Business Spectator
16 Feb 2010

Richard Elman, the founder and chairman of key Gloucester Coal shareholder Noble Group, sits down with Business Spectator's Isabelle Oderberg to explain:

• Asked if he would consider buys in the natural gas and methane space, he describes the sector as 'interesting'
• He has an upbeat outlook, saying that Asian growth over the next five to ten years will be phenomenal, but warns that it won't be a straight line, and will have speed-bumps along the way
• Many potential resource investments in Australia are ruled out by high infrastructure costs
• Australia's unpredictable weather and related risks hamper its ability to compete with Brazil and Argentina in soft commodity production

Isabelle Oderberg: In the Australian press, when stories are written about Noble, you’re always referred to as 'commodity trader, Noble Group'. But you’ve been investing a lot in the back end of the resources, in projects and the mines themselves. How do you see Noble Group? How would you describe it? And how do you see its evolution going forward?

Richard Elman: Right, we’re an asset medium supply chain manager and we really get our hands dirty. We start at the beginning – and it all starts in the ground, whether it be hard commodities or agriculture – and it all ends up in somebody’s building or on somebody’s table at the end of the day. We’re a hybrid; we’re different things to different people. Certainly in Australia we are a developer of resources. Now, admittedly not the big high ticket projects, but the small ones that actually do work and we put a lot of muscle to work, resources behind these, and we’ve helped a lot of people develop a lot of businesses in Australia, but we’ve always kept a fairly modest appearance and we’re not looking to make headlines.

IO: As the world jostles to secure resources and secure particular commodities, it seems to be turning into a bit of a hunting ground. We’ve had much more Chinese M&A activity in our backyard. How much of a part do you want to play in the M&A process that’s under way in Australia right now?

RE: Well, we’re not in that business. We’re in the business of taking greenfields or brownfields and developing them and expanding them, so we’re not going to go out and make a bid for a major company. The only exception was Gloucester Coal and there were some very specific reasons for that, but we never intended to keep Gloucester Coal and we never wanted to privatise it. As you’ve read from the press, we’ve moved on and put it as part of a larger conglomerate, so it’s been a good experience for all the shareholders.

IO: Last year you did an interview with my colleague Tim Treadgold and you seemed to be more upbeat about China’s prospects and growth in this region, but you still had a little bit of caution about the potential for bubbles or speed-bumps. How do you feel now, looking forward?

RE: I feel the same way. I’m very upbeat. I think to take a five to ten-year view the growth of Asia is going to be phenomenal. Will it be a straight line? I don’t think so. Is my nature to be cautious? Yes, it is. I can never assume I know everything or even attempt to know everything, so you employ just a little bit of caution here and that doesn’t do any harm.

IO: What you see as the key risks? What makes you nervous or cautious, especially in relation to China?

RE: There’s inflation and interest rates. If growth is too fast, you get a hiccup. So, as I said to you earlier, if I take a ten-year view, I don’t have any fear or, it's just very little fear. I know that it’s going to work out. It’ll be okay. So, in ten years time we’ll be in a better place than we are today. But the bumps in between is what you have to negotiate.

IO: Soft commodities are an area that Noble is very active in. For China, a huge issue is going to food security and feeding its massive population. In Australia, iron ore and coal are our traditional commodities, but we also have a very big agriculture sector. Do you think that soft commodities are going to be the new M&A hunting ground?

RE: It’s a harder business. It’s subject to weather far more than anything else. I think, for example, in Australia it proved to be a bit of a problem; lack of water. Last year, we had these huge floods in Queensland. This year, I don't think they were as bad as last year but they’re certainly not particularly good. And Australia’s not a low-cost producer in agriculture. I think there are other countries that are probably better; Brazil, Argentina.

IO: Could China take positions in agriculture in Australia and produce at a low-cost level? Could they make it competitive?

RE: I think the Chinese experience in agriculture is probably very different from the Australian experience or the Brazilian or US experience. That’s one of the problems in China – it’s all small peasant farming. It’s not these large farms which are totally mechanised. Today, for example, we’ve got close to 250,000 hectares of land under cultivation in South America. We don’t cut sugar cane any more by hand. We have machines to cut it, but this takes very large, flat pieces of land to operate it and you can’t do it in small peasant type farming arrangements. I’m not sure the Chinese can do better. It’s not probably their expertise.

IO: There’s been a little bit of raising going at Noble and a stake sale. Are you looking to make acquisitions with some of that cash?

RE: We’re always making acquisitions, but they’re generally small add on acquisitions that help the existing pipeline that we have. We bought storage facilities in the Midwest of the United States last year and that adds on to our oil trading business.

IO: Is there anything you’re looking to bolster in Australia specifically?

RE: In Australia we’re interested in actually building businesses. We’re not interested in just making a quick margin on some stock exchange transaction. That’s not the nature of the company. We want sustainable long-term businesses that will continue for many years to come.

IO: There are a raft of really small Australian companies looking for funding, looking for assistance in developing projects that are in very early stages in areas. Do they have potential in Australia for the kind of investment that you’re talking about with a long-term view?

RE: Well, there must be some. I’m sure we don’t know which ones they are, but many of them the infrastructure costs are so high that we stayed away from them. It takes a railroad and a port and it’s very, very expensive. Some of them probably are not even worth the paper that the documents are written on.

IO: There are a few of those. [Laughter]

RE: Right. Right. So, you’d have to sort the wheat from the chaff.

IO: One area that’s been very successful is your energy business and there has been expansion in the last six months and it’s quite a large proportion of Noble’s business now is in the energy area. Why are you expanding now? What is it about the last six months that’s presented opportunity?

RE: No, we're always expanding. We have very, very substantial investments in agriculture that haven’t materialised yet. In other words, we’re building a crushing plant in Argentina. We’re building a port in Brazil. We’re building another sugar refinery in Brazil. Now, they’re all under construction. Because we start with greenfield or brownfield, it takes three to five years to recover to completion and then you suddenly start seeing the benefits. So, I think you’ll see this year, hopefully this year a lot of agricultural assets come on stream. That should certainly make things look much better on the agriculture front at the end of this year and going into next year.

IO: With biofuels, there is clearly some inter-relationship between your agriculture and your energy, with sugar and ethanol.How do you work to make sure that those two areas complement each other?

RE: Yeah. Of course they are. You do have some ethanol production in Australia and you do have sugar production in Australia.

IO: We do. Bright Food wants it.

RE: Some Chinese companies are interested, but the model of invention in this context is Brazil and that’s where we operate and that’s where you have a domestic market, so you’re not dependent upon exporting. In Brazil eighty per cent of the cars or whatever the number is are flexifuel and use either ethanol or gasoline, so it’s a very developed and sophisticated market there.

IO: And China’s looking to decrease its dependence on more traditional fuel.

RE: I think China’s looking to spread its energy basket. They want to do a bit of nuclear and a bit of solar and a bit of thermal and a bit of ethanol and wind, of course.

IO: That must bode well for you I guess in that you have positions in markets that will be attractive to what the Chinese demand.

RE: Yeah. We want a global business, so we have for example a large ethanol business in the United States which has got nothing to do with anything, so to speak, but it’s part of the global business, so we see ethanol throughout the world. Maybe we should be in ethanol in Australia, but I think actually looking at Australia probably natural gas or methane gas is probably much more interesting.

IO: Oh, really? Is that something that you would be looking to explore?

RE: I think it’s something more interesting, yes.

IO: In terms of the recent stake sale to CIC, did you have much debate about a Chinese SOE buying into the share registry?

RE: Well, we’re always happy to have strong and supportive shareholders, shareholders that can contribute good advice to our business.

IO: In discussing that transaction, would there be any difference from selling a stake to an SOE as there would be to another enterprise? Are there any differentials?

RE: Well, part of this particular transaction was an understanding to create an agricultural joint venture on a global basis, not specifically for China, so this was a rather appealing attraction for us.

IO: Do you think M&A is going to come back in a more healthy way this year?

RE: I don’t think so.

IO: No? It’s not time yet?

RE: I think the big firms are bought out and they’re exhausted and the small ones have yet to emerge.

IO: You’ve been doing business with China for many, many years. There have been growing tensions between China and the US politically and on trade fronts. And also with some other countries, like Australia. What advice would you give to Western countries looking to have a healthy two way relationship with China?

RE: Precisely that; to have a healthy two way relationship with everybody.

IO: What would you tell them not to do?

RE: I think the biggest fear for this world is in fact protectionism and I think if you go down the path of protectionism in a tit-for-tat type scenario regardless of which countries are involved, I think it’ll end up as a disaster for everybody.

IO: Which side do you think the protectionism is really coming from?

RE: I have no idea. Everybody has their own idea and they have their own position and I’m sure half of it is true and half of it is not. Any side in any dispute would say half is true and half is not, so it doesn’t matter.

IO: Somewhere in the middle there’s a truth.

RE: Yeah. That’s true.

IO: You’ve now moved into a chairmanship role as opposed to a day-to-day CEO role. What's next?

RE: Well, different things tie up time. Work fills the time available, so I was doing different things last week and different things this week, but I’ve got plenty of time to do new things, so I’m looking at a lot of new things.

IO: What kinds of new things, can I ask?

RE: Just new things which we will announce as and when they happen. [Laughter]

IO: Well I look forward to hearing about them! Thanks for your time.

RE: Thank you.