Monday, December 22, 2008

Noble founder Richard Elman turns scrap into gold

Tom Miles and Nao Nakanishi, Reuters
HONG KONG -- In an office full of modern Chinese paintings overlooking Hong Kong's Victoria Harbor, Richard Elman, founder and head of Asia's largest commodities supplier Noble Group, says he has been lucky.
Elman, who began his career in a scrap yard in England at the age of 15, is among the few non-Chinese listed by Forbes magazine as the wealthiest in town.
"I've just been lucky...being in the right place at the right time," Elman said, adding he has always believed in fate.
Noble, which he set up 21 years ago with his savings of US$100,000, is capitalised at around US$4.8 billion.
It supplies raw materials from coal, iron ore to coffee, chartering more than 100 ships at any given time. Its assets stretch from iron ore reserves in Brazil and ports in Argentina, to coal mines in Indonesia and soy crushers in China.
Fuelled by surging demand from Asian countries such as China and India, Noble's net profit spiralled to US$258 million by 2007, rising more than 10-fold since 2000.
"I never had any great ambition. I did it for fun, because I enjoyed it, and to make a living. That's what I still do," he told Reuters on Friday, sipping his tea, relaxed in an open white shirt with beige Chinese bead bracelets dangling from his arm.
Elman, 67, said nobody knew much about commodities when Noble was established. The company moved its stock listing in 1997 to Singapore from Hong Kong, where they felt they had not been understood and appreciated.
"We started in the years when nobody even talked about commodities," he said. "We built the company during years of disinvestment, very tough years."
Noble has expanded through economic downturns, taking over a series of companies in financial difficulties such as Andre & Cie SA from Switzerland, once one of the world's top five grains traders with a history of more than a hundred years, earlier this decade.
Noble prides itself on building pipelines from production to consumption, controlling and profiting from every link in the supply chain of raw materials, including ships and warehouses.
"At the beginning we could sit with two telephones and make a living. But over the years that disappeared," he said. "We don't have to actually own the assets but to secure more long-term marketing rights we bought some assets."
Elman said he hoped Noble would be larger and more professional in five years. It already employs more than 10,000 people and has over 100 offices in 40 countries."The company has grown about 20 percent every year in physical volume," he said. "For us to increase physical capacity gives us the ability to work with very tight margins."
Combining its business and geographical presence, the company is expanding rapidly into new businesses, such as biofuels and carbon credits. It had a market share of 28 percent in certified emission rights to the carbon credit market last year.
Despite Noble's growing ethanol business, Elman said he was not fully convinced about biofuels, which many countries have promoted with generous subsidies.
"I am selectively convinced," he said. "Ethanol works in Brazil. There's no question about it. (But) if you look closely at biofuels around the world, it often has its challenges."
With global food prices soaring, prompting riots in some countries, the biofuels industry has come under growing criticism as it eats up corn, sugar cane, rapeseed, soy and palm oil.
One area of potential expansion is uranium, which has seen prices soar to historic highs in the past five years, due to a nuclear power renaissance in the face of energy shortages and global warming caused by greenhouse gas emissions.
"I think the future energy requirements of the world will come from nuclear," he said. "We'd start with (uranium) mining...if they're the right price, we'll pursue them."
Elman said Noble would look at each opportunity and there was no shortage of offers coming its way, even though some of the easier targets had already been taken.
"There's consolidation in all these industries. We live off the crumbs of the big boys, which could develop into loaves of bread."
As a teenager in the 1950s, Elman started out sorting non-ferrous scrap metal after dropping out from school in London. His barrister father and his mother, who made women's clothes, got him his lucky break into the business.
He first landed in Hong Kong in 1968 as a metal merchant for a U.S. company. Following a stint in New York, he returned to Hong Kong to set up his own company after leaving Phibro, now part of Citigroup Corp.
Elman moved commodities in and out of China in the 1970s, when it was ruled by Chairman Mao Zedong. He was the first to sell China's Daqing crude oil to the United States.
"That was a place you could make a lot of money. You had one customer for everything," he said. "So it was very easy, and volume was enormous because they were buying for a country."
Asked about the key for success, Elman said: "Don't forget where you came from. Don't forget your origins. Don't forget you're fallible. Respect people, trust people."
Within Noble, Elman likened his role to a music conductor, pointing to a portrait of Herbert von Karajan, a renowned conductor of the last century, behind his desk.
Recalling a TV programme on the conductor, Elman said: "It occurred to me that this guy was a huge disciplinarian, but he managed to create beautiful music because he got everybody playing together."
Asked about his pastime, Elman, father of four and grandfather of two, said: "Not very much, apart from spending time with my family."
Yet pointing to model cars on the shelf, he said: "I like to watch motor racing. We sponsor some cars at the Macau Grand Prix. But I don't drive (racing cars). They drive too fast for me."
Thursday, December 11, 2008

Banking Weekly Review: 1st – 7th December 2008


· Public Bank – still going strong
During the week, we hosted a luncheon with the Public Bank Group for our clients, and came away confident that the Group will continue to grow in strength and build on its already strong base. Valuations are arguably "expensive", but for good reason. Its asset quality is the best in the industry, and loan loss provisioning the most prudent. Management's commitment to
maintaining its dividend in absolute quantum going forward offers a gross yield of 6%, admirable in current market and economic conditions.
· Elsewhere, more shedding of jobs
Credit Suisse, during the week, announced that it was reducing its workforce by 5,300 globally, mostly in investment banking. This comes on the back of a USD2.5bn loss as at the end of November. HSBC had also recently announced the shedding of 500 jobs at its British banking business following a review of the business.
· Valuations relatively undemanding
While we continue to maintain our NEUTRAL stance on the sector as a whole, we are positive on the propsects of and expect stronger recoveries in the share prices of AMMB Holdings and BCHB Holdings when market conditions improve. Maybank's potential impairments on its overseas
acquistions continue to concern us, despite its current weak share price. Public Bank will continue to remain a solid investment into strength, despite its risk-rewards leaving slightly lesser scope for upsides as compared to the rest. Its attractive dividend yields however, warrant continued exposure to the stock. The same can be said about Hong Leong Bank, though not in the
same breath.

We hosted a luncheon with the Public Bank Group for our clients during the week, where we had the pleasure of the company of Chief Operating Officer Mr Wong Jee Seng and Group Economist En. Nasaruddin Arshad share with us on the prospects and challenges of the Group, and we came away with confidence that management is fully "on-the-ball" and that its growth path is on track despite visibly tougher economic and operating conditions. Valuations are arguably expensive, but for good reason. Asset quality is the best in the industry, with net NPLs at 0.9% against the industry's 2.4% and loan loss provisioning the most prudent. We continue to like the Group for its strong earnings prospects, astute credit policies, superior ROEs and attractive dividend yields.
Key takeaways from the meeting, which may not necessarily be altogether new to the investing community, but nevertheless good points to reinforce:
· Focus will continue to be on the retail segment, an area it has always been strong in, and which currently contributes in excess of 80% of Group earnings. Home mortgages, vehicle financing, credit cards and personal financing are points of growth.
· Weaker capital markets will not impact Group as much as other banking groups given the relatively smaller contribution of non-interest income to net income.
· Cost of funding for loans is low as 92% comprise of deposits, hence "healthier" spreads.
· A 1% drop in OPR will impact the Group's net profits by approximately RM100m, should all rates (BLR and correspondingly, savings) fall in tandem. Given the current operating condition however where BNM has set a floor for FD rates (1- month, 3.0% and 12-months 3.5%), the impact will be slightly more pronounced.
· The recent reduction in SRR will "bring back" some RM300m to the fold, which it can then lend to the inter-bank market and generate income. RM10+m is the anticipated amount.
· Exposure to SME is not too much of a concern as close to 80% of it is to importers of consumer goods which feed the domestic services sector which is expected to remain strong in the coming quarters, and not the exporters of goods and services to the global marketplace which is undeniably going to face harsh operating conditions.

The Employees Provident Fund (EPF) continued to be the signficiant player in the market last week with regards to banking stocks, albeit on a relatively muted scale as compared to previous weeks. Share prices remained mostly flat for the week.

· Citigroup Inc plans to sell Nikko Citi Trust and Banking Corporation, its trust bank unit in Japan, in its efforts to reduce payroll and costs at its Japanese operations. The deal could possibly raise up to USD420m, with major Japanese banks like Mitsubishi UFJ Trust and Banking Corp, Sumitomo Trust and Banking Co Ltd, and Mizuho Trust and Banking Co Ltd reportedly showing interest in making bids.
· Citibank (M) Berhad, locally-incorporated subsidiary of the Group, has meanwhile reinforced its financial soundness and preparedness to weather the on-going economic and financial crisis. The bank is backed by an asset base of RM43.3bn domestically, while liquidity stood at RM14.5bn as at Sept 30th. In the recent financial quarter (Sept 30), the bank posted cumulative nine-month net profits of RM611.2m on revenue of RM2.2bn.
· Swiss bank Credit Suisse, announced during the week, that it had posted losses totaling USD2.5bn at the end of November and was trimming its workforce by 5,300 globally, mostly in investment banking. The Group has thus far managed to chart its course through the worst financial crisis since the Great Depression without state aid, but hefty losses at its investment banking unit have dragged it into a 1.3bn Swiss Franc (approximately USD1.1bn) loss in the third quarter.
· HSBC, Europe's biggest bank, also made an announcement during the week saying that it was cutting 500 jobs at its British banking unit following a review of the business.
· China's sovereign wealth fund, China Investment Corp, stated recently that it was "not brave enough" to invest in foreign financial institutions and lacks confidence in the shifting US financial regulatory situation. The fund is most well-known for investing in private equity firm, Blackstone Group, just before its listing at USD31 a share. The stock recently closed at about USD5 a share. Its 10% investment in Morgan Stanley at USD50 a share has fallen in value to about USD12 a share.

Saturday, December 06, 2008

CAO exploring long-term jet fuel supplies

Source: business times
They'll supplement those that the firm obtains through monthly tenders
CHINA Aviation Oil (Singapore) - with stronger controls in place after its restructuring - is discussing long-term jet fuel supplies for Chinese airports with parties including British Petroleum.

Top up: The new arrangements with BP gives CAO more flexibility in the procurement of jet fuel for receivers in China
These supplies will supplement those that CAO obtains through monthly tenders, which so far have been its sole source of fuel.
Pending the outcome of negotiations, BP Singapore will supply 'a small portion' of CAO's monthly fuel requirements for onward supply to China under a one-year arrangement from Jan 1 next year.
BT understands that CAO supplies about 10-12 cargoes a month, each of 30,000-40,000 tonnes, to Chinese airports including Shanghai Pudong. A CAO official declined to say what BP's 'small portion' amounts to, saying only that 'it is not significant'.
She also declined to say what volumes are being discussed for a long-term trading arrangement with BP.CAO chief executive Meng Fanqui said in a statement that the new arrangements with BP 'give us more flexibility in our procurement of jet fuel for PRC receivers'.
The interim deal ends the 'guardianship' role played by BP Singapore.

'Going forward, CAO will procure jet fuel through various means, instead of solely through regular monthly tenders,' he said.
'We believe this will enhance CAO's value proposition to its customers.'
Most of CAO's jet fuel is now sourced from Japan, South Korea and Taiwan through monthly tenders.
CAO is talking to traders, oil refiners and oil majors in these places and elsewhere about long-term supplies, a source said.
BP Singapore's chief executive for integrated supply and trading, Michael Bennetts, said that the interim agreement with CAO 'marks the beginning of a new stage of business cooperation' and that BP and CAO 'will continue to work together to explore and collaborate on new opportunities'.
BP Singapore, which has a 20 per cent stake in CAO, has been helping the jet fuel supplier get back on its feet after its US$550 million loss in a 2004 speculative derivatives trading scandal.
This help has included the secondment and subsequent transfer of several BP Singapore officials to CAO to help it put in place more checks and balances so that it can resume oil trading proper again. So far, CAO has ventured back into some jet fuel and petrochemicals trading.
CAO's interim trading arrangement with BP Singapore replaces an earlier business cooperation agreement. Under that agreement, BP Singapore advised CAO on jet fuel tenders and had pre-emptive rights to supply fuel on terms more favourable than those obtained by CAO through tenders. Pending a longer-term agreement, the interim jet fuel supply deal essentially ends the 'guardianship' role at CAO played by BP Singapore.
When the economy began to teeter a few months back, I proposed that Chinese investors would not look first at the Big brands (although I still believe one of the Big 3 will be bought in part/ whole by a Chinese firm), but that they would go after the real estate.
Domestic investors to shop for cheap US houses reports:
A GROUP of domestic investors is expected to visit the United States next month
to purchase discounted houses.
The 10-day trip from January 15 will cover San
Francisco, Los Angeles and Las Vegas, Shanghai Morning Post reported today.
Now for those of you who have not witnessed this before, this is a phenonmenon that was very popular in Beijing, Shanghai, Shenzhen, Hangzhou,Chengdu as full planes of HK, Taiwanese, and S’porean investors would fly into China get on a bus - and then proceed to buy property.
Typically following a single developer (Shui On, Capitaland, Hutch, etc) these fleets of investors essentially provided the hot money needed to drive the rampant property development. They were held as investments, flipped on a dime, and often remained empty for years.
Were this to be the first plane of many, there would be many interesting opportunities here, and my guess is that if you are in a city that is (1) safe (2) has a strong/ burgeoning Chinese community (3) has good academic institutions (4) has large clusters or developments in need and (5) has clean air… you are probably in the best position, and if you are one of those Americans looking to sell a property I suggest you learn a few simple phrases on welcoming guests and real estate terms over at Chinesepod.
New Technology to Speed up Alternative Solutions

By degassing Chinas coal mines, many of the gas explosions at Chinas coal mines can be reduced. Coal bed methane is actually methane gas present in coal seams. This is the gas that threatens the lives of miners working in underground mines.
China emits 6 billion cubic feet of methane gas annually from its mines. Methane gas is released into the atmosphere, from working mines, abandoned mines and through the exhaust system of mines, leading to emission of a greenhouse gas. By releasing the methane trapped inside virgin coal seams, it could instead be captured and used as an energy source.
There are on the order of 800 basins in the world with coal in them, explained Dr. David Marchioni, who was also interviewed in Part One of this report. There are probably still only about 30 or 40 producing coal bed methane areas. The pre-eminent coal bed methane (CBM) geologist, who is also overseeing the CBM exploration by Pacific Asia China Energy (TSX: PCE) in China, added, They havent all been looked at, but a lot of them have. New CBM drilling technology, which China has been openly soliciting for the past four years, may help resolve some part of the pollution and mine fatality issues.
China United Coal Bed Methane Company (CUCMB) President Sun Maoyuan believes the expansion of Chinas coalbed methane industry may help reduce the high incidence of coal mine accidents. Sun said, Development of this resource has great strategic significance for China, as it could help narrow the growing energy supply and demand gap, while reducing environmental pollution in the country. According to the US Energy Information Administration, overall natural gas consumption in China is projected to grow at an average annual rate of 7.8 per cent, from 1.2 trillion cubic feet in 2002 to 6.5 trillion cubic feet in 2025 jump of more than 500 percent. Every available method, including CBM development will be necessary to help meet that forecast.
The Xinhua news agency announced in March 2002 it was partnering with a Canadian executive agency help develop Chinas CBM resources. The Canadian group included the Canada Alberta Research Council, the Canada Computer Modeling Group Ltd, and Sproule International. The project aimed to effectively exploit the coal bed methane gas using Canadas
advanced technology. The 19th CBM concession awarded by China United Coalbed Methane Co (CUCMB) was announced in March 2004 through a news release issued by the Embassy of the Peoples Republic of China in New York. The 150.8 square kilometer CMB concession had estimated gas reserves of 30 billion cubic meters. What was noteworthy was this mention far down in the press release, According to the contract signed with CUCBM, Sino-American Energy, which specializes in the exploration, development and production of coalbed methane resources, will introduce its advanced horizontal well technology for pilot development in China.
China is eager to exploit its resources, lower its pollution standards and reduce the number of mine fatalities. However, technology is what will move China into major superpower status before 2050. CUCBM was granted favorable policies, not often awarded when dealing with foreign investors. Such include tax reduction, duty exemption and independence in investment and the same for their import and export decisions. In other words, free market pricing. China needs energy and will move mountains to get it. China is also developing its relationship with Canada. After the United States, China is Canadas largest trading partner. In late January 2005, the largest ever trade mission led by a trade minister took place in Shanghai, Beijing and Hong Kong between Canadian and Chinese companies with over 370 Canadian delegates from 279 companies participating. More than 100 agreements were signed between those countries leading companies. China is hungry for Canadian technology while Canada is eager to strengthen its ties with the worlds next major superpower.
Dr. Marchioni, who is also a director of Pacific Asia China Energy (PACE), strongly endorsed his companys relationship with CUCBM, They are your partners so it is to their benefit to make sure that things happen. They assist us in negotiating with the provincial coal bureaus. But PACE is carrying the project through the initial exploration. What does CUCBM
bring to the table for their share? Marchioni shot back, We have access to quite an abundance of coal exploration data before we even start drilling. That was provided by the regional coal group. CUCMB aided and assisted in that negotiation. Wheres the government interference one might expect? Its that committees job to get the project done, Marchioni explained. Its one of the benefits in having CUCBM as a partner because they have a vested interest in it. These people are bureaucrats within the organization within the govt. The success of our project would shine very nicely upon them, because they are part of the committee and part of the operation.
To date, PACE has been granted two CBM concessions by CUCMB. One of those concessions is about one-half the size of Rhode Island. Sproule International, which was part of the initial Canadian executive group that partnered with CUCBM in 2002, reviewed PACEs CBM 970-square-kilometer concession in the Boatian-Qingshan property in the Guizhou Province of China. For those unfamiliar with China, its sometimes called the Home of Coal in South China, and the region is reportedly Chinas second largest coal producer. The highly regarded Sproule research team, among Canadas leading specialists in evaluating coal bed methane projects, published an independent technical report announcing the concession may contain up to 11.2 trillion cubic feet of gas. A most likely scenario would be production capacity up to slightly more than 5.2 trillion cubic feet. By comparison, other CBM concession blocks, which we reviewed, announced CBM gas resources on the order of 30 billion to 150 billion cubic feet.
Other Canadian CBM exploration companies have also been awarded CUCBM concessions. Verona Development Corporation (TSX: VDC) followed in the footsteps of Pacific Asia China Energy in late November 2005 when CUCBM awarded the company its 23rd concession. Veronas 1015-square kilometer concession in northern Shilou may hold about 150 billion cubic meters of gas. Earlier this month, CUCBM signed a production sharing contract with Ivana Ventures Inc (TSX: ANA) in Suzhou of east Chinas Anhui province. Ivanas goal is to confirm Chinese estimates of more than 3.3 trillion cubic feet of gas on the 856-square kilometer concession.
MDCs Dymaxion Technology Opens Doors
Why the preferential treatment for Pacific Asia China Energy? True, it was the first Canadian publicly traded company to be awarded a CBM concession. Now they have two. Perhaps these valuable CBM concessions might have something to do with PACEs recent announcement of a joint venture with Mitchell Drilling Contractors (MDC) of Australia. All companies who wish to use MDCs proprietary drilling technology in China must make arrangements with the MDC-PACE joint venture company. A February 6th news release issued by Pacific Asia China Energy, announced,The Joint Venture company will have the exclusive license to use Mitchell's proprietary drilling Dymaxion System in China. Dymaxion is a unique and highly effective surface to in-seam drilling technique which the company has deployed since early 2000. To date, over 200 Dymaxion wells have been drilled on CBM projects.
What makes Mitchell Drilling special? Theyve developed things as simply as possible, as inexpensively as possible, as efficiently as possible, Dr. Marchioni pointed out. They are doing things probably at half the cost of what it might cost in Alberta. Theyve developed some unique approaches into how they drill their wells. Because they keep everything light, everything is simple. Efficient, less expensive, more portable most of their work is done with truck-mounted rigs, Marchioni added. They have fewer people on their well sites, mainly because of the small equipment.
We looked into Mitchell Drilling. Started in 1969 when founder Peter Mitchell bought his first drill rig for $11,500 at a repossession sale, the company has become Australias largest privately owned drilling company. Mitchell Drilling became involved in minerals exploration in 1971. Over the past thirty-seven years, the drilling company has contracted to nearly every major exploration company, drilling for oil, uranium, gas and coal reserves throughout the key mining states of Australia. With more than 150 staff, including some of Australias top engineers and geologists, the company has since expanded outside of Australia. Originally, we wanted to bring them over to work for us, Marchioni told us. The more we talked to them, the more they got interested in China, and the more excited they got about it. Not a bad partner to have in a country which does a lot of business with China.
Why are CBM geologists excited about the Dymaxion drilling technology? They have one of the highest success rates in this type of drilling, said Steven Khan, executive vice president of Pacific Asia China Energy. While there are other companies who have successful horizontal drilling techniques, they provide a service more successful and at significantly lower cost. While horizontal drilling is the nature of the beast in CBM drilling, MDCs Dyamxion surface to in-seam (SIS) technique is different, hence its proprietary nature. It is a new blend of oilfield, civil and mineral drilling technologies.
Most drillers will use methods that are either (a) vertical or horizontal underground or (b) surface penetration. Mitchell Drilling brought in a little of both. In Australia, where coal seams are found at shallower depths, greater pressures have to be created to bring out the gas from the horizontal seams. Khan said, The combination of vertical and horizontal drilling allows for a much more efficient extraction of water from CBM wells while it increases the flow rates of gas from the wells. A number of coal, gas and oil companies have turned to Mitchell Drilling, including BHP, Anglo Coal and the Oil Company of Australia. MDC has drilled more surface to in-seam wells than any other Australian company.
It was a marriage of equals for PACE and MDC. PACE needed a drilling company, but PACE had built up strong network of relationships in China. While MDC would be used to potentially drill a large number of wells on the companys Guizhou project, both saw a new revenue source. We are both leveraging on our connections, network and the ability to tap into these advanced projects in a shorter time frame. Khan believes revenues could be flowing into the PACE-MDC joint venture by the end of 2006. When would such revenues become substantial? Initially, they would be somewhat minor, but they should ramp up quickly from two sides, explained Khan. Revenues would come from outside companies who are seeking resources, and from PACEs own drilling activities within China.
How soon does Khan believe PACE will need the services of the MDC-PACE joint venture? We have plans to move the Guizhou project into pilot production in 2007, he responded. We may step up that program based on the results from our slim-hole test production program this year.
PACE announced earlier this month it should soon start drilling. Is Dr. Marchioni satisfied about the coal seam thickness on the first property the company plans to drill? Very much so, he responded instantly. At the depths were considering right now, geological structure is relatively uncomplicated. The advantage we have here is the maturity of these coals means that the gas contents are quite high by most standards, at relatively shallow depths. Presently, our plan is to try to exploit at relatively shallow depths, down to 800 or 900 meters maximum. This will give us a lot of gas. It will optimize our chances of finding permeability.