June 8, 2012
North American research team concludes fertiliser stocks are over-sold
The fertiliser sector''s outlook has been observed closely by the Macquarie Research North American fertiliser team and concluded that fertiliser stocks are over-sold.
This is based on a view that agriculture commodity price cycles are continuing the trend of higher highs and higher lows.
Despite Macquarie researchers'' call for sub-US$5 corn prices in 2012-13, farmer economics remain strong which should continue to see strong demand for fertiliser. Macro concerns have also weighed on sentiment. Fertiliser stocks are pricing in margin compression similar to that experienced in 2009.
Macquarie analysts believe this will not happen; they think that margins in the next few years will be substantially stronger than the last down cycle, especially for PotashCorp.
The Incitec Pivot (IPL) share price has been hit hard although it has performed in line with weak global fertiliser peers. Macquarie thinks the sell-off is overdone given impending Moranbah start-up in July. IPL is trading at a premium to undervalued global peers but continues to trade at a 20% price earnings discount to Orica.
IPL painted a subdued outlook for Dyno Americas given weak coal markets, however there are positive offsets in terms of strong metals/mining demand (+10%), flow-through of ammonium nitrate price rises seen in the first half and velocity.
Macquarie has forecast 8% second half 2012 earnings growth for Dyno Americas similar to Orica.
Indian DAP price settlement rumoured at US$575-580 per tonne CFR which would equate to US$530-535 per tonne assuming US$45 per tonne freight or a 5% discount to spot US$560-570 per tonne freight-on-board. This should set the floor price in a relatively balanced market.