Hong Kong Taipan Rebuffed by China Digs Into U.S. Natural Gas
Richard Elman, who got his start as a scrap metals laborer before creating Asia’s No. 1 commodities trader by revenue, surrounds himself with reminders of his hard- won success.
In his 18th-floor office in Hong Kong, the executive chairman of Noble Group Ltd. keeps a photo of himself with Bill Clinton, a hunk of coal from an Australian mine and two abstract paintings by Chinese artists. The billionaire attributes part of his good fortune to the amber bead bracelet that he fiddles with on his wrist, Bloomberg Markets magazine reports in its December issue. He’s been wearing it for more than 10 years after someone told him it keeps bad energy out and good energy in.
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“I am afraid to take it off,” says Elman, a Briton, with a smile. “Sometimes, you gotta be lucky.”
Elman, 72, founded Noble Group in 1986 and today presides over a commodities powerhouse with annual revenue of $80.7 billion. That makes Noble as big as Decatur, Illinois-based Archer Daniels Midland Co., the world’s No. 1 grain processor, and almost half the size of Glencore International Plc, the biggest publicly traded commodities supplier, which has its headquarters in Baar, Switzerland.
Noble’s meteoric rise has been fueled by the decade-long commodities boom -- a product of surging demand in emerging markets. Noble has roughly doubled in size every two years since 2001 by purchasing coal, soybeans and other commodities in countries such as Australia, Brazil and Indonesia and selling them to China, India and the Middle East.
“People in the trading business have a lot of respect for Richard Elman for what he has built,” says Vijay Iyengar, chairman of Agrocorp International Pte, a commodities trader in Singapore who personally owns Noble shares. “They are aggressive. And they know what they are doing.”
Now, after amassing a fortune worth about $1.7 billion, according to data compiled by Bloomberg, Elman faces some of the most daunting challenges in his long career. The torrid expansion in China and other developing nations has fizzled. After growing at an annual average of 10.4 percent from 2001 to 2011, China’s economy expanded 7.4 percent in the third quarter, the seventh straight quarterly deceleration.
On Nov. 9, 2011, Noble announced its first quarterly loss in 14 years, partly due to cotton trades that went wrong. The company’s stock plunged 27 percent the following day to S$1.18 on the Singapore Exchange. And Elman has had to cope with cooling markets at a time of management turmoil within Noble over choosing his successor.
The tycoon is now rushing into the world’s largest economy -- the U.S. -- which he considers a hot spot for commodities investors. He says America has cheap land, a sophisticated labor force and a good banking system.
“We deal with emerging markets, and we think that one of the fastest-emerging markets is the United States,” Elman says.
Since 2008, Noble has spent more than $781.2 million in the U.S., investing in natural gas pipeline companies and storage facilities, according to Bloomberg data.
Elman, a stout man who likes to hike in the mountains in Switzerland, hasn’t lost his zeal for work: He sometimes doesn’t leave the office until 8 p.m. Elman has done everything at Noble from emptying rubbish bins to signing deals in the deepest parts of Siberia.
His favorite stories are those about the virtue of dogged persistence. Tata Steel Ltd., the largest Indian steelmaker, refused to work with Noble when it was a startup, Elman says, until he persuaded its executives to accompany him to China to be introduced to customers who would buy chrome ore from Tata. The steelmaker became one of Noble’s first big clients.
A few years after Noble was set up, the entrepreneur says, he had to dip into his personal savings of $150,000 to pay the company’s bills. Today, he still demands his employees immediately pick up a ringing phone -- even if it’s not their own.
“What you see is a very dedicated self-made man who wants the principles he has established to continue,” says Hong Kong- based David Eldon, the non-executive chairman of HSBC Bank Middle East Ltd., a unit of HSBC Holdings Plc, and a Noble director.
Elman is dealing with what he calls the most difficult decision in the world: who will take over Noble after his involvement ends.
He has chewed through two executives since 2010 in searching for a leader for a company in which his family is the biggest shareholder, with a 22 percent stake. In naming Tobias Brown as a successor, Elman displayed his typically candid style of communicating in a July 2010 statement.
“We can fight like two dogs in an alley, but when the dust settles and the yelling stops, we are both better for it,” Elman wrote.
Brown resigned as executive chairman after two months on the job in November, saying that having both him and Chief Executive Officer Ricardo Leiman running Noble wasn’t working. Then Leiman resigned on Nov. 9, 2011, when the company announced its loss.
Investors say Elman’s stumble over picking his successor is their biggest concern with the company.
“Richard Elman has built quite a nice company, but a worry has been the succession issue,” says Jim Rogers, who developed the Rogers International Commodities Index and who is a Noble shareholder.
Elman says he has finally found the person who can eventually replace him. In April, he hired Bahrain-born Yusuf Alireza, 42, who was co-president of Goldman Sachs Group Inc.’s Asia unit excluding Japan, as Noble’s CEO.
“Hopefully, you hit it right the first time, but if you don’t succeed, you have to try again,” Elman says. “We found a solution. We move forward.”
While Alireza has day-to-day control of the company, the founder is always in his face. Elman sends his CEO multiple e- mails every day, and the two, who have nearby glass-walled offices, meet several times a day as well. Alireza says he’s getting less sleep now than when he was at Goldman, where he rapidly ascended the investment-banking ranks to partner at age 34 during his 20 years at the bank.
Alireza manages a behemoth that trades commodities and owns key parts of the supply chain for goods such as soybeans. Using its storage silos and ports in Latin America, leased ocean vessels and its own crushing plants in China, Noble produces soybean meal for livestock and oil for consumers without having to pay fees to other companies.
Rise to Riches
Elman’s rise to riches began at the bottom of the commodities heap, in a series of scrap metal jobs that took him from London to San Francisco and Hong Kong. There, in the early 1970s, he started to sense a shift in the center of gravity of the global economy toward Asia. So he founded his first company, Metal Ore Asia, in Hong Kong and sold the business to commodities-trading giant Philipp Brothers Ltd. in 1972.
Elman stayed on as the firm’s regional director of Asian operations for 10 years. His business, most of which was in mainland China, was growing so fast that he was given the nickname Taipan, which means a “big boss” in Cantonese.
The moniker is based on James Clavell’s “Noble House,” a novel about a fictional Hong Kong trading company that’s run by a taipan. The book inspired Elman’s company name.
“I thought, ‘If I’m a taipan, I need a Noble House,’” says Elman, who’s married to his third wife and has four children.
Armed with $5.9 billion of readily available cash and bank loans as of Sept. 30, Noble is looking for bargains in slumping economies around the world. Since the onset of the 2008 global credit crisis, the company has snapped up sugar mills and ethanol plants in Brazil, an electricity distribution business in the U.S. and coal mines in Australia and Indonesia. And grain assets in the U.S. are high on Alireza’s shopping list to meet demand from China, which will soon replace Japan as the largest importer of corn.
“This is the right time to build businesses,” Alireza says. “You get to buy assets at the right price, and you get to attract the best people.”
In the U.S., Noble is wagering on the rapid growth in shale gas production. Hydraulic fracturing, or fracking, has helped U.S. producers reach natural gas supplies trapped deep in tight layers of shale, unlocking massive reserves.
In June, Noble invested $50 million in Inflection Energy LLC, a privately held exploration and production company that plans to use fracking to develop resources in the Marcellus shale, which stretches from New York to West Virginia, and Ohio’s Utica shale. Noble also acquired a 25 percent stake in Thunderbird Power Holdings LLC, which owns a natural gas power generation facility in New Jersey, for $7.2 million.
The old consensus was that the U.S. would run out of natural gas in coming years; now, the country has an abundance of it. Shale gas production in the U.S. rose from almost nothing in 2000 to more than 14 billion cubic feet (400 million cubic meters) per day by 2010, according to a report by the James A. Baker III Institute for Public Policy at Rice University.
As a result, U.S. natural gas prices dropped to a 10-year low of $1.90 per million British thermal units in April. That compares with an average in April of $9.60 in Europe and $16.74 in Japan. Low prices will also bring down the costs of producing petrochemicals, fertilizers, aluminum and even cars in the U.S., Alireza says.
“This is an extraordinary transformational event,” he says.
Alireza says the plunge in U.S. prices creates a big opportunity for Noble to export natural gas from America -- traditionally an energy importer -- to Europe and Asia.
The company also plans to invest in several places along the shale gas supply chain, including exploration, power generation and logistics as well as liquefied natural gas.
“When you think about where refineries, storage facilities and pipes are located, all of that has to change as a result of shale,” the CEO says. “That is going to be a big theme for us.”
With shale gas, Noble has stepped into an environmental controversy. Fracking involves pumping millions of gallons of chemically treated water and sand underground to break shale rock and free trapped gas. Environmental groups say fracking causes ground-water contamination, and France has banned the practice.
“We fully support society setting enforceable standards that ensure that private benefits do not accrue at a cost to the broader community,” Noble spokesman Stephen Brown says. “We expect no less in the shale gas industry.”
Noble’s problems in the slowing emerging markets, which account for more than 60 percent of the commodities the firm hauls, are more urgent. Elman says his goals have recently shifted from increasing revenue to boosting profit.
“I feel a little bit like China,” Elman says. “We are so big now that just maintaining growth and keeping the company in good health is already quite a challenge.”
Alireza says one of his biggest concerns is the excess capacity of China’s steelmakers and other manufacturers. After years of breakneck expansion, steelmakers can’t sell as much as they produce as global demand falters. As these companies buy less iron ore, the raw material needed to make steel, the price falls, hurting Noble.
Ore at the Chinese port of Tianjin, a global benchmark, fell to a three-year low of $86.70 a dry ton on Sept. 5 compared with $180.50 a year earlier.
Noble has diversified its businesses to minimize the damage from any single market. In 2011, energy accounted for 64 percent of the company’s revenue, agriculture made up 23 percent and metals, minerals and ores contributed 13 percent.
Last year, Noble’s operating profit from its iron ore and metals business supply chain slumped 64 percent, while its energy operations posted a 59 percent gain. In the first nine months of 2012, Noble’s profit rose 17 percent from a year earlier to $380 million as operating income from its energy supply chain increased 30 percent, offsetting a 53 percent drop in agriculture.
Elman is keeping a close eye on his new CEO. Four months into his job, Alireza presided over the second-quarter-earnings conference call on Aug. 16 while Elman was on vacation. Elman dialed in without telling anyone.
“He did extremely well,” Elman says. “The important thing is, Yusuf is now CEO and that’s his job. Don’t think because I am not the CEO, I don’t care about the company. I still care about the company, but I will not interfere with his job.”
Noble’s stock fell 1.9 percent to S$1.275 since Alireza’s appointment in April through Nov. 8, compared with a 15.2 percent drop for Glencore. Noble’s shares peaked at S$2.34 in January 2011.
“Noble has taken one step forward and two steps back on finding a successor,” Agrocorp’s Iyengar says. “Recently, there seems to be some stability on this front.”
Elman placed a bronze sculpture in his 18th-floor lobby a few years ago that reflects his optimism. The 2008 work by China-based Qu Guangci is titled “Everything Is Possible II” and shows a man with a golf club on top of a tree. Elman says the artwork is a message to employees that those who seize opportunities can achieve more than they ever believed was possible.
“His biggest challenge is his legacy,” Iyengar says, “to make sure it lasts.”
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