Commodities giant reports first loss for 14 years

11 November 2011

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11 November 2011 | Adam Leach

Noble Group's 14-year run of profitable financial announcements ended yesterday as it reported a $17.5 million (£11 million) loss in the third quarter with extreme price volatility and broken contracts cited as significant factors.

The global commodities trading house, which purchases and sells a range of commodities including cotton, cocoa and iron, often through futures trading contracts, was hit particularly hard by severe volatility in the cotton market.

It said it was forced to buy supplies at high spot prices in order to meet demand after a “systematic default” on contracts by cotton farmers looking to capitalise on high prices.

The problem with broken deals continued when prices dropped. Companies that had locked in guaranteed supplies at high prices changed their minds and decided to buy more cheaply off the market. The rate of change in prices over the year saw a low of $1/lb (60p) and a record high of $2.27 (£1.40) earlier in the year.

Giving his views on suppliers' conduct in a statement, Noble’s chairman Richard Elman, said: “Extreme price volatility, has resulted in participants walking away from contracts in an unprecedented way.” Adding: “So much for the sanctity of contracts!”

Elman, who will step in as acting CEO at the company after Ricardo Leiman resigned from the role yesterday, went on to raise concerns about contracts being broken in the future. “Obviously, if the end result of the past few months is that it becomes the industry ‘norm’ to walk away from binding commitments, we will have to review the business model in the light of its changed risk profile.”

In addition to the problems in the cotton market, the company said the uncertain economic climate was continuing to create volatile commodity prices. The report said: “The current market environment led us to be prudent and reduce our risk exposure, inevitably reducing upside potential but allowing us to preserve capital.”

The disclosure of the loss, together with the departure of Leiman, resulted in the company’s share price dropping by as much as 28 per cent during Singapore trading hours on Wednesday, where it is listed.

This week, low-cost clothing retailer Primark reported an 8 per cent drop in profits as a result of high cotton prices and its decision not to pass the increase onto customers. And last month, both Debenhams and H&M reported that they had been hit by the high prices. Debenhams reported that it had put increased pressure on its purchasing team, however it still reported a rise in profits, while H&M saw profits drop by 15 per cent and cited cotton prices as a major factor.

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