Monday , June 18 2018

Can the commodities bounce be end of Noble?

It’s customary for companies reporting a horror-show result to blame the general trading environment, rather than anything within control of management.
Commodities trader Noble Group Ltd. is no exception. In declaring that it had been holed below the waterline with a $1.9 billion net loss over the June quarter, the company declared the problem was not with the crew, but the weather:
The operating environment continues to be difficult for the Group, in particular following the announcement of a loss for the three months ended 31 March 2017, as well as the ongoing challenges in the commodities’ sector.
One has to ask: What ongoing challenges? Just a few hours earlier, Noble’s distant corporate cousin Glencore Plc announced a more than four-fold jump in first-half adjusted Ebit and its lowest net debt levels in five years.
A week earlier Rio Tinto Group announced a $3 billion dividend and share buyback. Thermal coal in Newcastle has averaged $82 a metric ton over the past year, compared to $58 a ton over the previous two, and the Bloomberg Commodities Industrial Metals sub-index on Thursday touched its highest level since 2015.
Nonetheless, the challenges in this instance are real. Better prices are great news if you’re a producer of commodities and a minor inconvenience if, like Glencore, you’re a trader with a decent balance sheet to fall back on. For Noble, they could be an existential threat.
To see why, consider the commodity trader’s business model. To finance a ship carrying 100,000 tons of coal at $50 a ton, you need a roughly $5 million credit line just for the cargo. When coal prices climb—say to the eight-month high of $93 a ton, where they’re sitting right now—the credit line has to expand as well, to the region of $9.3 million.
If you’re producing commodities, rising prices will improve your margin, but traders are mostly buying from third parties instead. As a result, the main effect of better prices is to require a larger sum of credit to produce the same amount of profit.
That’s a problem for a business like Noble, which is rapidly losing what faith its lenders still have in it. Take the latest performance in the oil liquids business, which management are trying to offload. Volumes fell 20 percent “on higher prices within the constrained liquidity environment,” Noble said on Thursday. The metals unit suffered for similar reasons.

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