Tokyo: The Chinese economic slowdown that’s caused a rout in mining giant Glencore PLC’s stock price claimed a victim in Japan’s shipping industry, sparking a jump in the default risk for other competitors and trading companies reliant on the commodities and energy business.
Daiichi Chuo KK filed for bankruptcy protection in Tokyo on Tuesday with 120 billion yen (Dh3.67 billion, $1 billion) in liabilities, in the biggest failure by a publicly-traded Japanese company this year. The cost to insure shipper Mitsui OSK Lines Ltd’s debt against non-payment surged 43 basis points last month and touched 156, the highest since October 2013, while trading house Mitsui & Co’s credit-default swaps climbed to the most since August 2012, CMA data show. The Markit iTraxx Japan CDS index rose 19 basis points in September.
China is Japan’s biggest trading partner and its deceleration is rippling through Prime Minister Shinzo Abe’s economy, which probably slipped back into recession after unexpectedly weak industrial production in August, according to a report by JPMorgan Chase & Co on Wednesday. Daiichi Chuo filed for bankruptcy protection this week after four consecutive years of losses amid plunging freight rates and too many ships built to supply commodities to Asia’s biggest economy.
“If you look at the big picture, China’s weakness is the reason why Daiichi Chuo is heading for default,” said Mana Nakazora, the chief credit analyst in Tokyo at BNP Paribas SA. “The market has lost confidence and it’s now testing names where it can see the possibility of a Glencore-like sell-off.”
Glencore lost almost a third of its value on Monday amid concern over the commodity trader’s debt and waning raw materials demand. The stock rallied 33 per cent in the two days ended Wednesday, paring the plunge in the commodity trader’s shares to 69 per cent this year after it said it has “good liquidity and absolutely no solvency issues.”
A Bloomberg index of commodity futures has fallen 50 per cent since a 2011 high. Data on Monday showed Chinese industrial profits dropping the most in at least four years, while gauges of shares listed in Hong Kong and Shanghai were among the world’s worst performers in the third quarter as a stock boom turned to bust and data signalled a sharper slowdown for the nation’s economy.
The debt risk of other Japanese shippers and traders are also rising. Kawasaki Kisen Kaisha Ltd.’ s CDS reached 138 basis points, the highest since October last year, while Nippon Yusen KK’s swaps touched 80 basis points on Sept. 29, a level unseen since November 2013, CMA data show. The default risk of Marubeni Corp, a Tokyo-based trading company, surged to 132.5 on Wednesday, the highest since January 2013.
Earnings hit
“There is a growing consensus that companies with exposure to developing and commodity-dependent nations will see earnings weaken severely because those economies are slowing,” said Yoshihiro Nakatani, a senior fund manager in Tokyo at Asahi Life Asset Management.
While yield premiums on bonds of trading houses and shipping companies may widen as a result, debt maturing under two-years for some trading companies such as Itochu Corp offers a potential investment opportunity, Nakatani said.
The spread on Itochu’s 0.206 per cent notes due March 2016 has widened three basis points since mid-September to 17 basis points, Bloomberg-compiled data show.
China’s move toward a consumer-led economy rather than one based on fixed investments is bad for metal and mining companies, according to Thanh Ha Pham, an analyst at Jefferies Group LLC who covers Japan’s trading houses. Glencore sold shares two weeks ago as part of a wider $10 billion debt- reduction plan designed to protect its investment-grade credit rating. Standard & Poor’s rated Glencore at BBB, two grades above junk, with a negative outlook.
“If Glencore loses their investment grade, we just don’t know how it would affect the trading companies,” said Pham. “The prudent thing to do when you don’t know something and are pretty scared of something is to get rid of it. And I think that is what happened.”
