FA: Obviously many industries are trying to understand the implications of September 11. How do you see shipping being affected by the events?
You have to look at it from different aspects. In the immediate aftermath, there was panic and nobody really knew what could happen. The events have caused problems that are not going to go away overnight, so you have to look at the medium and long term effects.
Initially after 9/11, oil prices went through the roof and that was reflected immediately on the freight rate, which jumped up. But as the world was already in recession so the basic demand for the commodity was only affected in the very short term. Within a few weeks the oil price came down, because people realized we were heading into a deeper recession and the price reflects where we are going to be in six to nine months from today.
As far as the medium term impact goes, no market likes uncertainty, be it shipping, commodities or the financial markets. These are uncertain times and I do not think that anybody can predict what the implications will be û will there be more terrorist attacks, how that will effect the economy etc.
Basically though, shipping is very much related to the economy. When it sneezes, shipping catches a cold. Global trade obviously has an effect on shipping and short-term demand has taken a downturn. Demand in the US, Europe and Japan has dried up. The only place that is keeping the shipping business afloat at the moment is China.
China is obviously an important issue for the Hong Kong shipping business. How is Hong Kong faring in terms of competition with ports in Southern China?
Hong Kong isn't in competition with these ports. They are in competition with Hong Kong. Shanghai is competing; Shenzhen, Guangzhou and Xiamen are competing. This will definitely have an impact on Hong Kong in the long run because Hong Kong's success was based on it being the only window to China. Everything went in and out of Hong Kong en route to China. Over the last 15 years, China has opened up and there are more doors and windows for things to go in and out. The trade volumes going through Hong Kong have been taken over to some extent.
Over the past few years, you also have to think about the way technology has impacted the industry, the information flow has quickened dramatically. A person in the remotest part of China knows what is going on in the World û they can look at the internet, see and compare prices. The margins at what Hong Kong companies could operate are going to get squeezed and this will be reflected in the Hong Kong economy.
Today, China can provide almost a similar quality workforce in terms of education, English-speaking and being tuned in to what's happening. The difference is that they are available at half the cost of Hong Kong and you can see the effect because companies are shifting into Shenzhen and other areas for their back-up offices.
As the evolution takes place in China, you will see that a more educated people will return to China and that is not a good sign for Hong Kong.
Ultimately, in 10 or 15 years time, these places in China are going to be on a level playing field with Hong Kong. The costs of doing business in these places will almost be at parity.
But at the moment, Hong Kong still has an advantage over these places?
Hong Kong has got a huge advantage over these places in terms of the banking system; the legal system, the insurance companies, shipping and information technology are all available here. The changes I mentioned are not going to happen overnight: China will need a lot of investment to create the infrastructure and educate the workforce to catch up with Hong Kong.
What is Noble doing to position itself for opportunities in China?
We started in China 15 years ago and it was one of the first places we traded. Today it represents somewhere between 35% to 40% of our total trade. We are committed to China and have five offices there. For any company like us, China has huge potential: it has 1.2 billion people, it's the world's biggest steel producer still, on a per capital basis, although there is a long way to go before it matches European or US levels. The potential is enormous.
In the last 10 years, the Noble Group has transformed from a company with a $1 million balance sheet to a $117 million net asset value and China has played a massive role in that. There are a lot of opportunities and you can reap the returns.
A lot of Hong Kong tycoons originally got rich from shipping? What is the likelihood of seeing a new generation of shipping tycoons emerging from China?
There are already a lot of tycoons in China. Maybe not from shipping û yet û but in industry, steel, trading and you will see this spreading as we see state-owned enterprises being privatized. Ten years ago private business contributed 9% to GDP and today it contributes 40% to GDP.
You are also active in India.
We are very active in India. We are one of the largest exporters of raw materials from India into China. Similarly, we are also a large importer of coal, grains and fertilizers into India. We have seven offices there. We employ about 2000 seafarers from India.
On a more general note, shipping acts as a pretty good barometer for what's happening in world trade. Looking at the volumes that have been traded over the last year, do you think the world's economy has hit rock bottom or are these problems going to persist for much longer?
From the shipping point of view, we have to look at both the demand side and supply side. With the present state of world economy, demand has been substantially reduced, whilst the supply side has greatly increased. Over the last two to three years, investors placed large new orders for building ships, in the expectation that world GDP would grow by 3% to 4%, which did not happen. This has caused a serious gap between the supply and demand side, hence todayÆs collapse of the shipping market, which has dropped about 50% drop from year 2000.
And, as far as the state of the world economy, I personally feel we havenÆt seen the bottom yet û there is more to come.
It seems a fairly volatile business. How difficult is it to manage the shipping business long-term when you face such volatility?
There is no simple answer to that. The world markets have become more volatile because the information flows have changed so quickly. We have also been in a deflationary period for the last five years.
Markets react so much more quickly than they did a few years ago. Trading patterns change faster than before. All this creates volatility, which needs complicated and structured tools to manage, not to mention hands-on management.
The business is so much more transparent now and it has become more complicated in how you hedge or arbitrage trades. Today it is almost impossible to predict how a market will change beyond two years.
So the shipping business cycle has changed?
The cycles have narrowed and the fluctuations have increased although that is not limited to the shipping industry.
Does that mean you have to be more conservative when it comes to issues like capital expenditure?
Noble does not have much capital in fixed assets. We own three ships out of 350-400 that we operate, the majority of which we lease and charter on yearly basis. To us, it does not make commercial sense to be ship owners. We can get a much better return on equity by leveraging elsewhere.
Because of that, we are in a much better position to take advantage of market fluctuations. We know when to get in and when to get out. A company like us benefits from know how and knowledge. We have become a sophisticated logistics provider, giving a door-to-door service and ship owning is not essential in that.
Where do you see the business going in the next five years?
We will remain within our core business of commodity trading. Over the years we have expanded from handling a few industrial commodities to products like fertilizers, aluminum, sugar, oxygenates, cocoa. We see ourselves expanding into new commodity markets and providing a complete value added chain.
We are in the process of becoming a commodity merchant banker. Our customers will be able to come to us and get all they need, be it raw material for industry, finished products, metals, minerals or grain products. This will be tied to us providing financial services, insurance, freight and logistics. We want to be a one-stop shop and that's how we have always approached the business.