Commodity Deals Show China Flexing Muscles in Trading Clout HuntBloomberg News
Sinochem may get international-markets access via Noble stake
Potential deal in line with China’s other purchases in traders
China’s stepping up its campaign for greater clout in global commodities trading.
The Asian nation’s state-run Sinochem Group is said to be in early talks to become a strategic investor in embattled commodities trader Noble Group Ltd. A potential deal could give the Chinese oil and chemicals behemoth access to Noble’s trading expertise and businesses around the world, from gasoline blending on the U.S. Gulf Coast to petroleum storage in Panama and fuel transport via American pipelines.
China, the world’s biggest raw-materials consumer, wants to assert more influence on the flow and prices of commodities around the world amid expanding domestic demand and a revamp of its byzantine state-run enterprises. A deal with Noble would be the fourth time a government-owned company bought into an international commodities trader over the last five years.
“The bulk of Sinochem’s trading activities are domestically focused, so potential interest in acquiring a stake in the Noble Group makes a lot of sense,” said Steve Jenkins, Vice President of Consulting for Chemicals, Polymers & Fibres at PCI Wood Mackenzie. “It would offer greater access to larger, international markets.”
A potential deal would also be in line with China’s policies to encourage state-owned enterprises to expand in international markets, “especially in areas that have power to set or influence global commodity prices,” said Tian Miao, a Beijing-based analyst at North Square Blue Oak Ltd.
Revamping state-owned enterprises is critical to President Xi Jinping’s policy of moving the $10 trillion economy away from an over-reliance on debt-fueled infrastructure investment and exports to one powered more by services and consumer spending. The so-called SOEs, spanning from power companies to train makers to banks, have traditionally been a source of political patronage and economic power for the Communist Party.
“One of the targets of this round of SOE reform is to strengthen those companies’ competitiveness internationally, and one measure to achieve that is to seek control of supply chains and trading platforms,” said Tian.
China’s state-run commodities giants already have significant trading operations. They include Chinaoil, a unit of the nation’s biggest energy company; Unipec, a unit of the country’s largest refiner; Minmetals Corp. as well as Cofco Corp., which trades agricultural products.
Over the past few years, Cofco has taken control of Hong Kong-based Noble’s agritrading business and Dutch grains trader Nidera BV. ChemChina, a chemical giant that may be merged with Sinochem, has bought a stake in Mercuria Energy Group Ltd. Cofco’s deals have suffered setbacks, including costly scandals uncovered by the Chinese company at Nidera and tough market conditions for Noble.
Sinochem is already a big player in oil and chemicals, and posted trading volumes of 100 million metric tons in 2015 for crude and refined products, or about 2 million barrels a day, according to that year’s annual report. It has total crude and petrochemical storage capacity of 25 million cubic meters, runs 900 fuel stations in the Asian nation and has interests in refining, agriculture and even property development and financial services such as insurance.
Noble Group offers access to a trading network spanning continents. The company traded 950 million physical barrels of crude oil and refined products via ship, barge, pipeline, truck and rail in 2015, 32 percent more than the previous year. It’s one of the biggest gasoline blenders in the U.S. and supplies products to the Colonial and Magellan pipelines. It has petroleum storage facilities in Panama and Europe, and is also a major coal and LNG trader.
The company is also in need of a liquidity boost after enduring a torrid two years during which its shares dropped more than 75 percent while it battled plunging commodities prices, mounting debt and criticisms of its accounting. Chairman Richard Elman said in September that Noble is still seeking a strategic investor and that it may take as much as two years for a return to profit.
“On the one hand Noble is in need of cash, on the other it can add supply-chain value to Sinochem’s existing trading business, and they can be complementary to each other in products, regions and portfolios,” said Li Li, an analyst at industry researcher ICIS China. “There is certainly a pattern for a rich China Inc. to invest in a quickly growing trading house with a specialized focus.”
— With assistance by Aibing Guo, Sarah Chen, Javier Blas, and Livia Yap