The Noble endeavor

by Meyer Sosland
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In 2004-05, the Singapore-listed Noble Group was one of the world’s most successful commodity traders. With a multi-billion dollar turnover, respectable profit margins and healthy share performance, it had earned its place at the top table.

But managers noticed a tangible turning of the tide. The consolidation of commodity production, processing and distribution resources with a handful of global conglomerates was tying the hands of traditional trading houses. Suppliers were being gobbled up, warehouse space was harder to find, third-party ports and processing facilities were becoming scarcer as multinationals extended their reach. A decision had to be made, a new strategy deciphered and pursued. Transformation was in the air.

Fast forward five years and Noble, which is headquartered in Hong Kong, China, has become a commodities giant, boasting stakes in some of the world’s key commodity trades, not just grains.

Last year Noble debuted on the Fortune Global 500 at 349 and now operates over 100 offices in more than 40 countries. In the first nine months of 2008, Noble’s revenues reached a record $29.3 billion. Profit climbed to $1.15 billion, up 117% from $531 million a year earlier, while group tonnage grew 20% year-on-year to 108.2 million tonnes. Final-year figures are expected to set new records.

Noble might not quite be in the same league as BHP Billiton, Cargill, ADM or Rio Tinto, but it is not far off. Despite the global downturn in commodity prices, most analysts are still issuing "buy" recommendations for Noble.

A QUICK CLIMB
Clearly the company has come a long way in a very short time. So what prompted the Noble change of direction that has yielded such spectacular success?

"The industry was consolidating," explains Chief Operating Officer Ricardo Leiman. "When you see your suppliers and even your end users being bought by the competition, you have to act if you want to keep control of your own destiny. Noble realized there was a need to participate in all the many steps of the value chain in order to deliver predictable, sustainable earnings over the long term."

The decision was made to invest up and down the supply chain in the key trades of agriculture, energy and industrial products, generating earnings at each step and prompting the coining of the "pipeline of profit" slogan, which has become a corporate reference point for managers.

"We took a strategic approach to the grain business," said Leiman, who was recruited in 2006 to implement the new strategy from Louis Dreyfus, where he was global agribusiness chief. "We focused on where we could establish ourselves in a way that would generate sustainable growth in the long term.

"In Europe and North America, the market was already mature and sophisticated, and we didn’t think we could generate the returns our shareholders required. So we looked at where there was the potential for rapid growth, where we could find low-cost production, and where market demand was growing."

Sizeable investments ensued as Noble expanded its grain and soybean export capabilities in South America and developed new processing, storage and distribution facilities in growing markets such as the Middle East and China.

The company now accounts for some 10% of soybean exports from South America and controls sizeable swathes of farmland. "We have around 25,000 hectares of land for oilseed and grain farming and we also produce and distribute fertilizer for agricultural production," said Leiman.

Noble Argentina announced plans in December to build a state-of-the-art crushing plant capable of processing 2.7 million tonnes of soybeans a year at the Port of Timbues. The plant, which is due to open in 2010, will produce soybean oil, meal and pellets, adding value prior to shipment for export.

Port assets either in operation or under construction in South America can be found at Itaqui and Santos in Brazil, Timbues and Lima in Argentina, Baelpa Terminal at Encarnacion in Paraguay, and Terminales Granelera Uruguayas in Nueva Palmira, Uruguay.

EXPANDING EXPORTS
Leiman said the global slowdown, which is expected to hit port asset values hard over the next two years, could create further opportunities for Noble to expand its terminal network both in South America and elsewhere.

"We have construction going on at three terminals at the moment, but we’re definitely looking at acquiring more as part of our strategy of building up the value chain," he said.

Noble’s port network is served by a fleet of barges and tugs it owns that link interior production facilities via inland waterways with deep sea export terminals. Warehousing facilities have been acquired or built across the continent to support the export supply chain.

The export business in South America feeds Noble’s logistics division, which includes a ship management company and a chartering arm which counts as one of the world’s largest, chartering over 500 vessels per year which cumulatively ship almost 50 million tonnes of cargo for the company’s commodity product division and third parties.

Noble has also now embarked on its long-awaited entrance into vessel ownership with seven of its own bulk carriers that, along with the purchase of an array of support logistics assets, have cost the company some $226 million in recent years.

Leiman said Noble was watching the bulk carrier newbuilding market for some time before it entered the fray. Now that vessel asset prices have collapsed, further purchases might be made. "We have acquired some ships and we are looking at this opportunity," he explained. "In the next six months I think we’ll look very closely at acquiring more ships."

At the other end of the grain supply chain, Noble owns four soybean crushing plants in China purchased for approximately $74 million, giving the Group about 10% of China’s total soybean crushing capacity. This has allowed the company to benefit from the massive increase in demand from China for soybeans over the last five years. Noble has also acquired two crushing plants in India.

The Group also operates grain storage facilities in Canada and recently opened new offices for grain sourcing in South Africa and Ukraine.

In the Middle East and Mediterranean area, Noble has built up crushing and grain distribution in seven countries and has opened new offices in Italy, Spain and Portugal. "We are one of the largest grain and oilseed distributors in Jordan and Saudi Arabia, and we have warehousing in Jordan and Turkey as well," said Leiman.

In the Netherlands, $12.6 million has been invested in a joint venture with HES Beheer to operate Maas Silo BV, which runs a bulk import terminal in the Port of Rotterdam’s Botlek area.

CAPITALIZING ON STRENGTHS
According to Leiman, the massive investment in infrastructure and logistics in support of Noble’s traditional trading activities has allowed the company to add value and generate profit at each stage of the supply chain. Fertilizer is sold to farmers at a profit. Grains are then bought directly from farmers which Noble finances, again generating a profit on the transaction. Products are stored in Noble facilities (for a profit) and are then loaded on vessels at Noble-owned ports, which charge elevation fees. Noble chartering sells logistics and shipping services to exporters. Cargoes of grains and soybeans are shipped to Noble’s integrated plants in China and India, which levy crushing and refining charges. Finished products are finally sold to end users worldwide as feedstock or oil at a profit.

But despite the ingenuity of the strategy, wouldn’t the dramatic drop in grain prices in recent months have a negative impact on Noble’s balance sheet in 2009?

Not so, said Leiman. The beauty of the "profit point" system, he explains, is that at each stage of the chain the company hedges its exposure.

"This means we’re price neutral," he said. "We cover freight, for example, so we’re not dependent on whether there are high or low freight rates. This is hedged and neutral in our overall book. We do the same up and down the chain; it just depends on volumes.

"Our theory is that during the financial crisis, few companies have the capital necessary to run grain supply chains. This means that consolidation will continue and margins will go up rather than down."

He predicts that commodity prices and demand will start to pick up later this year or early in 2010. "There might not be a lot of growth in 2009, but we think world demand for food will be relatively inelastic. We think demand will start growing again within 12 months, so we’re relatively insulated from the current economic crisis or any other macro-economic events.

"Noble deals in demand for basic raw materials and their supply chains. With the changes in emerging economies, we think we’ll remain in good shape." WG

Michael King, a freelance journalist and editor, has been writing about shipping, transport and commodities for more than a decade. Currently based in Indonesia, he can be reached at Michael@borderline.eu.com.

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