Yes, we know the drought has had a dramatic impact on rural and regional Australia’s farmers, towns, cities and companies, but a combination of surging world prices and a possibly better season this year has seen the country’s biggest fertilizer maker, Incitec Pivot forecast a more than doubling in pre tax earnings for the year to September 30.
IN a positive day’s trading for the overall market, IPL shares ended weaker, despite a $15 jump to a high of $174.10. That was an all time high. They finished $2.40 lower at $157.28 on profit taking after the stunning upgrade.
IPL said before trading opened on the ASX that earnings before interest and tax (EBIT) may rise to between $700 million and $730 million in the current year, around $100 million above market forecasts.
The shares opened $13 higher at just over $173, traded higher, and then started easing.
Thanks to rising demand from China and India, world fertiliser prices have been driven higher, especially for potash based manufacturers.
While surging prices for corn, wheat, soybeans, cotton, edible oils, sorghum and even sugar, have attracted headlines, there’s been a boom in agricultural nutrients.
It’s another side to the so-called commodities "super cycle” that has seen iron ore prices rise 65% this year in early contract talks and estimates of coking coal price rises of $150%.
Incitec said it expects the average price of diammonium phosphate, known as DAP and used on grain crops, to average between $US760 a tonne and $US790 in 2008. DAP prices hit a record $890 a tonne last week.
IPL said “The improved outlook is largely attributable to an increase in earnings from manufacturing flowing from higher international diammonium phosphate prices. This follows strong international demand, supply disruptions in China and record high input costs.”
Helping the company has been the impact of the Queensland floods which has trimmed output from its Phosphate Hill plant in that state. As a result production of ammonium phosphate fertilizer is expected to drop 78,000 tonnes to 900,000 tonnes
The rise in world prices had been offset partly by adverse currency movements, higher sulphur costs and lower production volumes at IPL’s plant at Phosphate Hill in Queensland.
"The earnings guidance is based upon expectations that global influences will drive an increase in average DAP prices to a range of between $US760/tonne and $US790/tonne in 2008," the company said.
"This follows strong international demand, supply disruptions in China and record high input costs of phosphate rock, ammonia and sulphur."
Incitec said production at Phosphate Hill had been affected by railway line outages due to floods, the current interruption to metgas feedstock supply at the Mt Isa sulphuric acid plant and scheduled maintenance shutdowns.
"It is now expected that IPL’s ammonium phosphate production in 2008 will be approximately 900,000 tonnes, compared with the 2007 production of 978,000 tonnes," it said.
"To mitigate future interruptions … IPL is investigating a range of capital investment opportunities to address transport and storage of sulphur and sulphuric acid, as well as de-bottlenecking at the Mt Isa sulphuric acid plant."
The company was created by the merger of Incitec Ltd. and Pivot Ltd. in 2003. It was controlled by the world’s largest explosives maker Orica Ltd. until May 2006.
Incitec has five manufacturing plants in Australia and controls more than half of the national market for crop nutrients. It is looking at a major expansion in Indonesia that will significantly boost production if approved. A decision is expected shortly.
Incitec owns 13% of Dyno Nobel Ltd., making it Dyno’s largest shareholder. So far there’s been no further advance; Dyno is a major manufacturer of ammonium nitrate, mostly for the explosives industry.
Incitec said the outlook for the 2008 winter crop looked promising, "but it was still too early to anticipate how the season will unfold".
But this week we got a flavour with the March commodity outlook from ABARE, the Australian Bureau of Agricultural and Resource Economics.
World wheat prices have risen more than 20% in the past two weeks and have more than doubled in the past year as world stocks have fallen because of drought in Australia, indifferent growing seasons in other nations and the switch of US growers to corn and soybeans for last season.
ABARE said that depending on the growing season this winter in major production areas, production may rise to 26 million tonnes in 2008-09, up from last year’s drought-reduced 13.1 million tonnes.
These record prices are prompting farmers to increase plantings, especially in the US with global output forecast to climb 7% by June 30, 2009, according to a report last week from the International Grains Council.
But world stocks are at 40 year lows and US stocks at 60 year lows and it will take more than a 7% rise in global output to repair them, especially with China and India buying more and more grain every month.
A crop of 26 million tonnes would be Australia’s second-largest wheat crop, after the 26.1 million tonnes harvested in 2003-04, according to the bureau’s data.
ABARE said that if the crop hit that level and depending on prices, the value of the nation’s wheat exports may more than double to $4.7 billion in 2008-09 financial year.
ABARE said exports could more than double to 15.4 million tonnes of wheat in 2008-09, up from 6.4 million tonnes a year earlier.
ABARE said Australia may sow a record area of 13.4 million hectares of wheat and a total 22 million hectares of all grains, if the season is good to above average (which after two years of intense drought, it could be).
And that will mean higher demand, prices and earnings for IPL.
