25 November 2013 15:04 [Source: ICIS news]
LONDON (ICIS)--Turkish fertilizer producers are facing depressed prices, low volume growth, competitive pressure from imports and high positioning on the global cost curve, an investment bank said on Monday.
Initiating coverage of Gubretas and Bagfas, which it rated as 'hold' and 'sell', respectively, WOOD & Company said that against this backdrop of difficulties it saw vertical integration as “the key differentiating factor driving earnings resilience”.
“While domestic players continue to seek growth via capacity expansion, we believe the upside to profitability remains largely capped in the context of Turkey’s low capacity utilisation rates and limited international competitiveness,” said Piotr Drozd, an analyst at the bank.
“In this context, we see Gubretas as the best-positioned to perform in the current environment, with its low-cost, Iranian upstream exposure, market-leading position in Turkish distribution and healthy balance sheet,” he added.
Looking at Bagfas, Drozd said the market was over-rating the company’s earnings upside stemming from likely reduced input costs in 2014 and capacity expansion in 2015.
“Bagfas’s lack of integration and dependence on imported feedstock largely cap the margin upside, in our view, while the bulky capex, financed by Euro-denominated debt, increases the project risks,” he added.
Turkey, which is largely supplied by imported fertilizers, suffers from a lack of key fertilizer feedstock, including phosphate rock and potash salt, and from insufficient competitively-priced natural gas, the bank said.
“With Turkish fertilizer production geared to NPK [nitrogen, phosphorous and potassium], DAP [diammonium phosphate] and TSP [tripolyphosphate] fertilizers, the 28-29% year-on-year slump in global DAP and NPK pricing continues to weigh on margins,” said Drozd, noting there is a lukewarm outlook for global fertilizer demand growth in 2014.
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