Australia | Dec 19 2012
-China raises fertiliser export incentives
-Incitec Pivot sensitive to fertiliser prices
-Fertiliser market may be negative
-Explosives market looks robust
By Eva Brocklehurst
China has increased incentives for fertiliser exports and dealt a bit of a blow to the likes of Incitec Pivot ((IPL)). The Ministry of Finance has announced its new fertiliser export policy which has increased incentives for fertiliser producers to sell product into export markets. This may be the thin edge of the wedge. Citi sees it as immediately negative for IPL, given the impact lower tariffs are likely to have on global fertiliser trade and pricing of urea, diammonium phosphate (DAP) and monoammonium phosphate (MAP). Moreover, the broker sees risk from the possibility that lower export tariffs on glyphosate and explosive grade ammonium nitrate may be forthcoming, given the Chinese government's apparent focus on promoting exports. This would also put IPL's sector bedfellows, Nufarm ((NUF)) and Orica ((ORI)), under scrutiny.
IPL earnings are highly sensitive to global fertiliser pricing, notes Citi. Citi estimates that each US$10/mt movement either way in DAP and urea affects IPL's earnings by 2.5%. Citi cites current consensus estimates for 2013 DAP (US$535/mt) and urea (US$410/mt) compare to current trading prices around US$500/mt and $410/mt 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 pricing is below its current FY13 DAP price assumption for IPL of US$550/mt. Moreover, a 5% change in Goldman's average FY13 realised DAP price assumption would result in a 5.2% change in its FY13 profit forecast for the company. Goldman's FY13 urea price assumption for IPL is US$400/mt FOB, largely in line with recent spot pricing.
Two key changes to the Chinese fertiliser 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/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 notes, in the 10 months to October 2012, China exported 3.8mt of urea. Citi analysts forecast urea exports from China of 5-5.5mt for the full year. Whilst China's DAP 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.
However, most brokers reviewing the stock are not overly worried about the tariff change. Even Citi says the tariffs just add another headwind to an already tough outlook and retains its Hold rating. Goldman rates IPL as still a Buy, noting DAP pricing was unchanged at US$502/mt (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 inventories (as at the end of November) rose 36%, or 130,000t, 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.
Deutsche Bank also reviewed IPL, which held its AGM 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 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 business will be impacted by a deteriorating urea price with fertilisers affected as traders are reluctant to take on risk ahead of year end.
Macquarie notes fertiliser remains a good business and one which IPL aims to build on. The broker believes the Chinese decisions are marginally negative for DAP markets but observes IPL has not been exporting DAP in the last 2 months due to a sulphuric outage. Global DAP 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 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, increasing to 20% or more in FY14 and FY15, driven by the ramp up of its Moranbah 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.
IPL has a consensus target price on the FNArena database of $3.37 in a range of $3.05 to $3.60, with five Buy ratings and three Holds.
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