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Noble Prize


21 July 2008

Commodities are hot, but Global 500 newcomer Noble Group is poised to win whether prices rise or fall.

When Noble Group founder Richard Elman visits his sprawling soybean-crushing plant in Qinzhou, China, he likes to inhale. He scales a narrow steel stairway to the top of a four-story oven and asks an engineer to bring out a shovel of freshly roasted bean flakes. "Smell this!" he hollers over the din of the machinery. Elman's expression as he breathes in suggests that the flakes might be some rare delicacy--akin to a French Bordeaux or a Cuban cigar. In fact, they are the final incarnation of a Brazilian commodity, hauled to Qinzhou in the hold of a 65-ton Panamax freighter and destined for the bellies of Chinese chickens and pigs. But for Elman, Qinzhou's pig meal gives off the sweet aroma of success.

In just two decades Elman, a 68-year-old, tough-talking Brit who flunked out of secondary school, has transformed Noble from a small-time Hong Kong metals trader to a $23.5 billion commodities powerhouse that is making its debut on the Fortune Global 500 list at No. 349. The group last year handled 128 million metric tons of bulk commodities, including wheat, soybeans, sugar, coffee, cotton, iron ore, steel, coal, coke, vanadium, and petrochemicals--the equivalent of some 19 kilos of cargo for every person on the planet. And demand for all those commodities is exploding as emerging economies grow hungry for more food, energy, and building materials, while mature economies look to corn and soy for industrial uses.

Noble sits at the center of this global boom, sourcing, storing, selling, shipping, and trading commodities on six continents. Elman's strategy is to control the entire pipeline for a select--but critically important--group of goods: From the moment a commodity gets wrested from the earth to the time it is delivered to the end user, Noble plays some sort of role to add value--digging iron ore or crushing soybeans, for example--and boost profits. (Net income last year rose 93% on a 71% increase in sales.)

In recent years Noble has invested more than $1 billion to lock in access to low-cost raw materials around the globe, securing stakes in coal mines in Australia and Indonesia; it built a $51 million port in Argentina and acquired a sugar and ethanol processing plant in Brazil. For soybeans Noble does just about everything but plant the crops. It sells seeds to Latin American farmers, trucks harvested beans to its own port, stores them in its own silos, transports them on Noble-chartered ships, and crushes them at Noble-owned plants in China and India. Noble's mining investments enable the group to get its hands on coal, iron ore, and other raw materials almost as soon as they leave the ground. It sells iron ore from India and Brazil to steelmakers in China and is waiting at the factory's opposite gate to buy up finished steel from China for sale to manufacturers in Japan and Korea.

As a result of these moves, Noble is faring nicely as the rest of the planet grapples with rising food and oil prices. Oil at $140 a barrel, for example, has encouraged manufacturers the world over to switch to coal (to the dismay of environmentalists), boosting the value of Noble's mining operations in Australia and Indonesia and providing a bonanza for Noble's ethanol business.

Elman, a 40-plus-year veteran of the business, knows the commodities mania can't last forever, of course, and he's created a structure at Noble that allows the company to weather economic downturns and bursting bubbles. Noble focuses on three main groups: grain, coal, and metals and minerals. What's common to all three commodity types is that they're big and heavy and have to be transported vast distances on ships--similarities that allow Noble to leverage its expertise and reap economies of scale. But historically the three commodity types move according to separate business cycles--the current craze for all three is unusual--so that if demand cools for metals, the grain and coal businesses could remain stable. "Noble is the only commodities company I see that has balanced exposure across the board," says Merrill Lynch analyst Han Lim Chong. "That makes them very strong."

ELMAN, WHO IS NOW WORTH AN ESTIMATED $1.5 BILLION, WAS BORN in Brighton, on England's southern coast. He says he failed all his exams in school and was sent by his parents at the age of 15 to apprentice with the boss of a scrap metal yard in Newcastle. "'Apprentice' is kind of a nice euphemism," says Elman. "It was basically slave labor." After two years Elman was assigned to run a yard himself, managing men many years his senior and taking responsibility for decisions about what metal to buy, how much to pay for it, and how to prepare it for resale. That training won Elman a succession of promotions that took him eventually to San Francisco, where he managed a yard that sold scrap metal to Japanese steelmakers, and later to Tokyo to sell to the Japanese producers directly. He took to Asia immediately. "Nobody spoke English, and no one sold shoes in my size. But the sushi was great, the dollar was strong, and I began to see that you could develop a whole business in Asia," he says.

By the end of the decade Elman had relocated to Hong Kong and was crisscrossing the region building a network of suppliers and buyers. He bought rails discarded by Indian railways and shipped them to Mexico to be rerolled for construction projects in Thailand. "My advantage was that there were no telephones and no faxes," he says. "Nobody else knew where the market was."

After a few years Elman struck out on his own and was soon approached by David Tendler, an American he'd known in Tokyo who had returned to New York to become president of Philips Brothers, then one of the world's most powerful trading houses. Tendler needed someone to run the company's burgeoning Asian operations, and in the early 1970s Tendler bought out Elman's company and brought him onboard.

For the next decade, Elman sold metals and grains to China. His timing couldn't have been better. Deng Xiaoping had begun to nudge the Chinese economy in the direction of greater openness to foreign trade. In the late 1970s Elman was among the first foreign traders allowed to visit Guangzhou for the Canton Trade Fair. Gradually he expanded his mainland contacts. He set up Phibro's Beijing office, finding temporary office space in the Beijing apartment of the Panchen Lama.

Phibro in 1981 acquired Salomon Brothers, but Tendler ultimately lost out in a power struggle to Salomon's CEO, John Gutfreund. Elman, who had been working in New York for Phibro, left the firm and returned to Hong Kong in 1986, determined to relaunch a trading shop of his own. At Phibro, colleagues had called Elman "Tai-Pan," a nickname from the James Clavell novel about European traders in Hong Kong. So when he needed a name to register his new business, Elman was inspired by another Clavell novel, Noble House.

THE DEAL THAT TRANSFORMED NOBLE FROM AN OBSCURE TRADING company to a leading supply-chain manager came in 2001 when Elman was offered a chance to purchase the grain and cocoa business of Swiss-based Andre & Cie. The deal doubled Noble's revenue overnight and pushed the company for the first time into agricultural commodities. But Elman soon discovered his new prize had a significant drawback: Andre had access to millions of tons of Argentine soybeans, but there was no port to get them to overseas markets. What to do? "We went to Argentina, bought some land, and built a port ourselves."

Today Noble's collection of assets--ports, mines, processing plants--and constant conversations with a diverse group of suppliers and customers give Noble an inside track on what's ahead in global markets. In 2006, when the blue-eared-pig virus decimated China's swine population, Noble's executives were among the first to know. "We saw the demand for pig meal go slack and pork prices start to climb," says COO Ricardo Leiman. "Reports in the Chinese media were limited, but it didn't take us long to figure it out." That knowledge enabled Noble to shift to high-protein meal favored by chickens and lock in soybeans from Latin America at low prices in preparation for a return in demand for pig meal a few months later as piglets born after the disease matured. Arbitrage investments brought in roughly a third of the company's 2007 earnings of $258 million.

Elman first took Noble public in 1994, floating shares in Hong Kong. The stock debuted just above $1 Hong Kong--about $7.70 in U.S. dollars--and sank immediately. The stock never recovered its opening price, forcing Noble's bankers to take the loss. "We didn't know how to market ourselves properly," says Elman. After two years, frustrated by his company's valuation, Elman led a management buyout that purchased the stock for double the IPO price.

In March 1997 Noble relisted, this time in Singapore. There, too, the stock took an early drubbing, dragged down a few months after the IPO by the outbreak of the Asian financial crisis. But the capital it had raised kept Noble afloat through a tumultuous period in which scarce credit forced many midsized trading houses out of business.

Today investors are taking notice of Noble's prime position in commodities. Noble shares are up almost 25% this year, and it is one of the best performers in Asia over the past decade, with an annual return on equity north of 20%. And Elman, who prides himself on being hands-on and entrepreneurial, is outfitting his firm with the trappings of a big company, adding former HSBC chairman David Eldon and former Goldman Sachs vice chairman Kenneth S. Courtis to its board. His senior management team also hails from establishment companies and underscores the truly global nature of Noble's operations: CFO Stephen Marzo is a former Goldman Sachs banker from the U.S. COO Leiman is a Brazilian who joined Noble from French commodities giant Louis Dreyfus. Vice chairman Harindarpal Banga is a former captain in the India merchant marine, and Noble's director of human resources, Lelia Konyn, is a Romanian-born former Israeli diplomat who speaks six languages, including Mandarin.

For now, Elman seems content to focus on making sure Noble is well managed as it grows. He stresses that execution is his top priority for the next five years, and indeed, Noble probably could continue to show strong financial results simply by sticking to its current crop of, well, crops and other commodities. Still, Elman can't seem to help thinking about new ways to expand his empire: He muses about applying his firm's pipeline strategy to other bulk commodities, such as uranium and even petroleum. "If we didn't have a little bit of nerve, we wouldn't be as successful as we are today," he says with a shrug. Spoken like an entrepreneur who likes to follow his nose.