richard elman

China trader cautiously hopeful
By Tim Treadgold
April 15, 2009


PORTFOLIO POINT: Richard Elman, of the Noble Group, expects China trade and the global economy to improve now ‘the panic has gone’.
Commodity prices are bouncing and China, the locomotive of Australia's mining industry, is chugging again. Sure, the sudden surge in China's industrial output is fed by one of the world's biggest stimulus packages, but nonetheless the figures are real and they're enough to bring a cautious smile to the face of one of the last China tycoons: Richard Elman, the man behind the $30 billion Noble Group trading house.

Elman should be familiar to Eureka Report readers. We spoke to him in 2007, long before he made a takeover bid for Gloucester Coal. A few days ago I decided to revisit this China merchant in his glass-panelled office high above the bustling harbour of Hong Kong.

My timing was useful. From their low point a few months ago, commodities are rebounding: copper has risen by 25% over the past four weeks; zinc is up by 17%; and soy beans (Noble Group is one of the world's biggest traders in the crop) are up about 51% on this time last year.

Yet though he is more familiar with these figures than most, and though he guided Noble through last year’s crash with great dexterity, he remains cautious. “We could see more blood spilled,” he says, in a conversation conducted 18 floors above Gloucester Road, “but if there was any real stress in the 4000 companies we deal with we would have seen it by now.”

That uncertain view of the future typifies Elman's outlook in mid-2009. On one hand he is confident of an improvement in demand for commodities in China, Noble’s biggest market, and one with which Elman has been trading for more than 40 years. On the other he wants to see proof that this improvement in market indicators is more than a short-lived bubble.

On balance he comes across as positive. Here's why:


Noble's all-cash bid for Gloucester, which is designed to beat-off a rival merger proposal from Whitehaven Coal, is the only aggressive takeover offer ever made by Noble.
Gloucester Coal is not the only Australian miner receiving close attention from Noble. On April 1 Noble agreed to help the small iron ore miner Territory Resources restructure its finances, including the provision of a $US29 million loan.
Elman is convinced that the fear of social unrest in China will ensure that its stimulus spending delivers the economic growth demanded by the government.

As Elman suggests: “They [China] will pour money at it and keep the industries going because they have a bigger problem than that. They have a [social] problem of livelihood. I’m hoping everything they’re doing works.”



Hoping for China to continue growing is a dramatically different view from the confidence he expressed when Eureka Report travelled to Hong Kong for an interview 18 months ago.

In September 2007 (see China merchant’s ASX favourites), Elman’s view was optimistic but, like now, tinged with caution. Although he believed in Australia's pivotal position in the commodities market, he was concerned the credit crisis then rearing its head in the US housing market would become a bigger problem for global trade finance.

How right he was, with that early concern perhaps explaining why Noble was able to adjust its business to sail through 2008 largely unscathed. While many other companies were decimated by last year’s events, Noble booked a record $US36 billion in turnover for the 12 months to December 31, and lifted net profit by 124% to a record $US577 million. (Noble is listed on the Singapore Stock Exchange)

This year will see profit slip, though Elman declines to provide a forecast, simply saying that he is confident that Noble will achieve its long-term target of a 20% return on equity.

Apart from Elman’s lifetime as an Asian-based commodity trader and supply-chain manager, first with Phillips Brothers (which later changed its name to Phibro) and then with his own firm, Noble Group’s business model is extremely flexible. It makes money at points along the supply pipeline, including control of port and shipping functions, but rarely carries the principal risk of owning a cargo.

By having a finger on the pipeline that delivers commodities to China, and another on the export of finished products, Noble gets a very accurate reading of the pulse of the region, and after several scares over the past year the pulse is encouraging.

With its sole stockmarket listing in Singapore and its head office in downtown Hong Kong, Noble remains little known in Australia, although its $US30 billion revenue and its high profile directors (including economist Ken Courtis) have put it on the radar of institutional investors. Elman, the driving force behind the operation, went to Hong Kong from Britain as a young man and garnered an exceptional range of contacts inside and outside of China as he built his empire.

His range of interests are wide, even by the standards of Hong Kong traders. Noble controls 10% of the soy exported from South America, and is a major soy “crusher” in China, which means he controls the supply and distribution of product. He is also an important operator in the ethanol business, and ranks as the world’s second-biggest trader in thermal (electricity producing) coal, and the biggest non-miner trader in iron ore.



For Australian investors he is also one of the most interesting and potentially powerful offshore investors in the local mining and commodity sectors, while his willingness to air his views stand in dramatic contrast to the silence from China government-controlled entities such as Chinalco and Minmetals, which dominate the headlines.

“We will naturally have a smaller business this year than last year,” he says. “The question is how much smaller. If you look at the trade statistics around the world you will see anything from (a decline of) 20% to 40%. You’ll probably see roughly the same thing in prices.

“I think you’re looking at a bottle that is 60% full. That’s what 2009 looks like to me. It’s question of maximising how much of that 60% you can get. This is not a forecast, it’s just a conversation I have with myself most mornings”.

Those comments are from the cautious side of Elman. On the positive side there are the Gloucester and Territory moves, plus a surprisingly busy executive recruiting program that has seen Noble’s staff numbers swell by 100 over the past few months, including a team of specialist oil and gas traders. Those new recruits have joined Noble because they are available courtesy of the downturn, and because Elman is positioning Noble for the next upswing.

Other key observations from a man closer to China than most include:

He is more optimistic about the global economy today than he was three months ago because “the panic has gone”.
China might not score 100% and get everything right with its economic stimulus but “you have to assume that it will get an 80–90% hit rate”.
Confidence that China will achieve annual growth of 6–8%, but deep concern should growth fall below that target. “Six-to-eight I’m quite happy; if it goes below 5% we have a problem, my senses tell me that”.
Steady recovery in Hong Kong’s economy, which he rates as being back to a business level that could be measured at a confidence level of about 70%.

For Australian-based investors, Elman’s view of the future is encouraging, though not enough to spark a rush back into resource stocks. “China needs raw materials,” is his simple assessment of the future. “It’s really more of the same.”



If that sounds too simple to be true then Elman’s assessment of what went wrong with the global economy, especially banking, is even more clear-headed – and as devastatingly accurate. “We have a very straightforward business. We have one word we stamp on everything, it’s KISS (keep it simple, stupid).

“A lot of the dislocation in the banking industry was caused by a lack of correlation between instruments. People were hedging a peanut with an apple, on the theory that they both came out of the ground and if the price of one goes up they should all go up. It doesn’t work like that.”

Another clue that the global crisis is passing is Elman’s assessment that counter-party risk is declining, meaning that there is reduced fear that someone on the other side of a trading deal might fail.

In 2007 he said counter-party risk was something that “kept him awake at night”. He said: “We’ve made it better for ourselves because we’re very careful about who we deal with. We had some issues, yes, of course we did. There’s not a company in the world that hasn’t, but we managed them.”

Pressed to describe current risk conditions, Elman hedges his bets. “I don’t exclude the possibility of more blood on the streets,” he says. “It’s strange this time. I would have expected more problems, and I’m not sure it’s still not going to come.

“There could still be some big industrial bankruptcies, though this time it is different; it is a unique time. There might be companies that should not be in business, but maybe the banks are going to hang on to them because they don’t want to take the losses either.”

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