##{"id":61092,"date":"2012-12-19T13:04:45","date_gmt":"2012-12-19T02:04:45","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/12\/19\/incitec-pivot-can-blast-through\/"},"modified":"2012-12-19T13:04:45","modified_gmt":"2012-12-19T02:04:45","slug":"incitec-pivot-can-blast-through","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/12\/19\/incitec-pivot-can-blast-through\/","title":{"rendered":"Incitec Pivot Can Blast Through"},"content":{"rendered":"

\n\t-China raises fertiliser<\/span> export incentives
\n\t-Incitec<\/span> Pivot sensitive to fertiliser<\/span> prices
\n\t-Fertiliser<\/span> market may be negative
\n\t-Explosives market looks robust<\/strong><\/p>\n

\n\t
\n\tBy Eva Brocklehurst<\/span><\/p>\n

\n\tChina has increased incentives for fertiliser<\/span> exports and dealt a bit of a blow to the likes of Incitec<\/span> Pivot ((IPL<\/span>)). The Ministry of Finance has announced its new fertiliser<\/span> export policy which has increased incentives for fertiliser<\/span> producers to sell product into export markets. This may be the thin edge of the wedge. Citi<\/span> sees it as immediately negative for IPL<\/span>, given the impact lower tariffs are likely to have on global fertiliser<\/span> trade and pricing of urea, diammonium<\/span> phosphate (DAP<\/span>) and monoammonium<\/span> phosphate (MAP). Moreover, the broker sees risk from the possibility that lower export tariffs on glyphosate<\/span> and explosive grade ammonium nitrate may be forthcoming, given the Chinese government's apparent focus on promoting exports. This would also put IPL's<\/span> sector bedfellows, Nufarm<\/span> ((NUF<\/span>)) and Orica<\/span> ((ORI<\/span>)), under scrutiny.<\/p>\n

\tIPL<\/span> earnings are highly sensitive to global fertiliser<\/span> pricing, notes Citi<\/span>. Citi<\/span> estimates that each US$10\/mt<\/span> movement either way in DAP<\/span> and urea affects IPL's<\/span> earnings by 2.5%. Citi<\/span> cites current consensus estimates for 2013 DAP<\/span> (US$535\/mt<\/span>) and urea (US$410\/mt<\/span>) compare to current trading prices around US$500\/mt<\/span> and $410\/mt<\/span> respectively. So there's little upside factored in for prices, although Goldman Sachs notes the recent rally in soft commodities, improving farmer terms of trade, and robust phosphate demand skews the risk to the upside. The broker notes DAP<\/span> pricing is below its current FY13<\/span> DAP<\/span> price assumption for IPL<\/span> of US$550\/mt<\/span>. Moreover, a 5% change in Goldman's average FY13<\/span> realised<\/span> DAP<\/span> price assumption would result in a 5.2% change in its FY13<\/span> profit forecast for the company. Goldman's FY13<\/span> urea price assumption for IPL<\/span> is US$400\/mt<\/span> FOB, largely in line with recent spot pricing.<\/p>\n

\tTwo key changes to the Chinese fertiliser<\/span> tax regime are likely to pressure global prices. These are lower off-peak tariffs — that which allows exports during periods of low domestic demand — has been lowered from 7% to 2% on urea and from 7% to 5% on DAP<\/span>\/MAP, and the lower tariff window, which will extend from 4 months to 5 months (16 May to 15 Oct). The export window on urea is unchanged from 2012 and peak season tariffs (110%) have not been changed. Citi<\/span> notes, in the 10 months to October 2012, China exported 3.8mt of urea. Citi<\/span> analysts forecast urea exports from China of 5-5.5mt for the full year. Whilst China's DAP<\/span> exports are tracking around 10% below 2011 levels, an extension to the export window in 2013 is supportive of increased exports and lower international pricing.<\/p>\n

\tHowever, most brokers reviewing the stock are not overly worried about the tariff change. Even Citi<\/span> says the tariffs just add another headwind<\/span> to an already tough outlook and retains its Hold rating. Goldman rates IPL<\/span> as still a Buy, noting DAP<\/span> pricing was unchanged at US$502\/mt<\/span> (FOB) in the week to December 14. This is in line with prices last observed in April and 12% below prices through September. Goldman notes North American DAP<\/span> inventories (as at the end of November) rose 36%, or 130,000t<\/span>, on the prior month while inventories are 11% below 5-year average levels for this time of the year. So inventories are building but remain at low levels.<\/p>\n

\tDeutsche Bank also reviewed IPL<\/span>, which held its AGM<\/span> this week, but maintained a Hold rating and $3.15 price target. This broker noted the company has a positive outlook for the medium term with a strong balance sheet and each of its businesses is in a sound position. Deutsche expects conditions in the Australian and North American explosives markets will have improved in the December quarter, granted the fertiliser<\/span> markets have deteriorated. The Australian explosives market has benefited from improving commodity prices while the North American coal market is improving, given higher coal and gas prices as well as seasonal impacts. Metals markets remain firm while quarry and construction activity is steadily improving. However, Deutsche believes IPL's<\/span> business will be impacted by a deteriorating urea price with fertilisers<\/span> affected as traders are reluctant to take on risk ahead of year end.<\/p>\n

\tMacquarie notes fertiliser<\/span> remains a good business and one which IPL<\/span> aims to build on. The broker believes the Chinese decisions are marginally negative for DAP<\/span> markets but observes IPL<\/span> has not been exporting DAP<\/span> in the last 2 months due to a sulphuric<\/span> outage. Global DAP<\/span> and MAP values generally remain under pressure in what is a seasonally weak time of year, Macquarie contends, and a vigorous return from Latin American and other non-US buyers will be needed to fuel a rebound. Macquarie does see IPL<\/span> earnings as close to bottom of the cycle, following big earnings downgrades over the course of 2012. The broker forecasts 7% like-for-like earnings growth in FY13<\/span>, increasing to 20% or more in FY14<\/span> and FY15<\/span>, driven by the ramp up of its Moranbah<\/span> ammonium nitrate plant and a US recovery. Macquarie has rating the stock a Buy and raised its target price to $3.38 from $3.33.<\/p>\n

\tIPL<\/span> has a consensus target price on the FNArena<\/span> database of $3.37 in a range of $3.05 to $3.60, with five Buy ratings and three Holds.
\n\t <\/p>\n

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