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How Japan's Marubeni Stumbled In China After Rapid Expansion

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A year after spending $3.6 billion to buy grain trader Gavilon to expand in China, Japan's Marubeni Corp has been shaken by defaults on soybean sales and faces an investigation into alleged tax evasion in the world's top food consumer.

Its aggressive expansion, fuelled by offering flexible terms on soybean contracts and a willingness to deal with less-established customers, has been blamed for making it more vulnerable to buyers walking away from deals in a shaky market.

The problems in China come as the Japanese trading house also faces more competition. Chinese state trader COFCO Corp has gone on its own spending spree and may soon rival Marubeni, the top grain exporter to China, as it builds its own trading house.

'The rapid expansion that Marubeni is pursuing has caused them to take risks that other grains companies would not in their pursuit of business,' said Nobuyuki Chino, president of Tokyo-based Continental Rice Corp, who has spent more than 35 years trading grains, including as a broker for Gavilon.

Asked about its business operations in China and any problems it faced, a Marubeni spokeswoman said China was one of its most important markets and it would ensure stable supply.

Chinese buyers have recently defaulted on at least 500,000 metric tons of soybean shipments and threatened to default on more than 20 physical soybean cargoes, which have not yet been priced.

Marubeni President Fumiya Kokubu said on Friday the firm, which supplies a quarter of China's soybean imports, had suffered defaults on as many of three of its cargo shipments by Chinese buyers in late March and early April.

Another Marubeni official, who requested anonymity, said all companies operating in the Chinese grain market had faced a 'perfect storm', with tightening credit, sliding crushing margins and the first fall in feed demand in recent memory.

Typically, commodities sellers only start shipping after buyers provide a letter of credit (LC) to guarantee payment. However, some trading firms relax the requirement and are willing to accept deposits, particular from established clients.

The Marubeni official said difficult market conditions had forced it to divert some ships initially earmarked for China and suspend loading of others docked in Brazil because of delays in receiving LCs, in order to give the trading firm time to find alternative buyers and minimize losses.

The official said the company, which trades under the names of Gavilon and Columbia Grain Trading in China, had not taken excessive risks. Marubeni's president said the firm's exposure to soybean cargoes without LCs was falling.

'We have about 20 late May, early June cargoes we're aiming to sell to China that have already been loaded and now are gradually having LCs opened on them,' said Kokubu.

An executive at one of Marubeni's main customers in Shandong province said as the Japanese firm sought to expand in China its local units had supplied cargoes where customers had provided a deposit. This was a practice followed by rivals, though the executive and traders said its deposits were smaller.

Marubeni's Chinese business, which competes with global trading firms such as Bunge and Cargill supplying soybeans, had required a deposit as low as 3 million yuan ($482,000) for a cargo of 55,000 metric tons to 60,000 metric tons worth around $40 million at current Chinese prices, said the executive, who declined to be named due to his business relationship.

According to traders, other suppliers required about 10 million yuan per cargo.

A Marubeni spokeswoman said the firm was unable to comment on the details of individual business transactions and payment terms would depend on the creditworthiness of each client.

'Among suppliers, Marubeni offered the lowest deposit payment,' said Gao Yanbin, an investment manager at Shanghai Shenkai Investment Co. Ltd, which trades agricultural products.

Gao said Chinese buyers seeking to get out of deal with Marubeni saw losing a deposit as a relatively cheaper option.

It is rare for international traders to revert to legal action or arbitration under such circumstances, given the importance of the Chinese market and difficulty of enforcement.

Traders and industry sources said Marubeni's difficulties in China were compounded by it focusing too much on small- and medium- sized buyers, which have had a tougher time coping with stricter lending conditions introduced by Chinese authorities.

'This is because they deal with second- and third-tier players in the market which are more likely to default when the prices rise,' said a Singapore-based trading manager with a rival global firm that sells soybeans to China.

The Marubeni official said it had a broad range of counterparties from the biggest to smaller crushers and traders.

Marubeni's acquisition last year of U.S. grain merchant Gavilon made it China's top grains supplier.

The concept was simple: take Gavilon's vast storage network in the Americas, combine it with Marubeni's export capabilities to Asia, and sell corn, soybeans and wheat, to China.

The purchase made Tokyo-based Marubeni the biggest soybean exporter to China, shipping 15-16 million metric tons, or about a quarter of the nation's annual imports of 60 million metric tons.

But just as the firm has been expanding in China, it has faced a potentially more difficult trading environment.

Adding to complications, Chinese regulators only approved the Gavilon deal on condition the two firms maintain separate, independent trading units when selling soybeans to China.

At the same time, relations between China and Japan have become more strained, amid escalating tensions over a chain of uninhabited islands both countries claim, raising worries about the dispute spilling over to harm business ties.

China recently seized a bulk carrier owned by Japan's Mitsui O.S.K. Lines Ltd in a case related to a wartime claim. Mitsui had to pay almost $30 million to Chinese claimants and the ship was released.

Beijing said it was a simple business dispute, but it has set off alarm bells in Japan and increased scrutiny over the probe involving Marubeni's operations in China.

Three employees at Marubeni's Chinese unit of Columbia Grain Trading were detained last month for what Chinese customs said was suspicion of smuggling, which is often used by authorities when referring to tax evasion. Marubeni says it does not know why the staff were detained.

The health of China's soybean sector has deteriorated. Crushing margins in China, which takes 60 percent of the soybeans traded in the world, indicate processors are losing 500-600 yuan a metric ton of soybeans, compared with a 600 yuan profit in the fourth quarter of 2013 during peak consumption.

But even with these obstacles it is impossible for trading houses like Marubeni to ignore China, the world's top buyer of everything from soybeans to copper.

'They've put a huge amount of money into their grains business and when you look at it, almost only China has the means and the mouths for all the supplies that will come out of the U.S. and South America,' said Masayuki Nagano, a senior analyst at Mitsubishi UFJ Morgan Stanley Securities Co.

Other analysts said given the importance of Marubeni's strategy in China meant there could be a hit on earnings if there was any threat to its operations.

But a source familiar with Marubeni's strategic thinking, who did not want to be named, said the firm would stick to the thrust of its plans. 'China is China. There isn't any choice but to make deals with the Chinese.'