Cover Story

Overcoming Adversity, Accomplishing Growth

In fiscal 2014, the Sumitomo Corporation Group
recognized impairment losses centered on upstream
mineral resources and energy businesses, which resulted in
an overall loss posted for the year.
We are fully aware of the seriousness of this situation and are
committed to pushing forward with managerial reforms and
enhance our earning power to recover trust and
advance toward future growth.

  • Question 1
  • Question 2
  • Question 3

Question1 Please tell us about the impairment losses recognized by the Sumitomo Corporation Group in fiscal 2014.

Answer1 Impairment losses totaling \310.3 billion were recognized with regard to a tight oil development project, shale gas project, and tire business in the U.S. as well as an iron ore mining project in Brazil, coal mining projects in Australia, and oil field interests in the North Sea.

Overview of Impairment Losses

Impairment losses totaling approximately ¥310 billion were recognized primarily with regard to large-scale projects in the upstream mineral resources and energy field.

One subject of impairment loss was a tight oil development project in the Permian Basin, which is located in the U.S. state of Texas. The geographic layout of the region under development (shale layer) proved to be more complex than initially expected, with underground conditions varying greatly between different areas, even within the same stratum. Accordingly, the development of different drilling methods was necessary for each area, which has made it difficult to extract oil and gas efficiently. It was therefore determined that continuing development while guaranteeing profitability would be difficult, and we thus decided to sell the project together with our partner Devon Energy Corporation. We also revised long-term business plans for regions in which Sumitomo Corporation plans to maintain holdings. As a result, the Company recognized an impairment loss of ¥199.2 billion.

The Company has developed a track record in and acquired expertise related to such projects through its involvement in the Barnett and Marcellus shale gas development projects, in which we commenced participation in 2009 and 2010, respectively. Regardless, we succumbed to risks regarding tight oil excavation that we were unable to predict when we started participating in the Permian Basin project.

In regard to the iron ore mining project in the Serra Azul region of the Brazilian state of Minas Gerais, we determined the amount of investment in this project based on the value of expansion projects that were planned at the time of participation. However, these expansion projects were later delayed, and iron prices dropped. We were therefore forced to revise our long-term business plans, leading to the recognition of an impairment loss of ¥62.3 billion.

Elsewhere, the shale gas project in the United States, coal mining projects in Australia, and oil field interests in the North Sea were all impacted by falling resource prices, which led to the recording of impairment losses.

Impairment losses were also recorded in nonmineral resource businesses.

TBC Corporation, the operator of a tire business in the United States, had been suffering from poor performance for some time. This was largely due to a decline in the number of automobiles within the age range that TBC targets, a result of the drop in new automobile sales that followed the bankruptcy of Lehman Brothers in 2008, as well as the delays in this company's response to diversifying customer needs in its retail operations. While we attempted to address this situation by placing the reconstruction of TBC's retail operations as a top priority, the pace of recovery was not up to the speed called for by business plans. The Company was therefore forced to record an impairment loss of ¥21.9 billion.

Breakdown of Impairment Losses on Large-Scale Projects

  Project outline Amount of impact on profit for the year
attributable to owners of the parent
Main reasons for impairment losses
Tight oil development project in the U.S. Tight oil and gas development and relevant businesses in the U.S. state of Texas −¥199.2 billion
  • Resolution to sell certain held assets
  • Decline in crude oil prices
  • Revision of long-term business plans
Iron ore mining project in Brazil Iron mine development and related businesses in the Serra Azul region of the Brazilian state of Minas Gerais −¥62.3 billion
  • Decline in iron ore prices
  • Revision of long-term business plans and future expansion plans
Shale gas project in the U.S. Shale gas development and related businesses in the U.S. state of Pennsylvania −¥31.1 billion
  • Decline in crude oil and gas prices
  • Revision of long-term business plans
Coal mining projects in Australia Investments in coal mines in Australia −¥24.4 billion
  • Decline in coal prices
Tire business in the U.S. Retail and wholesale of tires in the U.S. −¥21.9 billion
  • Revision of business plans
Oil field interests in the North Sea Crude oil and natural gas development, production, and sales in the British and Norwegian zones of the North Sea −¥3.6 billion
  • Decline in crude oil prices
  • Revision of long-term business plans
Tax effect, etc.   +¥32.3 billion  
Total   −¥310.3 billion