.
The trading house booked a 170 billion yen ($1.6 billion) writedown of the value of its oil and gas project in the Permian Basin in Texas, which it has been developing with U.S.-based Devon Energy Corp (N:DVN).
It plans to divest lease properties, wells and other facilities in part of the project after paying an initial $1.4 billion for the stake in 2012, with plans to invest $2 billion over a three-year period.
Test drilling carried out in the northern part of the Permian Basin shale formation in Texas showed that "geological conditions are more complex than our assumptions," according to a presentation on Sumitomo's website attributed to company president Kuniharu Nakamura.
IRON ORE WOES
Sumitomo also expects a 50 billion yen loss as the expansion of a Brazilian iron ore project is delayed due to the decline in prices for the mineral, and a 20 billion yen loss in a U.S. tyre business due to a stagnant retail market there.
Slumping prices of industrial commodities such as coal and iron ore are weighing on the balance sheets of trading houses, which have business portfolios like investment funds. The sector's five biggest names have all booked lower profits in their metal resources businesses for April-June.
Iron ore prices have fallen more than 42 percent this year, hit hard by a glut in supply as top, low-cost global miners boosted output at the same time as growth in demand has slowed in China, the biggest consumer of the steelmaking ingredient.
Iron ore for immediate delivery to China <.IO62-CNI=SI> dropped to $77.70 a tonne on Monday, the lowest since September 2009, according to data provider Steel Index.
"Iron ore market prices have dropped dramatically recently and (their) recovery in the short term is not expected," according to Sumitomo's presentation.
The revision came after a senior executive at Mitsui told Reuters last month the company may miss the current year's profit target of $1.1 billion for its metals business due to the slump in iron ore prices.
Sumitomo and partner Vale SA (SA:VALE5) will also close their Isaac Plains coal mine in Queensland, Australia by the end of January because of the slump in coal prices, with Sumitomo expecting a 30 billion yen impairment loss from the shutdown.
The trading house booked a 30 billion yen gain from tax benefits, bringing net impairment charges to 240 billion yen.
Mitsubishi shares fell 3 percent, Mitsui was down 2 percent and Marubeni declined 4 percent, compared with a 0.8 percent decline in Japan's Nikkei 225 benchmark (N225).
(Reporting by James Topham, Aaron Sheldrick and Yuka Obayashi in Tokyo; Manolo Serapio Jr in Singapore; Editing by Edwina Gibbs, Christopher Cushing and Ryan Woo)