Investor Q&A

His pockets just got deeper

The boss of commodities firm Noble discusses partnership with CIC

Elman: feels the West is losing its economic advantage to China

Richard Elman’s office in Hong Kong is a long way from the manager’s dugout at Eastlands. But they do have something in common.

For while Manchester City has Abu Dhabi and its billions to spend, Elman has found a seriously wealthy backer too. And both have ambitious growth plans. The key difference: Elman is more likely to use the funds to buy a soya bean plantation than a French midfielder.

Elman – who started out in the scrap metal business in England at age 15 – is the CEO of Noble Group, which he founded in 1987.

The commodity supplier hit the headlines last September when it announced a transformational transaction: it had sold a stake worth $850 million to China Investment Corp (CIC). The Chinese sovereign wealth fund got 15% of Noble, and Elman got a partner with very deep pockets.

CIC’s interest in his firm is not hard to fathom. Producing (or processing) many of the raw materials that China needs – think iron ore and coal, as well as foodstuffs – Noble has grown fast. It now operates in 40 countries and has seen its net assets grow twentyfold – to $2 billion – since it listed in 1997.

Here Elman talks to WiC about commodity prices, the partnership with CIC and his pessimistic outlook for Europe and America.

How important to Noble’s business is China’s economic growth?

I’ve always believed that Asia was going to be the centre of the world, and it’s starting to look that way. For the next 10 years I am very confident that the region will have a strong growth story and we will participate in it.

I would ask another question: how important is China for the world? China has emerged as the world’s third largest economy and will soon be the second largest, and probably the biggest. Today, China is absolutely critical to world growth.

Noble is a global company and is in two fundamental businesses: agriculture and energy. My view is that demand for the products we handle will be very strong in years to come. The world is growing 3% a year and demand for food products will continue to grow. The same applies to energy.

China has grown very fast, but there are still a lot of people there who need to catch up. I am very optimistic that the next 10 years in China will be very exciting. In my view, the best is yet to come.

This also applies to other emerging countries such as India, Brazil and Indonesia. So, yes, we’re bullish.

But there is a major divide opening up. In the past the economic advantage has been with the West. But I feel the West is losing that advantage. The growth is coming from emerging markets, particularly in Asia.

So you’re pessimistic on the old G7 economies?

I am. They have to change their thinking. Asian economies are cash rich. Those in the US and Europe are not. The most important difference between Asia and the rest of the world is 1997. In 1997 Asia blew up and we all learned that you cannot run long term investments on short term funding. Everybody in Asia took the pain and either went out of business or pared their balance sheet, and started running themselves more prudently. America and Europe fell into the same funding trap Asia did, but a decade later.

Most companies in Asia are doing quite well – in spite of the recent crisis – because they managed themselves properly and maintain strong balance sheets.

I am not writing off America or Europe, but I believe most of the world’s growth is going to come from Asia and the emerging world. In the coming years we will see rising standards of living in these parts of the world. Meanwhile for the average American and European the outlook is much less promising.

Whenever you have shifts in economic power, it typically leads to conflict. Does this concern you?

Conflicts are already emerging in the form of trade barriers. There are a lot of people getting disturbed about the Chinese, their exports and their currency and they would like to do something about it.

Will there be a move to block Chinese firms buying natural resources around the world?

Well, I have a differing view here. If, for example, the Chinese didn’t buy Australian iron ore or coal, who is going to buy it? The boom that Australia has experienced has come from China. Is it a bad thing? No, it’s good for Australia and ordinary Australians have benefited too – through rising salaries.

In the same vein, will Africa also benefit from China’s growth?

The Chinese have a huge advantage in Africa because they’ve actually gone in and done something. They’ve built roads, factories and so on. I don’t think the G7 has done much for Africa, except for offer a little bit of medical assistance.

Africa in the next 10-20 years is going to be very interesting. We opened two years ago in South Africa and opened a regional office in Kenya. We have an operation in Ivory Coast and all of the businesses are going well.

Returning to China and your agricultural business, have you noticed that the nation’s rising affluence has impacted on diet?

Yes. For example, there is a greater amount of meat in the diet today. I believe the next big market in China will be beef and if they can’t produce it, they’ll import it from Brazil, Australia and New Zealand.

In fact, in the same way that China is going abroad to secure raw materials for its industries, it will do the same thing in agriculture. That is the purpose of our joint venture with CIC – to develop the Chinese sovereign wealth fund’s agricultural business on a global basis. CIC and Noble are both thinking about this commercially, as a business. The investments have to be profitable. But the fundamental issue is finding supplies of the right agricultural produce around the world.

But the end market is China?

It doesn’t have to be. From the perspective of China, it can be a hedge. If you need it and own it somewhere else, you are less exposed if prices rise.

In the past few years Noble’s risk management has proven successful. Was that one of the reasons CIC felt comfortable about investing?

Yes, that and the fact that CIC also saw that we are very hands-on and very focused. And we weren’t arrogant. We are a growing company and we need some help. The injection of CIC’s capital will help Noble to grow more quickly, and do so while maintaining our investment grade rating.

Likewise CIC is also a young, growth company…

Yes, and it has a department that just looks at investing in commodities, which is precisely what we do. So the fit was very natural.

It sounds like Manchester City. It has Abu Dhabi’s deep pockets behind it. Noble now has access to CIC’s deep pockets…

It’s not quite the same… I don’t know that CIC will participate in every investment we propose. I know it has certain interests and if those match ours, there could be potential to invest as partners.

Of course as a big shareholder of Noble there is a mutually-aligned interest: if we succeed, their investment succeeds.

What I will say is that I sense there is a willingness on both sides to work with and engage with each other. As the Chinese expression goes: it takes two hands to clap.

Is the plan to scale up this new business to the size of a Cargill?

How big it gets I don’t know. Cargill is a 150 year-old company. You don’t build companies instantly.

But 10 years ago I wouldn’t have predicted we’d be as big as we are today. And with CIC as a strategic investor I’d like to try and double the size of this company in the next few years.


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