Noble Group’s Richard Elman explains the domino effect of the financial crisis on moving commodities around the world.
Richard Elman, founder and chief executive officer of global supply chain manager Noble Group, has more than 40 years experience in Asian trade and markets. He spoke with McKinsey Quarterly editor Clay Chandler in Hong Kong in November 2008 about the economic downturn’s implications on global trade.
I think the interesting thing was that, in 1997, we had a crisis that was the Asian Crisis. It really didn’t affect Europe that much. It didn’t affect Africa particularly. Didn’t affect the United States so much. This time, we have a crisis—which seems to have started in New York—that’s creating recession globally.
So I think the interdependence on everything in the world, or everybody in the world, is getting deep. The US consumer doesn’t buy electronic goods unless they’re made in China. And the Chinese factory doesn’t have any employment unless it can export [these goods].
In fact, you’re seeing today a large number of factories in southern China closing down, for a number of reasons. One, they don’t have enough business. And two, they also became very expensive. But somebody else will fill that slot. Whether it be the Indians or maybe it goes to Romania or Bulgaria or some other country. But somebody’s going to fill those slots.
We’ve learned how to manage a lot of volatility. But it’s very, very difficult when there’s a breakdown of the financial system of the world. And you simply don’t know.
The charter rates for cape-sized ships have gone from a peak, a very short period, of $250,000 a day. But let’s take the top-end average; let’s say it’s $150,000 a day, down to $10,000 a day. So people [who] have made commitments of $150,000 have an asset that’s nearly $10,000 today. That is major. You’ve lost 90 percent of your asset value. Equities, many of them. Fifty percent is nothing. Sixty percent, 70 percent, 80 percent, 90 percent—these are major, major impacts.
We were fundamentally right in our thinking. And we have always said if we don’t understand it, we shouldn’t do it. And I think we avoided doing a lot of things we didn’t understand. And we avoided spending a lot of money on buying businesses at exorbitantly expensive prices. In fact, we never bought a single business; we bought assets and we built the business around the assets. So I think that the model is good. We naturally have debt. Fifty percent of our debt is nonbank. The rest is committed. And we paid for it. We paid commitment fees for it. So it should be good. So I think we did—you know, in retrospect—maybe not with great foresight or great intelligence, but subsequently we can see we actually did some things—maybe because we were so conservative, I suppose. We’ve actually done some things that are right.
When we look at things, we say, “Does it make any sense? Is it real? Can we trust it? Can we rely upon it?” And that to us is the acid test at the end of the day. Because whether the VAR is 1.5 or 1.9 or 1.7, that tells you something, but it doesn’t tell you everything. It doesn’t tell you who the customer is, what his background is, how reliable he is, how’s he behaved in the past whatever number of years. And these are the things that you really have to look at much more closely. It’s not the intellectual risk. It’s the practical risk.