(Bloomberg) — One after another, Japanese executives from some of the country’s most elite firms filed into Warren Buffett’s suite at the luxury Four Seasons Hotel in central Tokyo.
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The legendary investor was on a trip to the Japanese capital last month, and the titans of the country’s giant energy and raw-materials conglomerates were there to make their pitches. Over glasses of Coca-Cola, one of Buffett’s most famous investments, they separately told the 92-year-old American the same thing: Japan’s trading houses, as they’re known, must accelerate their move beyond commodities, and they wanted one of their biggest shareholders to help.
Buffett, who’s sitting on billions of dollars in gains after buying stakes in the companies in 2020 and later increasing them, listened intently and asked many questions, according to people with knowledge of the talks. He wanted to know more about their businesses, their views on the economy and geopolitical situation and what’s next for these groups with roots dating back hundreds of years. He was eager to find ways to work with them, the people said, asking not to be identified discussing private information.
The Oracle of Omaha’s renewed backing is an important vote of confidence in Japan’s big-five traders — Mitsubishi Corp., Mitsui & Co., Sumitomo Corp., Itochu Corp. and Marubeni Corp. — as they step up a pivot away from fossil fuels that’s been under way for years. It’s also a broader endorsement of a Japan that’s often seen as past its prime, less relevant than Asian counterparts such as China and India.
But there’s one big question: Is Buffett betting on the move away from fossil fuels, the commodities themselves or a combination of the two? Or is it something else? Another billionaire, Fast Retailing Co. founder Tadashi Yanai, suggests there are a few factors, one of which is to work with them to do more in Japan.
“It’s probably the influence of the weak yen,” said Yanai, whose Uniqlo clothing brand has made him Japan’s richest person with a fortune of more than $36 billion, according to the Bloomberg Billionaires Index. “And he may think there are many companies in Japan with growth potential,” he said on the sidelines of Fast Retailing’s earnings presentation last month. “The trading houses could be a guide to Japanese companies. They could be a guide to the Japanese market in that they can contact all these firms.”
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Buffett’s Berkshire Hathaway Inc. disclosed in August 2020 that it had taken stakes of about 5% in the five trading houses, triggering a surge in their shares and sending the combined value of the investments above $6 billion. The pandemic had dampened demand for commodities. Liquefied natural gas had hit an all-time low months before. Coal was at its cheapest in years. That had depressed the companies’ shares, with four of them trading below book value.
“They were selling at what I thought was a ridiculous price,” Buffett told CNBC last month.
Berkshire stood to benefit in a few ways. Any gains in the yen would increase the dollar value of the investments when converted back. A recovery in commodities would boost the trading houses’ stocks. And if prices didn’t rebound, the companies’ diversification into almost every part of the economy provided a hedge that wouldn’t be available in pure-play commodities bets.
Buffett’s investments now look prescient. Oil, coal and gas have jumped since Berkshire disclosed its stakes, padding the companies’ profits. Mitsubishi shares have about doubled since late August 2020. Mitsui is up about 120%, Marubeni has roughly tripled, while Itochu and Sumitomo have gained at least 65%.
The value of Berkshire’s holdings has increased by at least about $4 billion. After adding to positions, the company now owns more than 6% of each of the firms.
Still, Buffett’s comments following the initial investments suggest the value investor had even bigger plans.
“I am delighted to have Berkshire Hathaway participate in the future of Japan and the five companies,” he said in a company statement at the time. “The five major trading companies have many joint ventures throughout the world and are likely to have more of these partnerships. I hope that in the future there may be opportunities of mutual benefit.”
And that’s what the executives were pitching last month.
Berkshire didn’t immediately respond to a request for comment, Itochu declined to comment. Representatives for Mitsubishi, Mitsui, Sumitomo and Marubeni confirmed discussions took place with Buffett.
Mitsui and Buffett “had a meaningful exchange of views on how to expand our profits,” a spokesman for the trading house said in an email. Mitsubishi “will strive to enhance our corporate value through dialog, not only with Berkshire but also with our various stakeholders,” according to a spokesman.
Sumitomo will continue to talk with Buffett as a shareholder and business partner, a spokesperson said. Marubeni aims to maximize value for all stock holders including Berkshire Hathaway, a representative said.
Part of the discussion in the Four Seasons was about history, and how these uniquely Japanese firms known as sogo shosha, or general trading companies, came about. Although they trace their roots to the zaibatsu conglomerates that controlled Japanese industry from the Meiji era around the 1860s through the end of World War II, their more recent history has been one of helping resource-poor Japan secure its energy needs by heading to far-flung parts of the globe and making large investments in oil, gas and other commodities.
While the groups are largely unknown to the general public outside Japan, inside the country they’re among the most prestigious firms, hiring the top graduates from the best universities, paying them high salaries and developing them into go-getting international business all-rounders. They’re embedded in every part of the Japanese economy — from carmaking to iron and steel and consumer businesses such as convenience stores. They’re also comfortable working outside Japan on everything from energy projects in Africa to fashion businesses in Milan.
The firms’ shift away from fossil fuels isn’t new. Some of them already make more money from non-resource business. But all of them still count energy and natural resources as major sources of profit. In the Four Seasons, they said it was time to reduce the reliance even more, and pointed to some recent decisions.
In 2022, Mitsubishi announced a plan to become a provider of decarbonization solutions, committing 1.2 trillion yen ($8.8 billion) in green investments by the end of March 2025, while also toning down its fossil fuel spending. Mitsui’s medium-term strategy plan outlined in 2020 pledged to add growth in areas like health care and nutrition.
Sumitomo exited shale in 2021, and is transferring employees from the fossil fuel department to teams focused on finding clean energy investments. The firm sold its silver and zinc mine in Bolivia earlier this year. Marubeni offloaded oil assets in the UK North Sea in 2021.
In the hotel with Buffett, Mitsui’s president talked about health care opportunities. A Mitsubishi executive discussed offshore wind. Itochu outlined its strategy for its sprawling textile business.
The pivot doesn’t mean the trading houses have any plans to forget their roots. Japan still needs to meet its energy needs, and metals such as nickel and copper are more important than ever, needed to meet rising demand for batteries used in electric vehicles. And the firms still need to manage relations with an important stakeholder — the Japanese government, which has been calling for slower divestments from fossil fuels after last year’s energy crisis.
In April, Mitsui completed the purchase of a US gas field strategically placed near export plants.
“Mitsui believes that natural gas and LNG will play an important role as a ‘pragmatic solution’ for energy transition,” the company said in a statement, echoing similar sentiments from Japanese government officials during climate negotiations at a Group of Seven energy and environment ministers meeting last month.
The meetings with Buffett, who’s famously picky about food, ended without any of the big Tokyo dinners for which the trading houses are known. There was no going out for drinks. It was all business — with the discussions trained on what could be a turbulent economy over the next few years.
The Japanese executives, who had been nervous about meeting one of the world’s most respected investors, left with a sense of relief. In an interview with the Nikkei, Buffett had compared the firms to Berkshire Hathaway itself and said he’d like them to come to him with big plans for working together.
They’d given the ideas. He’d listened carefully. Where it goes from here remains to be seen.
“I suspect he thinks their current share prices are below their intrinsic values,” said Lorraine Tan, director of equity research at Morningstar Asia. “And secondly, the trading houses’ established network of suppliers and customers may be difficult to replicate.”
–With assistance from Max Reyes and Hideyuki Sano.
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