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Noble group coal bunkered
1. Noble Group: coal bunkered
Premium Buying the commodity trader requires much from even the hardiest contrarian Lex
Commodity traders have a simple business model: make money on every deal. Easy to write,
tough to do regularly. Noble Group of Hong Kong should understand this point well. Operating
cash flow has been negative in four of the last five quarters, according to data from S&P Capital
IQ. More than once over the past two years Singapore-listed Noble has had to find pliable
lenders to fill the funding gap in its cash flow. Another collapse in its share and bonds last week
underscores why the trader’s shift to an “asset-light” model has failed it badly.
2. The latest wobble follows a disappointing first-quarter earnings report. A loss of $129m was
more than triple the deficit of the same period a year previously. Operating cash flow returned
to the red. A trading error on thermal coal — it can be called nothing less — caused much of the
loss.
True, coal traders have experienced unusually treacherous markets in the past year, partly
because of Chinese government interference. All the more reason to avoid a strategy such as
Noble’s, which depends more on debt funding than producing assets.
Rising competition among an increasing number of trading houses means either taking more
exotic risk or betting more heavily on lower margin trades. Meanwhile, banks have sensibly
reduced their exposure to Noble. Since the beginning of 2016, Noble has raised almost $2bn via
equity rights issuance, high-yield bonds and the sale of its Americas Energy Solutions to US-listed
Calpine. Noble’s banks retain some risk, at least another $1bn. Why would any bank extend
more credit to the trader? Noble has few assets bar the people it employs and the relationships
it depends upon. To take risk one has to have confidence. Noble shares trade at less than a third
of book value and bonds below half their par value. To buy requires lots of faith from even the
hardiest contrarian. Neither confidence nor contrarianism is merited by Noble’s strategy.
Martin Sandbu
