The Warren Buffett way to profit from the energy crisis

Warren Buffett is the third-biggest shareholder in Mitsui and a leading investor in its compatriots Mitsubishi Corp., Itochu Corp., Sumitomo Corp. and Marubeni Corp.

When the Deepwater Horizon rig exploded in the Gulf of Mexico in 2010, triggering the largest-ever oil spill in the US, all eyes turned to BP Plc, the British company behind the drilling. But BP wasn’t alone in the project. Among its partners was Japan’s Mitsui & Co., which held a 10% stake.

Little-known outside the natural-resources industry, Mitsui is part of a group of five Japanese companies that invests in energy and commodity projects around the world. They are Japan Inc.’s commodity arm with interests in everything from coal mines in Australia to oilfields in Oman and wheat silos in Canada. For years, it has been a monotonous business few paid attention to.

But now, thanks to a yearlong period of sky-high raw-material prices, the Japanese traders are squeezing more cash than ever from those projects, becoming among the biggest – though under the radar — winners of the 2022 inflation boom. Add the profits from buying and selling the commodities, and net income is at a record.

The Japanese traders may be largely unknown, but one of their top investors — and beneficiaries  — is quite prominent: Warren Buffett.

The Oracle of Omaha has turned a two-year old bet on the five companies – known collectively as the sogo shosha, or general trading companies — into gold, recently upping the wager by increasing his stake in each. Today, Buffett is the third-biggest shareholder in Mitsui and a leading investor in its compatriots Mitsubishi Corp., Itochu Corp., Sumitomo Corp. and Marubeni Corp. With some differences, the five follow the same business model: take stakes in natural-resources projects, trade the commodities they produce, and use the cash to slowly diversify.

Berkshire Hathaway Inc., Buffett’s investment vehicle, first disclosed the investment in the sogo shosha in August 2020, with 5% stakes in each worth a total of $6 billion at the exchange rate of the day. Those positions have gained more than 50%, even when accounting for the depreciation of the yen against the dollar. Two months ago, Berkshire disclosed the purchase of more shares, bringing the stake to about 6.5% — or roughly $12 billion at today’s exchange rate.

Berkshire timed its entry perfectly. True to his motto of being “fearful when others are greedy, and greedy when others are fearful,” Buffett invested in the sogo shosha after many others had abandoned the companies due to a long period of stagnant profits and poor market performance. Before 2020, their combined net income had been stuck at around 1.5 trillion yen ($11.2 billion) for more than a decade, and few had anticipated a turnaround.

The ESG trend added another obstacle for mainstream investors, since the sogo shosha are huge in metallurgical coal, oil and liquefied natural gas. And for those not tied to ESG principles, many in 2020 were worried about oil projects becoming stranded assets and demand for fossil fuels peaking. It was an illusion. The Covid pandemic had only temporarily derailed energy usage. As soon as economies reopened, consumption -- and commodity prices — soared. Coal demand last year rose to an all-time high. Meanwhile, Europe rushed to replace Russian gas supplies with other LNG sources. And despite slow economic growth, oil consumption will hit a record high this year.

That has transformed the sogo shosha into cash machines. Just before Buffett invested, the five companies reported a combined net income of 1.7 trillion yen in the year to the end of March 2020. In the 2023 fiscal year, which ends in little more than two months, the companies have guided investors to expect net profits of almost 3.9 trillion yen. A lot of that would come from stakes in coal, oil, copper and LNG projects. The cash gusher is flowing to shareholders via record dividends and hefty buybacks. The share prices of Mitsubishi and Mitsui, the two most profitable sogo shosha, are up 100% and 130% respectively since Buffett’s entry in 2020.

Buffett may be better known for some of his successful trades in blue-chip American companies, like Apple Inc., Bank of America Corp, and The Coca-Cola Co. But he makes lots of money from fossil fuels and commodities. Berkshire is the largest shareholder in Chevron Corp., the second-largest American oil company. It owns Burlington Northern Santa Fe Railroad, which ships bucketloads of US coal. And its utility subsidiary also produces electricity from coal and natural gas (and increasingly from wind, too).

How long can Buffett profit from his Japanese commodity trading adventure? Natural gas and oil prices have fallen back but remain high by historical standards. Coal and copper prices are still close to record highs. And in contrast to many Western governments, Tokyo is encouraging its companies to buck the divestment trend from fossil fuels. Despite climate change, the world still needs coal, oil and gas. Even if not as high as the 2021-23 period, that means higher-than-average profits ahead for Buffett and the sogo shosha. 

Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. Views are personal and do not represent the stand of this publication.

Credit: Bloomberg Opinion