Plough, yes a switched on reporter BUT more important a very...

Plough, yes a switched on reporter BUT more important a very switched on Richard Elman. The fact that Noble Group owns 26% of TTY is a very good sign for the future.

Noble Group’s Richard Elman, Last Of The Hong Kong Taipans, Casts A Watchful Eye Down From His Eyrie Above The Harbour


By Our Man in Oz



China has returned, which is an odd thing to say since it never actually went away. What it means is that the business of selling minerals and metals, food and fibre to the world’s most important “factory” is returning to normal, or at least to a condition significantly improved on the disaster which was the second half of 2008. Nowhere is it easier to sense a recovering “China trade” than in Hong Kong, and no-one is better placed to talk about it than the last of the great British “taipans”, Richard Elman, founder and still the hands-on boss of the supply-chain management specialist, Noble Group. From his eyrie overlooking one of the world’s great harbours, Elman sees and hears everything, which is why Minesite’s Man in Oz popped up for a session at the feet of the great man, leaving after a stimulating hour which confirmed his belief that recovery is underway.
A conversation with Elman can be a prickly affair. He is very much the boss, and this latest encounter was no exception. It started with a firm refusal to discuss Noble Group’s latest quarterly performance. “We don’t judge our business in 12-week chunks”, he said disdainfully. Fair enough, but there’s no denying that Noble Group had did well last year, in the face of daunting conditions. The calendar 2008 year produced stellar numbers. While other businesses were suffering, Noble lifted its annual turnover to a record US$36 billion, and net profit to a record US$577 million. Profit will probably be less in 2009, though all Elman will acknowledge is that he is confident of achieving his long-term target of a 20 per cent return on equity, a remarkably strong performance in difficult times, which illustrates the point that China, and other customers, are still buying the coal, oil, iron ore, manganese, soy and wheat that’s traded by Noble.

With the topic of financial forecasts falling into the teeth-extracting category Minesite’s Man switched to something easier: is the worst of the crash behind us? “I am more optimistic than a few months ago”, Elman said. “The good news is that the panic is out of the way. Around Christmas there was panic in the market and no-one seemed to know what was going on. I’m not sure we really know today, but I sure feel less stressed about it.”

China, Elman said was “quite committed” to doing whatever is necessary to stimulate its economy. “It is one of the few countries in the world that can actually get something substantial done,” he said. “Not everything is 100 per cent, but we have to assume that China will achieve an 80 to 90 per cent hit rate. For the time being things are okay. China will pour money at the issues and keep its industries going because there is a bigger problem than an economic downturn, and that is the social question which is pre-eminent in any discussions.”

The biggest challenge in China today is the reversal of its export-focused economy, something that is being achieved with basic industries such as steel-making switching production runs from steels used to make exported products to heavy-duty construction steels for girders, and other “long” products. Whether that is being done legitimately remains to be seen, with US steelmakers complaining bitterly that China is dumping steel to shift its stockpiles and win market share unfairly. “For the last 10 to 20 years China has been export focused, which is all well and good, but you have to find someone to import,” Elman said. “That means there is a much greater reliance today on domestic consumption, and that’s something we’re watching very closely.”

Elman is cautious about China’s future growth rates, almost as careful as he is in talking about Noble Group’s financial results. In late 2007, before the wheels fell off the world, Elman told Minesite that he doubted whether it would matter much if China’s double-digit growth contracted back to between six and eight per cent – a rate it appears to have achieved. “I’m still quite happy at the six to eight target, but I get worried if it falls below five per cent,” he said. “My senses tell me that five per cent is a threshold that we do not want to fall below.”

On the outlook for his home-town of Hong Kong, Elman is equally optimistic, in a cautious sort of way. He acknowledges the decline in sales of luxury goods, and the pressure being felt in the financial and property markets. “The mood of Hong Kong is back to a reading of about 70 per cent,” he said. “At the depths of the crisis it was below 50 per cent.” Elman then reminisces about the changing fortunes of Hong Kong. “Years ago we used to feel very rich in Hong Kong, and everything was affordable, and we wondered why everyone didn’t come and live in Hong Kong”, he said. “And then for the last three-or-four years, when we travelled to London, everything seemed so expensive and we sort of became the paupers. The wealth was coming from somewhere else. Suddenly, we didn’t feel as important any more. We couldn’t push our way around in queues in shops. But now it’s coming back. Now, we feel quite important again.”

Elman’s “feeling good in Hong Kong” mood is relative, and perhaps a reflection that the mood in London, and elsewhere is awful. But, for investors there is a message in the strength he is feeling in Hong Kong’s pulse, a strength derived directly from its proximity to the world’s great commodity sink, China. It leads naturally to a final question from Minesite: Where will the opportunities come from for investors as China spends big on its internal economic stimulus?

“I think it’s more of the same,” he said. “China needs raw materials, and it needs lots of them. All of the world’s major toilet makers manufacture in China, which means there’s a market for the raw materials which go into making a toilet.” Is that his way of saying that commodities are a good investment category for the future? “Well, we think so. I don’t mean to be rude, but it’s a silly question for someone who’s spent that last 50 years in supply-chain management.” Minesite duly apologises for asking a silly question but digs the hole a little deeper by persevering and asking (tongue in cheek) whether Elman might have made a terrible mistake by being in commodities for the past 50 years?

For the first time, as the conversation gets close to an end a laugh is extracted from the Taipan. “They are very fundamental things,” he said. “We believe that somewhere in the world we affect somebody every day because they eat, or build something, or use transport that we’re involved in, or use coal. It’s not this pen (Elman says, holding up his Mont Blanc). This is a luxury. You can also buy a cheaper pen, but it’s still got raw materials going into its manufacture.”

Elman’s final words are on the financial crisis itself, and how Noble rode it out so successfully, and is plotting a profitable future. “We’re very simple people,” he said. “We apply the KISS principle, keep-it-simple-stupid”. We don’t understand most of the financial products created over the past decade. You know, a huge amount of the dislocation in the banking community was caused by a lack of correlation between the 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 just doesn’t work like that. It was a terrible mismatch that had to come to an end.”

For investors in resource-related stocks there is hope, and a warning. The hope lies in the fact that demand in China for basic raw materials such as iron ore, copper, zinc and nickel, is rising after six dreadful months. It is demand from China which underpins much of the price recovery seen in those metals. The warning is that turning China around from an export-driven economy to one focused on internal consumption will not be as easy as it sounds. The US steel industry’s anti-dumping case against China is an early shot across China’s bows. More shots can be expected as China rebounds and attempts to steam away from the rest of the world. Hands up anyone who remembers the “de-coupling” theory which argued that China’s growth was separate from the rest of the world? De-coupling didn’t work last year, and it will not work next year – which is why Elman is optimistic, but watching very, very, carefully.