Sojitz Corp. (2768), Japan’s top trader of rare earths, plans to tap into the nation’s shift from nuclear power by setting up its own liquefied natural gas business and building solar plants, said Chief Executive Officer Yoji Sato.
The smallest of Japan’s six major trading houses, Sojitz is a minority shareholder in gas and LNG projects in Indonesia and Qatar, and is now considering independent investments in Nigeria, Australia and Canada, Sato said in an interview in Tokyo Dec. 11.
“We need to invest in new assets and from here on we’d like to invest as ourselves, as Sojitz,” Sato said.
The 2011 Fukushima disaster has left most of Japan’s atomic capacity idled while gas’s share of the power mix this year climbed to about 50 percent, the highest of the world’s top 10 energy users. That’s led to an unprecedented shortfall in Japan’s LNG supplies through 2017 and pushed cargo prices to a two-year high, according to data from Tri-Zen International Inc., which estimates that the country has long-term contracts to cover 76 percent of its needs this year.
Annual demand will outstrip supply until 2017, when gas from new export projects in Australia and the U.S. boost Japan’s contracted volumes, Singapore-based research firm Tri-Zen estimates. Meanwhile, Japan’s utilities plan to build an extra 24,000 megawatts of gas-fired capacity, an increase of 40 percent, within a decade, according to government reports.
Along with Inpex Corp., Japan’s top energy explorer, the country’s investments in new oil and gas fields are led by its major trading houses, which include Mitsubishi Corp. (8058), Mitsui & Co. (8031), Itochu Corp. (8001), Sumitomo Corp (8053), and Marubeni Corp. (8002) The five traders in 2012 pledged at least $30 billion to develop new gas deposits, according to company data compiled by Bloomberg.
“It’s a capital intensive industry and the price tag for a 10 percent stake will be around $1 billion to $2 billion” for a project in Australia, followed by $2 billion in costs to develop the field, said Neil Beveridge, an analyst with Sanford C. Bernstein & Co. in Hong Kong. An undeveloped asset today is not likely to begin producing before 2018 to 2020, he said.
Sojitz’s main involvement in the gas industry has been via its LNG Japan Corp. venture with Tokyo-based Sumitomo, which owns 7.4 percent of Indonesia’s Tangguh LNG, 4.4 percent of an oil and gas block in the the East Kalimantan project in the same country, and 3 percent of the Ras Laffan LNG Co. of Qatar.
The scale of Sojitz’s gas industry participation may now change to meet growing demand for a cleaner alternative to coal from utilities, Sato said.
“We’ll do a wholesale review by the end of March of what opportunities there are in North American shale gas, including in the chemicals businesses,” Sato said.
The shale revolution in the U.S. has made it the world’s largest producer of gas and lowered the domestic price for the fuel to less than a fifth of that paid by Japan, the world’s top LNG importer. The surge in the U.S. means the energy resources of Canada may be easier to access, Sato said.
“Canada should be welcoming to any country’s companies that want to develop assets there,” Sato said. “Canada used to be a gas exporter to the U.S., but with the gas revolution it’s become superfluous. What you do with the large resources now is a big issue.”
Canadian Prime Minister Stephen Harper approved Cnooc Ltd. (883)’s $15.1 billion takeover of Nexen Inc. (NXY:US) to mark the biggest Chinese overseas acquisition. The deal, which gives Beijing- based Cnooc a stake in Canada’s largest oil-sands project, also prompted Harper to warn that the nation won’t approve any more oil-sand takeovers by state-owned companies, except in “exceptional circumstances.”
Elsewhere, Sojitz is weighing the high-cost development of Australia’s gas resources with the low country risk, Sato said. In Nigeria, the parameters are reversed yet the nation’s rich resources make it attractive and Sojitz would invest there if an opportunity presents itself, he said.
Investments in Australia will not come cheap.
“The industry looks increasingly challenged owing to rising costs and issues with project execution,” Goldman Sachs Group Inc. (GS:US) said in a Dec. 11 report. “Australasian projects stand out for their position at the upper end of the curve. We believe the LNG winners are those companies with advantaged exposure to low cost projects or with an attractive existing long-life portfolio of projects.”
Sojitz had 441.4 billion yen ($5.3 billion) in cash at the end of the last fiscal year on March 31. The stock fell 0.9 percent to 112 yen in Tokyo at 9:04 a.m., extending this year’s decline to 5.9 percent. Mitsubishi was little changed for the year, while Mitsui was down 2.3 percent in the period.
To capture gas profits along the value chain Sojitz plans to build gas-fired power plants in Oman and Saudi Arabia together with GDF Suez (GSZ) SA unit International Power Plc. and is in talks to develop a station in Mongolia, Sato said. As other such opportunities come up Sojitz will consider them, he said.
“Electricity and infrastructure is an area that we’ll strengthen from now on,” Sato said.
Another way for Sojitz to meet the changing energy needs of Japan will be via renewables.
Sojitz wants to build five solar power plants totaling about 100 megawatts, including on the northern isle of Hokkaido and in Kagoshima prefecture, western Japan, Sato said. The trader aims to register the projects with the government by the end of March, he said.
Japan introduced this year the world’s highest payment rate for renewable energy, known as a feed-in tariff, as a way to stimulate investments in solar, wind and biomass generation and ease reliance on nuclear power. The tariff rate will be revised from April.
“With a fixed feed-in tariff the economics set up has become very easy to understand,” Sato said.
The current low cost of raw materials for solar panels and Sojitz’s experience with three solar energy projects in Germany should help the trader set up an efficient business in Japan, Sato said. The company has since sold one of the projects, he said.
Sojitz commissioned a 24 megawatt solar plant in Mixdorf in July 2011 and completed a 3 megawatt station in Betzweiler in May 2010, according to Bloomberg New Energy Finance data.
The Japanese trading house traces its roots back to 1892 when its predecessor sold cotton before moving into shipbuilding, commodity trading and machinery sales. Nissho Iwai Corp., which in 2004 merged with Nichimen Corp. to create Sojitz, was an early investor in Nike Inc. (NKE:US), lending capital to the U.S. sport company’s co-founder Philip H. Knight at the start of the 1970s.
Today, the trading house tries to balance its investments in metals and energy equally with those in non-resource areas such as utilities, retail and food, Sato said. Sojitz Group, of which the trading house is the center, consists of 483 units, 133 of which are in Japan, and has 16,467 staff.
Sojitz posted 27 billion yen ($346 million) in net income from its energy and minerals business, its biggest earner, in the year ending March 31, when it reported a 3.65 billion yen loss due to writedowns from corporate tax law changes. Last month Sojitz cut its profit forecast for this year by half to 10 billion yen on lower commodity prices and demand.
The Tokyo-based trading company is looking for new businesses as Japanese demand for rare earths drops to 20,000 metric tons a year, from 30,000 tons previously, Sato said.
In rare earths, Sojitz is evaluating two investment options, one a mining project for a radioactive material, and the other for a Chinese asset where the material is lodged in clay, Sato said. The latter doesn’t involve much radioactivity and will be simple to process, he said.
“What’s good about the Chinese project is that on top of having heavy rare earth metals, there’s low radiation,” he said, declining to give more details as talks still continue.
Rare earths are 17 chemically similar metallic elements used in rechargeable batteries, wind turbines and electric vehicles. The metals are often found close to deposits of uranium and thorium, which are used to make nuclear fuel.
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