July 1 – Standard & Poor’s Ratings Services said today that its ratings on Sumitomo Corp. (A/Stable/A-1) are unaffected by the company’s announcement that it would purchase a 30% stake in an iron ore mining business owned by Brazil-based steelmaker, Usinas Siderurgicas de Minas Gerais S.A. (Usiminas; BBB-/Stable/–). Sumitomo expects to invest up to $1.929 billion or about JPY170 billion, which is equivalent to approximately 11% of the company’s consolidated capital as of March 31, 2010. Sumitomo’s risk assets are likely to increase substantially with this investment, which is likely to be one of the biggest in Sumitomo’s investment portfolio, and concentration risk may also increase. However, any increase in risk volume is likely to be offset when Sumitomo carries out its planned replacement of existing investments assets. Given this, Standard & Poor’s expects Sumitomo’s total risk volume, relative to its profitability and equity capital, to remain within the range assumed in the current rating.

Amid a recent rally in iron ore prices, the breakeven point for Sumitomo’s investment in Usiminas’ mine may be high compared with the existing iron ore-related investments of other domestic major general trading companies. Consequently, Sumitomo faces the market risk of a fall in iron ore prices. Nevertheless, it is Standard & Poor’s opinion that the investment risk pertaining to the deal is unlikely to substantially weaken the balance between Sumitomo’s risk volume and equity capital. This is based on our view that Sumitomo is likely to secure considerable profits even if iron ore prices drop from the current levels. In addition, we believe that business and market risks pertaining to iron ore investments are relatively low compared with investments in other resources.

In recent years, Sumitomo has made large-scale investments, including investments in Jupiter Telecommunications Co. Ltd. (J:COM; NR) and the San Cristobal mine in Bolivia. As a result, the company’s investment portfolio faces increased concentration risk. Although the amount of the investment in Usiminas’ mine is within its plan for new investments, the net risk volume assumed by Sumitomo may grow significantly due to a delay in scheduled asset replacements or larger-than-expected investments that the company may make in the future. This may drastically weaken the balance between the company’s risk volume and profitability and equity capital, and in turn, negatively affect the ratings on Sumitomo.