Noble Group Case Study Solution - Why Does Noble Group Perform the Activities It Performs?

Noble Group Case study Solution

Why does Noble Group perform the activities it performs?

Nobel Group manages a global portfolio of supply chains covering agriculture, energy, minerals and ores, originating from low cost producing countries and delivering to high growth demand markets. All of Nobel Group segments boasted rising revenues in response to the ever-increasing demand for commodities. Since there was an increase in the demand for commodities, this was the motivation for Nobel to perform its activities it has been performing. The firm was well versed in the commodity business for 20 years and has thrived in the commodity boom of April 2008.

Further a significant amount of the firm’s profits came from its ability to perceive and then take advantage of the arbitrage opportunities in the markets it traded. Noble’s collection of assets—ports, mines, processing plants and constant conversions with a diverse group of customers and suppliers gave the firm an inside track of what is ahead in global markets.  This also motivated Nobel to perform the activities it was already performing

Further the evolution of Nobel’s business model allowed it to diversify its sources of income. In addition to profits related to trading arbitrage, Nobel also generated fee income from off –take arrangements, marketing contracts and financial arrangements, as well as asset backed income from processing facilities and mine operations. The opportunities of earning of additional income has also motivated Nobel group to perform its activities it is already performing

What are the benefits of vertical integration in the commodity sector?

Prices in the commodity sector are highly volatile and instable. Vertical integration is one of the most effective approaches for managing the price volatility. One of the oldest strategies for managing commodity price risk is through vertical integration. It is one of the most effective strategic risk management tools.

The main advantage of the vertical integration is the increased control. For instance, an enterprise has a contract with a supplier for buying a maximum amount of a product, but the context changes and that organization needs more than the fixed amount for a certain period of time. It has to renegotiate with the supplier to buy a higher amount, but it is really up to the supplier to deliver more than agreed previously, and it is possible that he won´t do it. Now, if the organization is handling that product by itself, it just has to increase production - it has the control to increase or reduce production, at will, so there is more supply chain coordination.

Another benefit of vertical integration, related to the previous one, is that you will be able to invest in highly specialized assets, which could represent an advantage over competitors that your external supplier or client wouldn´t be interested in. This way you can invest, and improve your products

It also provides increased market share and a greater competitive advantage by providing greater access to distribution channels. When you integrate in your organization the work done by previous suppliers or costumers, you are also introducing or expanding the core competencies of your workers

How does Noble's financial health compare to that of its competitors

Noble group needs to be performing better than its competitors in terms of the asset turnover ratios. It seems to be using its assets efficiently to generate profits as compared to his competitors which is very important in the commodity trading business.  It also seem to be managing its working capital more effectively and has got greater current ratio as compared to its competitors. This also signals that Nobel has got better liquidity as compared to his competitors which is very important in the commodity trading business. Even though the gross profit margin ratio is less compared to its competitors and it needs to focus on improving the same, in other ratios such as asset utilization and liquidity it seems to be performing better than its competitors.

What are the purposes and consequences of using receivables facilities?

Purpose and consequences of using receivable facilities:-

1. To remove the receivables off the balance sheet
2. Sell its receivables to financial institutions for cash
3. To discount its receivables
4. To receive funding against a pool of receivables which was constantly changing
5. To offer pre-purchase financing to its suppliers
6. Helped Noble manage its working capital

What are the uses of letters of credit and open accounting trading terms?

              Open Accounting trading terms-

1. Meet working capital needs
2. Open accounting terms enabled Noble to access financing on a transaction basis and supplemented the credit lines available through banks. Supplier financing was an attractive option when available, as it was comparatively cheaper in cost, and this amounts were excluded from most leverage metrics
3. Enabled the buyer and seller to have a direct relationship without an intermediary bank
4. Since Nobel group operated in many countries, where LOC was not available either due to the small size of the transaction or buyer’s inability to access a bank. Under this situation, Noble would trade an open account terms with clients that posed significant risks, but would increase the security of such transactions by acquiring credit insurance
5. Enabled Noble Group to offer customers payment terms that were most appropriate given the risk involved in the transaction. Customers who had good credit terms could access open account terms

Letters of credit

1. Provided payment guarantee that the seller, Noble group would receive from the issuer of the letter of credit
2. Enabled added protection to pay to the seller as long as all the transaction documents conformed to the LOC
3. LOC helped Nobel in minimizing their counterparty risk by means of due diligence on potential suppliers and customers, analyzing their credit risk profiles

What are the purposes and consequences of entering into the soy prepurchase agreement?

1. Helped to mitigate risks
2. Helped in hedging commodity price risk since the commodity prices were highly volatile and were subject to price fluctuations
3. Helped Nobel Group to manage its working capital
4. Noble Group received an award for arranging pre-payment plan negotiated with a group of Brazilian farmers at that time where credit was particularly scarce for the farmers and as a result of rising prices of fertilizer and other inputs, it was making it difficult to finance their production cycle. Nobel was able to arrange the financing so that more than 90% of the financial risk was non-recourse to Nobel. Nobel was also able to earn an interest spread on the loan facility
5. A significant amount of the firm’s profit came from its ability to perceive and then take advantage of the arbitrage opportunities in the markets in which it traded

How do increasing commodities prices affect working capital need for commodities traders?

The working capital element exists because the commodity trading firm has to finance the input from the time it is purchased until it can realize revenue from the sale of the refined good after processing is complete. Commodity firms typically need to pay for the inputs they process before they receive payment for their outputs. This creates a need for working capital to finance the timing gap between cash outflows and inflows. Increase in commodity price ask for extra funds to be used as working capital. The price level changes determine the increased working capital needs by means of affecting the inventory, payables and the receivables