21 October 2011 17:00 [Source: ICIS news]
In a report entitled “All good things come to an end”, ING analyst Adam Milewicz revised the bank's ratings on Poland's largest fertilizer companies: Zaklady Chemiczne Police (ZChP) was moved from 'buy' to 'sell', Zaklady Azoty Tarnow (ZAT) was moved from 'buy' to 'hold', while the 'sell' rating on Zaklady Azotowe Pulawy (ZAP) was maintained.
“In October, the US Department of Agriculture again raised its 2011/12 forecasts for grain stocks. In our view, the 2011/12 grain demand forecast (2.4% year on year growth) is overestimated as it does not appear to take into account an expected continued global economic slowdown,” Milewicz said.
“Therefore, we expect cuts to forecasts for 2011/12 grain consumption, which could imply a grain stocks increase for this harvest season. This could put downside pressure on grain and thus fertilizer prices,” he added.
The three Polish fertilizer manufacturers are facing additional threats to their profitability because they are also producers of chemical products whose main consumers - the automotive, construction and textile industries - are closely tied to GDP growth, Milewicz said.
“Given the expected global economic slowdown, we forecast a downward correction in [these firms'] non-fertilizer product prices in 2012,” the analyst added.
ZChP's product portfolio of complex fertilizers and titanium dioxide (TiO2) is highly vulnerable to a cyclical downturn, with short term pressure expected on the prices of both product lines, he said.
It was notable that in Europe, TiO2 buyers are trying to resist fourth-quarter product hikes while Chinese producers are simultaneously lowering prices on an expected construction demand slowdown in the final quarter of this year, the analyst said.
He said the company would likely be hit by declines in melamine and caprolactam (capro) prices, and an increase in gas tariffs - which make up 33% of its operating costs - following the recent weakening of the Polish zloty against the US dollar.
ING is anticipating a 15% year on year drop in both capro and melamine prices during 2012.
Of the three firms, ZAT, also a capro and polyamide 6 (or nylon 6) producer, could suffer the smallest decline in earnings in 2012 given that it has the highest positive earnings correlation with a weak zloty against the euro and is consolidating its newly acquired majority stakes in ZChP and Zaklady Azotowe Kedzierzyn (ZAK), a fertilizer and oxo-alcohols producer, ING forecasts showed.
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