Keep an eye on the share prices of Incitec Pivot and Orica, plus some rural groups, like GrainCorp and perhaps Elders, after a major global fertiliser player cut its earnings guidance.
Falling demand and prices has already seen earnings warnings issued by brokers, while the just taken over ABB Grain and several other companies supplying rural Australia, have also been hit, or noted the potential from falling prices.
Nufarm has also downgraded its earnings on the rural chemicals side because of a similar fall in demand from farmers in its markets.
Canadian group, PotashCorp. is a world class major in fertilisers and Friday night it revealed its second earnings downgrade in three months.
The news will very likely see Australian brokers re-examine Incitec (IPL) and Orica to see if there’s any fallout.
Orica and Incitec compete in different forms of the market, but both supply ammonium nitrate, especially for the mining industry where demand remains weak.
Incitec is big in supplying farmers as well.
IPL and Orica balance the 2009 financial years at the end of this month.
Potash shares fell more than 4% during after hours trading in the US early Saturday, Australian time, after the fertilizer giant slashed its earnings forecast amid stagnant demand. Shares of rival Mosaic Co. also fell.
Potash shares dropped 4.2% to $US93.05, while Mosaic fell 3% to $US52.60 in late trading.
IPL shares rose 3 cents to $3.09 in Australia on Friday.
Potash said late Friday that it expects fiscal full-year earnings of $3.25 to $3.75 a share, down from a previous forecast of $4 to $5 a share.
"The change primarily reflects lower than forecasted potash sales volumes due to continued slow demand and limited restocking by fertilizer distributors around the world," Potash said in a statement.
Potash also expects third-quarter earnings to come in at the low end of a range of 80 cents to $1.20 a share. Analysts are looking for 93 cents a share from that period.
In January, Potash forecast it would earn US$10.00 to US$12.00 a share in 2009, numbers that would have been in line with last year’s record-setting results (which came amid a red-hot potash market).
that’s a 70% fall, based on the latest guidance.
Farmers in the US, Canada, Brazil, Europe, Argentina and Australia have cut fertilizer application rates because of the global recession.
They have been using their existing inventories and bought much less potash in hope of lower prices in the future, which is now happening.
In response to weak demand, the potash industry has aggressively cut production, removing almost 20 million tonnes out of the market in the past 12 months. But that hasn’t stopped the slump or restarted demand.
"Over the past 12 months, nearly 20 million tonnes of potash production has been curtailed by global producers," the company said in the statement.
"PotashCorp will continue to keep a tight rein on our production until demand returns in the new year.
"Our 2009 earnings are still expected to be among the best in company history, despite an anticipated decrease of 60 percent in year-over-year potash volumes and an 85 percent decline in our combined phosphate and nitrogen gross margin.
"Earnings for third-quarter 2009 are expected to be at the low-end of the $0.80-$1.20 per share guidance range previously provided."
Potash Corp says measurable potash inventories in the retail chain have been “largely eliminated”, suggesting that a period of re-stocking should come soon, with an uptick in prices.
Potash describes itself as "the world’s largest fertilizer enterprise by capacity producing the three primary plant nutrients and a leading supplier to three distinct market categories: agriculture, with the largest capacity in the world in potash and third largest in phosphate and nitrogen; animal nutrition, with the world’s largest capacity in phosphate feed ingredients; and industrial chemicals, as the largest global producer of industrial nitrogen products and the world’s largest capacity for production of purified industrial phosphoric acid".
It and its rival, Mosaic have been mentioned in broker reports about possible interest from BHP Billiton, which has marked out potash as one of the few industrial minerals it is interested in expanding in.
In May IPL announced a Net Profit After Tax (NPAT), excluding individually material items, of $169.8 million for the six months to 31 March 2009. This was a 1% fall on NPAT of $171.1 million in the previous corresponding period.
NPAT of $99.6 million, including individually material items (IMIs), was down 41%. IMIs included the $20.5 million after tax cost of implementing the Velocity business efficiency program and a $34.6 million after tax mark-to-market on phosphate rock.
Earnings Before Interest and Tax (EBIT) was $272.2 million, a 9% increase on the previous corresponding period of $250 million.
IPL (and Orica and Nufarm) are all due to report their results late next month.
Keep an eye out for possible revised guidance statements between now and then.
