We could be hearing a lot more stories like this. Big stories.
On Tuesday night Moody’s became the first ratings house to downgrade Asia’s largest commodity trader, Noble Group, to junk.
In its decision, it cited the potential for a prolonged slump in commodities prices and concerns about Noble Group’s liquidity.
Noble Group’s stock fell 10% on the news, and has now fallen 61% in the last year.
Consider this a strong sign that the rout in the commodities market has entered a new phase. This is when the pressure starts to hit the biggest players in the corporate sector.
It is brutal in the commodities business right now, and some smaller companies have already defaulted.
But it is the impact of the commodity price collapse on bigger companies, such as Noble Group, Glencore and Anglo American, and commodity exporting countries like Brazil, which has the potential to be really destructive and grab the business world’s attention.
Kit Juckes, an analyst at Societe Generale, wrote that in this new phase survival “will be about how the corporate sector reacts to weaker income in the longer run (some will be more resilient than others and some will fail), while at the macro level commodity exporters’ governments will also react.”
He continued; “It’s these second round effects of lower commodity prices that may dominate in 2016.”
The Bloomberg commodities index is down 25% so far for 2015, and it’s hard to see when demand for anything from oil to coal to copper will rise again. This is the end of the “commodities supercycle.”
An unholy mess
Noble isn’t the only commodities trader suffering in this environment, but it has internal problems that make it more vulnerable than its peers.
Short sellers like Muddy Waters have been accusing the company of playing accounting tricks for some time. Moody’s, S&P and Fitch have all had a negative outlook on the company’s credit since this summer.
“We think the company is deeply loss making and that’s reflected in their cash flow,” said analyst Gillem Tulloch, founder of GMT Research, in an interview with Bloomberg TV back in August.
Tulloch said that a lot of the profit Noble books comes from fair value gains and projects that haven’t been completed. Once the company’s creditors start to doubt the company, he said, Noble’s will face a liquidity squeeze.
Noble’s CEO, Yusuf Alireza, has denied these allegations and says that Noble’s pain is one that is being felt across the industry. To illustrate his point, he commissioned a report explaining Noble’s cash position from PWC and held a public forum on the matter.
In response to the pain the industry is feeling at large, he’s started selling off Noble assets for cash.
“The stock has slumped not because our core investors are selling, the stock has slumped because we have a short seller attack on the stock,” he told Bloomberg TV, also back in August.
Alireza also said at the time that his company didn’t need an investment grade to continue to do business. His peers don’t have one, he pointed out. He also said at the time that a credit rating cut was “not something that even is on the cards.”
It looks like there will be a more nasty surprises for as long as commodity prices stay low.