Q.1: Why does Noble Group perform the range of activities it performs?

Shortly describe Noble Group’s

business strategy and the rationale behind. How does this strategy impact its financing needs?

Noble Group Ltd. has been running global supply chain business across three core commodity segments
such as agriculture, energy and metals, minerals and ores. Noble also operated a logistics segment to
facilitate trade of these commodities. It employed a pipeline strategy that is taking part in nearly every
step of the global supply chain for products in those segments. There are several reasons behind
performing these wide range of activities.

1. All of Nobel’s segments boasted rising revenues in response to the ever-increasing demand for
commodities.
2. Nobel was facing strong competition as competitors are intensively involved in the processing and
production of commodities than Noble.
3. The involvement of different stages allows Noble to diversify its sources of income for instance, it
acquires profit from trading arbitrage as well as generated fee income from off-take agreements,
marketing contracts, financial arrangements, asset backed income from processing facilities and
mine operations.

Business Strategy of Noble:

In the beginning Noble had intermediary business that facilitated trade between counterparties across
industries and regions. In general, the firm sourced commodities from low cost supply markets and then
delivered them to high growth demand markets. On the both sides of these transactions customers relied
on Noble to provide reliable and timely service. Noble’s customers did not want to hold more inventory
than they needed. As the company was in matured stage and boosting revenues, it decided to expand
business through “asset medium” pipeline strategy where it has an active involvement in almost every
step of the supply chain. Noble began investing in key assets along the supply chain from mines, to
processing plants, to storage facilities, to ports, to vessels. The strategy was not to own 100% of the supply
chain but rather to manage or own those assets along the supply chain at points that were more attractive.
The rationale behind this strategy is to mitigate some of the risks involved in the trading process. For
example, for mitigating price risk of selling soybean Noble acquired four soybean processing plants in
China so that soybean could be crushed in china. Consequently, Noble did not export soybean to crushers
in china rather it crushed soybean in own plants and sell these crushed soybean in Chinese markets.
Moreover, the company wants to work actively in every steps from production to distributions so that
inventory can reach to the customers and suppliers timely and they do not need to hold excess inventory
for performing activities.

Since Noble started to involve every stage from production to distribution, it would need to raise
additional capital. To supply inventory to the customers, it needs to hold a large amount of inventory all
the time. Consequently, the company faces highly working capital needs. As the company started to
expand business it required to place huge amount of employees and investments in capital projects along
different points of supply chain. For instance, by the year end, Noble had placed over 10,000 employees
across 40 countries around the world and had invested more than $700 million in new investments and
capital projects.

Q.2: Analyze Noble Group’s risk position and its risk mitigation possibilities and measure. Why are there
still significant risks despite all hedging efforts?

Price or Market Risk

Noble’s main source of risk is price or market risk because commodity prices are volatile in nature. It
hedges this risk by using future markets. For purchasing commodities it takes long position and for selling
it has short position in the future contracts. Here price of the commodities is pre-fixed and contract is
closed when commodities are physically delivered. So, rising or falling price movements would have little
or no impact on profits.

Foreign Currency Risk

A change in currency value implied a change in the value of any contract denominated in that currency.
In case of transaction the risk is limited by the fact that most of the international commodity trading is
denominated in US dollars.

Counterparty Risk

The firm faceds the risk that the farmers, processors, and end buyers with whom it deals would not pay
or deliver goods when contracts come due. Noble minimizes collective counterparty risk by diversifying
its customer base across industries, products and geographies. It also minimizes individual counterparty
risk by doing its due diligence on potential suppliers and customers, analyzing their credit risk profile, and
seeking risk mitigants like letters of credit.

Political and Environmental Risk

Political risk could arise in the form of an unexpected nationalization policy, whereby the government
could expropriate property owned by Noble. On the other hand, environmental and health risk could
similarly emerge unexpectedly, in the form of a storm or a virus destroying a year’s worth of crops the
firm had bought or grown.

Though Noble has taken some effective measures to mitigate risks, it has still some significant risks which
are unhedged. Noble maintains a high level of hedged price risk with over 90% of inventory stock either
priced hedged or pre-sold. But it could not able to cover 100% or for all inventories. Secondly, foreign
currency fluctuations poses risk to Noble on the cost side as the firm owns offices and physical assets
around the world. Thirdly, Noble has substantial amount of counterparty risk in the area where letter of
credit is unavailable, either due to the small size of a transaction or a buyer’s inability to access a bank. As
a result, Noble might have to trade on open accounts which has high chance of default payment. Finally,
in the future contracts both parties have to post cash collateral in the event that commodity prices rise
and they will suffer losses on future contracts positions. If counterparty suffers huge loss and cannot able
to make maintenance margin, the contracts will be terminated automatically and Noble has the risk to
lose profit.