Mosaic, the world's largest DAP producer, reported 4Q09 earnings with a normalised earnings per share of US$0.33, well above consensus of US$0.073. Potash Corporation reported second quarter 2009 earnings with a normalised earnings per share of US$0.62, which was slightly below consensus of US$0.69. Potash Corp expects a 25% plus recovery in global potash demand in 2010 as re-stocking occurs and nutrient levels need to be replenished.
Impact
Positive outlook commentary from both companies supports the view that global fertiliser demand has bottomed and is now recovering. This is already flowing through to higher DAP prices. Excess fertiliser inventories have been a big problem over the last year. However company commentary suggests that both producer and dealer inventories (in USA) are below normal levels for this time of year. Hence we expect the fertiliser industry to experience a re-stocking cycle similar to other commodities (already happening in hard commodities).
Mosaic noted that it is seeing phosphate "demand from buyers all across the globe and we expect a strong recovery in sales volume this year". Brazil/Argentina have been active buyers of MAP and Diammonium Phosphate (DAP). India has just increased contract volumes with PhosChem by 450kt and Pakistan is back in market. Focus will start turning to the US autumn planting season where improved fertiliser demand looks likely.
Recent reports indicate that IPL has sold two cargoes of DAP at US$350- 360/t CFR or an estimated US$310-320/t on a free-on-board basis (source: British Sulphur). This is up US$20-30/t on last month. The non-integrated cash cost of production is US$330-340/t which is where DAP prices are now headed. Input costs such as rock, ammonia and sulphur are pro-cyclical hence improved DAP demand would logically increase demand and pricing for these inputs. Downside earnings risk exists for Dyno (50% of earnings before interest and tax). Project Velocity will need to do better than expectations (US$67m targeted benefits in financial year 2009) in order to shore up Dyno's earnings
AEV Price at posting:
42.0¢ Sentiment: LT Buy Disclosure: Held
