Having survived the fiercest moments of the commodities crash, Noble Group should hope the wounds it has sustained aren't mortal.
Commodities traders can still make plenty of money in a low-price environment. As with any middleman, it is not the cost that matters, but what they get for moving products between buyers and sellers. Yet greater price volatility, new regulations and a shift in the way traders get financing mean that Noble, and its competitors, still have a rocky road ahead.
Chief executive officer Yusuf Alireza said yesterday: "The markets are difficult... To say the worst is behind us is just not realistic." Noble has been reducing its holdings in physical assets, such as mines and grain-handling facilities, to focus on the more resilient trading business and thus has been able to reduce its share of expensive long-term borrowings. It can afford to do more.
Traditionally, commodity trading houses could be set up with little more than a contacts book and a telephone, as almost all their borrowings were secured against physical cargoes of oil, metal and grains. Debt that's secured with collateral ought to be significantly cheaper than the unsecured variety. During the heyday of the commodities supercycle, that model started to wane. Lenders' enthusiasm for the booming sector pushed the spread on secured over unsecured debt so low, many traders felt it was barely enough to cover the extra paperwork.
Mr Alireza said he plans to move Noble's balance sheet from a set-up where 90 per cent to 95 per cent of its borrowings were unsecured, to one where the proportion is down to about 65 per cent to 75 per cent. It still needs to go further.That is a safer position for a commodity trader to be in, given today's bearish markets.
Rising commodity-price swings are also taking a toll. The 30-day volatility of the Bloomberg Commodities Index, that is derived from futures prices, breached 21.5 per cent a couple of times last year, the highest since August 2012, and shows little sign of abating with a current reading of 17 per cent. That volatility is forcing traders to hold more cash for margin requirements.
Noble ended 2015 with almost US$2 billion (S$2.7 billion) in cash and equivalents, more than double the US$904 million it had the year before. One more blow is coming from pending financial regulations.
Europe's new Markets in Financial Instruments Directive will further limit the amount of derivatives commodity traders can hold before they are considered investment firms and forced to comply with similar capital and liquidity requirements to those imposed on banks.
The rules will not take effect until January 2018, but some countries are expected to start implementing them much sooner. While Noble is not based in Europe, it may find it hard to skirt the regulations, given how much commodities trade passes through the continent. While commodity prices have rebounded so far this year, none of these factors is going away quickly. No wonder Mr Alireza is doing all he can to reduce his funding costs.
•This column does not necessarily reflect the opinion of Bloomberg LP and its owners.